Test bank For Economics Principles, Applications, and Tools 8th edition by Arthur O’Sullivan

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Economics Principles, Applications, and Tools 8th edition by Arthur O’Sullivan – Test bank

Macroeconomics: Prin., Apps, & Tools, 8e (O’Sullivan) TB2

Chapter 2   The Key Principles of Economics

 

2.1   The Principle of Opportunity Cost

 

1) The opportunity cost of something is:

  1. A) the cost of the labor used to produce it.
  2. B) what you sacrifice to get it.
  3. C) the price charged for it.
  4. D) the search cost required to find it.

Answer:  B

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

2) The principle of opportunity cost:

  1. A) is more relevant for firms than for individuals.
  2. B) only refers to monetary payments.
  3. C) is only relevant in economics.
  4. D) is applicable to all decision-making.

Answer:  D

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

3) The principle that states that the cost of something is equal to what is sacrificed to get it is known as the:

  1. A) marginal principle.
  2. B) principle of opportunity cost.
  3. C) principle of diminishing returns.
  4. D) reality principle.

Answer:  B

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

4) When Bob has to give up lunch in order to have a fancy dinner, the economic principle that is highlighted by his situation is the:

  1. A) marginal principle.
  2. B) spillover principle.
  3. C) principle of opportunity cost.
  4. D) reality principle.

Answer:  C

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

5) Suppose that your tuition to attend college is $10,000 per year and you spend $4,000 per year on room and board. If you were working full time instead of attending college, you could earn $20,000 per year. What is your opportunity cost of attending college for one year?

  1. A) $14,000
  2. B) $24,000
  3. C) $30,000
  4. D) $34,000

Answer:  C

Diff: 1

Topic:  The Cost of College

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

6) Suppose that your tuition to attend college is $5,000 per year and you spend $5,000 per year on room and board. If you were working full time, you could earn $22,000 per year. What is your opportunity cost of attending college?

  1. A) $13,000
  2. B) $27,000
  3. C) $30,000
  4. D) $35,000

Answer:  B

Diff: 1

Topic:  The Cost of College

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

7) Mark quit his job as a salesman where he made $43,000 per year to start his own t-shirt making business. His business expenses are $6,000 per year on rent, $12,000 per year on supplies, and $4,000 per year on part-time help. As for his personal expenses, his apartment costs him $4,800 per year and his personal bills are an extra $1,200 per year. What is Mark’s opportunity cost of running the business?

  1. A) $65,000
  2. B) $57,000
  3. C) $71,000
  4. D) $43,000

Answer:  A

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

8) Mark quit his job as a salesman where he made $43,000 per year to start his own t-shirt making business. His business expenses are $6,000 per year on rent, $12,000 per year on supplies, and $4,000 per year on part-time help. As for his personal expenses, his apartment costs him $4,800 per year and his personal bills are an extra $1,200 per year. Which of the following is not part of the opportunity cost of running his business?

  1. A) his apartment costs
  2. B) his personal bills
  3. C) his part-time labor costs
  4. D) his apartment costs and his personal bills

Answer:  D

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

9) Suppose a ticket to a concert costs $39, and parking costs $5. Further, in order to watch the concert, you must miss 2 hours of work where your hourly wage is $15 per hour. The total opportunity cost of watching a concert is:

  1. A) $74.
  2. B) $44.
  3. C) $39.
  4. D) $30.

Answer:  A

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

10) An unemployed individual decides to spend the day fishing. The opportunity cost of fishing is equal to:

  1. A) the cost of bait and any other monetary expenses.
  2. B) zero, because the person doesn’t have a job.
  3. C) the value of the individual’s wages while he was working.
  4. D) the cost of bait, any other monetary expenses, and the value of the best alternative use of the individual’s time.

Answer:  D

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

11) The opportunity cost of going to college:

  1. A) is zero if your parents pay your tuition.
  2. B) is equal to the cost of tuition, room and board, and other expenses.
  3. C) includes wages you lose by going to school instead of working.
  4. D) is the same for all students at a particular school who pay full tuition.

Answer:  C

Diff: 1

Topic:  The Cost of College

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

12) Pat claims to save a great deal of money on groceries by traveling to various supermarkets to make her purchases at their advertised sale prices. She might visit as many as five different stores in one day in order to complete her weekly shopping. Her savings are not as great as she may think they are if she does not consider the:

  1. A) cost of the gasoline in driving from one store to another.
  2. B) mileage she is putting on her car driving from one store to another.
  3. C) value of the time she is spending doing the shopping as opposed to other things.
  4. D) all of the above

Answer:  D

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

13) Five years ago Tammy always took a big envelope full of coupons to the grocery store. Now she has a child in pre-school, she rarely brings coupons. Which of the following is not a possible explanation of this change in her behavior?

  1. A) Fewer coupons appear in the newspapers than five years ago.
  2. B) The opportunity cost of clipping coupons has risen above their monetary value.
  3. C) Grocery prices have decreased.
  4. D) The opportunity cost of grocery shopping has decreased.

Answer:  D

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

14) Nancy and Melissa both have broken light fixtures in their living rooms. Nancy opts to hire an electrician, while Melissa spends two hours replacing the fixture herself. Which of the following is a possible explanation of this behavior?

  1. A) Nancy dislikes electrical work more than Melissa.
  2. B) Melissa is better at doing electrical work than Nancy.
  3. C) The opportunity cost of Nancy’s time is higher than her cost to hire an electrician.
  4. D) All of the above are possible explanations of this behavior.

Answer:  D

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

15) Suppose that you own a house. What is the opportunity cost of living in the house?

  1. A) There is no opportunity cost because you own the house.
  2. B) There is no opportunity cost unless you could set up a business in the house.
  3. C) The opportunity cost is the rent you could have received from a tenant if you didn’t live there.
  4. D) The opportunity cost is the cost of your monthly mortgage payment plus bills.

Answer:  C

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

16) Steven lives in a big city where there is a shortage of parking. He has a parking spot in his driveway where he parks his car. Which of the following statement is most correct?

  1. A) Steven has a lower opportunity cost of owning a car than his neighbor, who must rent a parking spot.
  2. B) The opportunity cost of using the parking spot is zero, because Steven owns the house.
  3. C) The opportunity cost of using the parking spot is the price he could charge someone else for using the spot.
  4. D) The opportunity cost depends on how much Steven’s mortgage payment is.

Answer:  C

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

17) You have an hour between your economics and math classes. What is the opportunity cost of that time if you use it to do math homework?

  1. A) It depends on what you would do if you had no math homework.
  2. B) It depends on how much you like math.
  3. C) zero, because an hour isn’t long enough to go to a paying job
  4. D) zero, because it doesn’t cost any money to do your math homework

Answer:  A

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

18) You rent a copy of a new action/adventure movie. The rental is for seven days and you watch the movie on the first day. You tell a friend about the film and your friend asks to come over and watch the movie with you before it is due back. What is your opportunity cost of watching the movie a second time?

  1. A) zero, because it won’t cost you any money to keep the movie for another day
  2. B) one half the rental cost, because you have already watched the movie one time
  3. C) The answer depends on how much you liked the movie in the first place.
  4. D) The answer depends on what else you could do besides watching the movie.

Answer:  D

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

19) Jessica, aged three, decides to dress up like Sleeping Beauty for Halloween. What is her opportunity cost of this decision?

  1. A) the cost of the costume
  2. B) the fact that she can’t dress up like Barbie, her second choice
  3. C) zero, because three-year-olds do not have opportunity costs
  4. D) impossible to say, because Jessica does not understand what an opportunity cost is

Answer:  B

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

20) Spending money on a fixed budget is an example of:

  1. A) the principle of opportunity cost.
  2. B) how to survive with unlimited financial resources.
  3. C) a bad thing to do because you run out of money.
  4. D) living on the edge.

Answer:  A

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

21) The saying that “There is no such thing as a free lunch” refers to:

  1. A) the principle of reality in a modern world.
  2. B) the price of fast food in today’s economy.
  3. C) the principle of diminishing returns.
  4. D) the principle of opportunity cost.

Answer:  D

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Figure 2.1

 

22) Referring to Figure 2.1, if you increase the production of farm goods, what other area is affected?

  1. A) the price of produce
  2. B) the production of factory goods
  3. C) how much people can purchase
  4. D) the wages earned by farm workers

Answer:  B

Diff: 1

Topic:  Opportunity Cost and the Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

23) The production possibilities curve in Figure 2.1 illustrates the notion of:

  1. A) increased factory goods production.
  2. B) increased farm produce production.
  3. C) diminishing resources.
  4. D) opportunity cost.

Answer:  D

Diff: 1

Topic:  Opportunity Cost and the Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

24) On the production possibilities curve in Figure 2.1 as agricultural production increases by 200 tons per year from 200 tons to 400 tons and then to 600 tons, the opportunity cost in terms of tons of manufacturing goods:

  1. A) rises.
  2. B) falls.
  3. C) is constant.
  4. D) becomes negative.

Answer:  A

Diff: 3

Topic:  Opportunity Cost and the Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

25) On the production possibilities curve in Figure 2.1 the opportunity costs of increasing agricultural production from 200 tons to 400 tons is:

  1. A) 600 tons of manufacturing products.
  2. B) 500 tons of manufacturing products.
  3. C) 200 tons of manufacturing products.
  4. D) 100 tons of manufacturing products.

Answer:  D

Diff: 2

Topic:  Opportunity Cost and the Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

26) On the production possibilities curve in Figure 2.1 the opportunity costs of increasing agricultural production from 400 tons to 600 tons is:

  1. A) 600 tons of manufacturing.
  2. B) 500 tons of manufacturing.
  3. C) 200 tons of manufacturing.
  4. D) 100 tons of manufacturing.

Answer:  C

Diff: 2

Topic:  Opportunity Cost and the Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

27) On the production possibilities curve in Figure 2.1 the gain from decreasing manufacturing production from 700 tons to 500 tons is:

  1. A) 700 tons of agriculture.
  2. B) 500 tons of agriculture.
  3. C) 200 tons of agriculture.
  4. D) 100 tons of agriculture.

Answer:  C

Diff: 2

Topic:  Opportunity Cost and the Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

28) On the production possibilities curve in Figure 2.1 the gain from decreasing manufacturing production from 500 tons to 300 tons is:

  1. A) 700 tons of agriculture.
  2. B) 500 tons of agriculture.
  3. C) 200 tons of agriculture.
  4. D) 100 tons of agriculture.

Answer:  C

Diff: 2

Topic:  Opportunity Cost and the Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

29) If an economy is fully utilizing its resources, it can produce more of one product only if it:

  1. A) doubles manufacturing of the product.
  2. B) produces less of another product.
  3. C) adds more people to the labor force.
  4. D) reduces the prices of the most expensive products.

Answer:  B

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

30) If you remove resources from factory production, the quantity of factory goods will:

  1. A) increase.
  2. B) decrease.
  3. C) remain the same but their price will decrease.
  4. D) be diverted to other production.

Answer:  B

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Figure 2.2

 

31) Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the second new highway built in a year is:

  1. A) 30,000 people provided with medical care.
  2. B) 40,000 people provided with medical care.
  3. C) 50,000 people provided with medical care.
  4. D) 500,000 people provided with medical care.

Answer:  A

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

32) Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the third new highway built in a year is:

  1. A) 10,000 people provided with medical care.
  2. B) 50,000 people provided with medical care.
  3. C) 90,000 people provided with medical care.
  4. D) 450,000 people provided with medical care.

Answer:  B

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

33) Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the fourth new highway built in a year is:

  1. A) less than the opportunity cost of the third new highway.
  2. B) the same as the opportunity cost of the third new highway.
  3. C) greater than the opportunity cost of the third new highway.
  4. D) the sum of the opportunity costs of the first three highways built.

Answer:  C

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

34) Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The figure shows that the production possibilities curve is:

  1. A) bowed inward.
  2. B) bowed outward.
  3. C) a straight line.
  4. D) bowed inward and then outward.

Answer:  B

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Definition

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

35) Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The reason why the production possibilities curve is shaped as it is (bowed outward) is because inputs for healthcare and highways are:

  1. A) used in precisely the same ratios.
  2. B) substitutable, but not perfectly substitutable.
  3. C) not substitutable at all.
  4. D) perfectly substitutable.

Answer:  B

Diff: 3

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

36) Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The figure shows that as more highways are built, the opportunity cost of building each additional highway is:

  1. A) decreasing.
  2. B) increasing.
  3. C) constant.
  4. D) decreasing and then increasing.

Answer:  B

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

37) Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the fourth new highway built in a year is:

  1. A) 50,000 people provided with medical care.
  2. B) 70,000 people provided with medical care.
  3. C) 30,000 people provided with medical care.
  4. D) 90,000 people provided with medical care.

Answer:  B

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

Table 2.1

 

38) A group of people has formed a house cleaning and yard maintenance business. The number of houses or yards that they can clean or maintain in any given day is depicted in Table 2.1. The opportunity cost of cleaning the first house in a day is:

  1. A) 0 yards maintained.
  2. B) 1 yard maintained.
  3. C) 2 yards maintained.
  4. D) 20 yards maintained.

Answer:  B

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

39) A group of people has formed a house cleaning and yard maintenance business. The number of houses or yards that they can clean or maintain in any given day is depicted in Table 2.1. The opportunity cost of cleaning the second house in a day is:

  1. A) 1 yard maintained.
  2. B) 2 yards maintained.
  3. C) 3 yards maintained.
  4. D) 18 yards maintained.

Answer:  B

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

40) A group of people has formed a house cleaning and yard maintenance business. The number of houses or yards that they can clean or maintain in any given day is depicted in Table 2.1. The opportunity cost of cleaning the third house in a day is:

  1. A) 1 yard maintained.
  2. B) 2 yards maintained.
  3. C) 3 yards maintained.
  4. D) 15 yards maintained.

Answer:  C

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

41) A group of people has formed a house cleaning and yard maintenance business. The number of houses or yards that they can clean or maintain in any given day is depicted in Table 2.1. As the group cleans more houses, the opportunity cost of cleaning houses:

  1. A) falls.
  2. B) rises.
  3. C) stays the same.
  4. D) is the sum of the opportunity costs of cleaning all the houses prior to that one.

Answer:  B

Diff: 1

Topic:  Opportunity Cost & Production Possibilities Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

42) A group of people has formed a house cleaning and yard maintenance business. The number of houses or yards that they can clean or maintain in any given day is depicted in Table 2.1. As the group cleans more houses, the opportunity cost of doing yard work:

  1. A) falls.
  2. B) rises.
  3. C) stays the same.
  4. D) becomes equal to the opportunity cost of cleaning houses.

Answer:  B

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Figure 2.3

 

43) In Figure 2.3, the move from production possibility curve XV to production possibility curve YZ could be caused by:

  1. A) decreased unemployment.
  2. B) more land, labor or capital.
  3. C) a decline in technology.
  4. D) all of the above.

Answer:  B

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

44) In Figure 2.3, point B:

  1. A) implies unemployment of some resources.
  2. B) is the optimum.
  3. C) cannot be produced.
  4. D) all of the above.

Answer:  C

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

45) In Figure 2.3, point A:

  1. A) implies unemployment of some resources.
  2. B) is the optimum.
  3. C) cannot be produced.
  4. D) all of the above.

Answer:  A

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

46) In Figure 2.3, an efficient production point on production possibility curve XV is:

  1. A) point A.
  2. B) point B.
  3. C) point C.
  4. D) none of the above.

Answer:  C

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

47) In Figure 2.3, an efficient production point on production possibility curve YZ is:

  1. A) point A.
  2. B) point B.
  3. C) point C.
  4. D) none of the above.

Answer:  D

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

48) In Figure 2.3, the move from production possibility curve YZ to production possibility curve XV, could be caused by:

  1. A) increased unemployment.
  2. B) more land, labor or capital.
  3. C) a decline in technology.
  4. D) all of the above.

Answer:  C

Diff: 2

Topic:  Opportunity Cost & Production Possibilities Curve, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Recall Application 1, “Don’t Forget the Costs of Time and Invested Funds,” to answer the following questions.

 

49) According to the Application, if the interest rate rises, then the opportunity costs of running a business:

  1. A) rises.
  2. B) falls.
  3. C) is unchanged.
  4. D) cannot be determined with the information given.

Answer:  A

Diff: 2

Topic:  Application 1, Don’t Forget the Costs of Time and Invested Funds

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

50) According to the Application, the opportunity cost of your time should be ________ the opportunity cost of your invested funds.

  1. A) added to
  2. B) subtracted from
  3. C) multiplied with
  4. D) divided by

Answer:  A

Diff: 2

Topic:  Application 1, Don’t Forget the Costs of Time and Invested Funds

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

51) From the Application, the opportunity cost of your invested capital is:

  1. A) the interest you could get if you invested in in a bond.
  2. B) zero.
  3. C) the revenue you could get once the capital is used.
  4. D) the sum of the value of all your equipment.

Answer:  A

Diff: 1

Topic:  Application 1, Don’t Forget the Costs of Time and Invested Funds

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

52) Using figures from the Application, $5000 (which is the market alue of all your equipment) is the:

  1. A) invested capital.
  2. B) opportunity cost of the invested capital.
  3. C) the opportunity cost of running the business.
  4. D) opportunity cost of your time.

Answer:  A

Diff: 1

Topic:  Application 1, Don’t Forget the Costs of Time and Invested Funds

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

53) Using figures from the Application, the opportunity cost of running your business:

  1. A) should only include the opportunity cost of the invested capital.
  2. B) should include your invested capital.
  3. C) should not include the invested capital.
  4. D) should only include the opportunity cost of your time.

Answer:  C

Diff: 1

Topic:  Application 1, Don’t Forget the Costs of Time and Invested Funds

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

54) A principle is a self-evident truth that most people readily understand and accept.

Answer:  TRUE

Diff: 1

Topic:  The Key Principles of Economics

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

55) Opportunity cost is the difference between the benefit and cost of some action.

Answer:  FALSE

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

56) An increase in the benefit from undertaking an activity will result in an increase in the opportunity cost of that activity.

Answer:  FALSE

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

57) An increase in the wages received by lawyers in general will result in an increase in the opportunity cost of law school.

Answer:  FALSE

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

58) In order to go to college, James incurs an opportunity cost even though all he gave up was a full time job as a clerk at Wally World.

Answer:  TRUE

Diff: 1

Topic:  The Cost of College

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

59) The opportunity cost of going to a particular college is not the same for everyone.

Answer:  TRUE

Diff: 2

Topic:  The Cost of College

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

60) The opportunity cost of getting a master’s degree in engineering equals the tuition plus the cost of books.

Answer:  FALSE

Diff: 1

Topic:  The Cost of College

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

61) The opportunity cost of something is what you sacrifice to get it.

Answer:  TRUE

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

62) Tradeoffs involve an exchange of one thing for another because resources are limited and can be used in different ways.

Answer:  TRUE

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

63) The notion of opportunity cost allows the measurement of tradeoffs.

Answer:  TRUE

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

64) What is the opportunity cost of your college degree?

Answer:  A quick answer would be to say that the cost is the tuition, room and board, and books expenditures that are borne during the college years. But such a statement would be incorrect. First, it understates one aspect of costs: one is giving up income while a student. But it also overstates the costs in another dimension: people would eat and sleep somewhere regardless of their attendance in college. So one should not consider room and board to be part of the cost of college attendance.

Diff: 1

Topic:  The Cost of College

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

65) What do economists mean when they say that there is “no such thing as a free lunch”?

Answer:  Everything has a cost, even when you do not pay money for it. Suppose that somebody bought you lunch. The opportunity cost of that lunch is the lost opportunity to spend your time otherwise.

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

66) Suppose that you lend $1,000 to a friend who pays you back $1,100 the next year. Suppose that prices that year rose by 8% and the real rate of return in the stock market was 4%. Your friend says that he or she was being more than fair by giving you more than the rate of inflation as a return. What do you think?

Answer:  The opportunity cost of that money was not just the 8% inflation, but also the real rate of return that would have been enjoyed had the money been put in the stock market. For you to have been indifferent between loaning your money versus keeping it, your friend should have reimbursed you by $1,120, or a 12% return. This is another example of considering all the costs, both the loss in purchasing power of the money due to inflation and the implicit cost of the return that could have been earned if the money was invested in the stock market.

Diff: 3

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

67) What is the opportunity cost of investing $10,000 of your own money in a business you wish to start?

Answer:  The opportunity cost of your $10,000 is the money you lose because you cannot invest the money elsewhere.

Diff: 2

Topic:  The Principle of Opportunity Cost

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

68) By making acquisitions, resources are used that could have been used to ________.

Answer:  acquire something else

Diff: 1

Topic:  The Principle of Opportunity Cost

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

2.2   The Marginal Principle

 

1) The additional cost resulting from a small increase in some activity is called the:

  1. A) opportunity cost.
  2. B) marginal benefit.
  3. C) marginal cost.
  4. D) diminishing returns of the activity.

Answer:  C

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

2) When economists use the term “marginal,” they usually refer to:

  1. A) small, incremental change.
  2. B) large changes.
  3. C) no changes.
  4. D) average change.

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

3) The marginal principle states that “we should increase the level of an activity as long as:

  1. A) its marginal benefit exceeds it marginal cost.”
  2. B) its marginal cost exceeds its marginal benefit.”
  3. C) its total benefit exceeds its total cost.”
  4. D) its total cost exceeds its total benefit.”

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

4) If the government estimates that the marginal cost of building a bridge is $100 million, while the marginal benefit is $150 million, the marginal principle dictates that the government should:

  1. A) build the bridge.
  2. B) never build the bridge.
  3. C) wait until the marginal cost of building the bridge rises to above $150 million before building the bridge.
  4. D) wait until the marginal benefit of building the bridge drops to below $100 million before building the bridge.

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

5) The extra benefit resulting from a small increase in an activity is called the:

  1. A) opportunity cost.
  2. B) marginal benefit.
  3. C) marginal cost.
  4. D) diminishing returns of the activity.

Answer:  B

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

6) The additional cost resulting from a small increase in some activity is called the:

  1. A) opportunity cost.
  2. B) marginal benefit.
  3. C) marginal cost.
  4. D) diminishing returns of the activity.

Answer:  C

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

7) The principle that individuals and firms pick the activity level where the incremental benefit of that activity equals the incremental cost of that activity is known as the:

  1. A) marginal principle.
  2. B) principle of opportunity cost.
  3. C) principle of diminishing returns.
  4. D) spillover principle.

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

8) According to the marginal principle, an individual will do best by producing or consuming where:

  1. A) marginal benefit exceeds total benefits.
  2. B) marginal benefit is less than marginal cost.
  3. C) marginal benefit equals marginal cost.
  4. D) total benefit equals total cost.

Answer:  C

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

9) According to the marginal principle, a rational individual should undertake an economic activity as long as the:

  1. A) marginal benefit exceeds marginal cost.
  2. B) marginal benefit is less than marginal cost.
  3. C) marginal benefit equals marginal cost.
  4. D) total benefit equals total cost.

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

10) According to the marginal principle, a rational individual should not undertake an economic activity if the:

  1. A) marginal benefit exceeds marginal cost.
  2. B) marginal benefit is less than marginal cost.
  3. C) marginal benefit equals marginal cost.
  4. D) total benefit equals total cost.

Answer:  B

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

11) According to the marginal principle, a rational firm will introduce a movie sequel as long as:

  1. A) marginal benefit exceeds marginal cost.
  2. B) marginal benefit is less than marginal cost.
  3. C) marginal benefit equals marginal cost.
  4. D) total benefit equals total cost.

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

12) Suppose it costs a firm $200 million to produce and promote a sequel. If the firm follows the marginal principle and decides not to produce the movie, which of the following must be true?

  1. A) The firm believes that the marginal benefit is less than $200 billion.
  2. B) The firm believes that the marginal cost is larger than $200 billion.
  3. C) The firm believes that the marginal benefit is larger than $200 billion.
  4. D) The firm believes that the marginal cost is less than $200 billion.

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

13) If a consumer can buy four DVDs for $44 and five DVDs for $50, then the marginal cost of the fifth DVD is:

  1. A) $10.
  2. B) $50.
  3. C) $11.
  4. D) $6.

Answer:  D

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

14) If a consumer can buy four pizzas for $24 and five pizzas for $25, then the marginal cost of the fifth pizza is:

  1. A) $25.
  2. B) $5.
  3. C) $6.
  4. D) $1.

Answer:  D

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

Figure 2.4

 

15) Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe’s marginal cost of staying open per hour is $24. How many hours should Joe stay open?

  1. A) 3 hours
  2. B) 4 hours
  3. C) 5 hours
  4. D) 6 hours

Answer:  D

Diff: 1

Topic:  The Marginal Principle, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

16) Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe’s marginal cost of staying open per hour is $32. How many hours should Joe stay open?

  1. A) 4 hours
  2. B) 5 hours
  3. C) 6 hours
  4. D) 7 hours

Answer:  B

Diff: 1

Topic:  The Marginal Principle, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

17) Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe’s marginal cost of staying open per hour is $40. How many hours should Joe stay open?

  1. A) 3 hours
  2. B) 4 hours
  3. C) 5 hours
  4. D) 6 hours

Answer:  B

Diff: 1

Topic:  The Marginal Principle, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

18) Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 5 hours per day. If he is following the marginal principle, what must his marginal cost be?

  1. A) $16
  2. B) $24
  3. C) $32
  4. D) $40

Answer:  C

Diff: 1

Topic:  The Marginal Principle, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

19) Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 3 hours per day. If he is following the marginal principle, what must his marginal cost be?

  1. A) $24
  2. B) $32
  3. C) $40
  4. D) $48

Answer:  D

Diff: 1

Topic:  The Marginal Principle, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

20) Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 4 hours per day. If he is following the marginal principle, what must his marginal cost be?

  1. A) $16
  2. B) $24
  3. C) $32
  4. D) $40

Answer:  D

Diff: 1

Topic:  The Marginal Principle, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

21) Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 6 hours per day. If he is following the marginal principle, what must his marginal cost be?

  1. A) $16
  2. B) $24
  3. C) $32
  4. D) $48

Answer:  B

Diff: 1

Topic:  The Marginal Principle, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Table 2.2

 

22) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne’s marginal benefit of staying open per hour is $20. If she is following the marginal principle, how many hours should Julianne stay open?

  1. A) 4 hours
  2. B) 5 hours
  3. C) 6 hours
  4. D) 7 hours

Answer:  B

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

23) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne’s marginal benefit of staying open per hour is $12. If she is following the marginal principle, how many hours should Julianne stay open?

  1. A) 3 hours
  2. B) 4 hours
  3. C) 6 hours
  4. D) 7 hours

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

24) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne’s marginal benefit of staying open per hour is $16. If she is following the marginal principle, how many hours should Julianne stay open?

  1. A) 3 hours
  2. B) 4 hours
  3. C) 5 hours
  4. D) 7 hours

Answer:  B

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

25) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Julianne staying open 5 hours per day. If she is following the marginal principle, what must her marginal benefit be?

  1. A) $10
  2. B) $16
  3. C) $20
  4. D) $24

Answer:  C

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

26) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Julianne staying open 3 hours per day. If she is following the marginal principle, what must her marginal benefit be?

  1. A) $12
  2. B) $16
  3. C) $18
  4. D) $24

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

27) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Julianne staying open 2 hours per day. If she is following the marginal principle, what must her marginal benefit be?

  1. A) $8
  2. B) $12
  3. C) $20
  4. D) $22

Answer:  A

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

28) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne’s marginal benefit of staying open per hour is $24. If she is following the marginal principle, how many hours should Julianne stay open?

  1. A) 2 hours
  2. B) 4 hours
  3. C) 6 hours
  4. D) 7 hours

Answer:  C

Diff: 2

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

29) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne’s marginal benefit of staying open per hour is $28. If she is following the marginal principle, how many hours should Julianne stay open?

  1. A) 1 hour
  2. B) 3 hours
  3. C) 6 hours
  4. D) 7 hours

Answer:  D

Diff: 2

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

30) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne’s marginal benefit of staying open per hour is $3. If she is following the marginal principle, how many hours should Julianne stay open?

  1. A) 1 hour
  2. B) 3 hours
  3. C) 6 hours
  4. D) none of the above

Answer:  D

Diff: 2

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

31) When referring to “marginal” changes, the economic focus is on:

  1. A) changes that affect only a few people or products.
  2. B) large changes on the low end.
  3. C) graduated changes on the high end.
  4. D) small or incremental changes.

Answer:  D

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

32) The extra benefit resulting from a small increase in some activity is called the:

  1. A) marginal cost.
  2. B) marginal benefit.
  3. C) marginal value.
  4. D) marginal equilibrium.

Answer:  B

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

33) When deciding whether to engage in an activity or how much to do, people should follow:

  1. A) the principle of microeconomics.
  2. B) the principle of macroeconomics.
  3. C) the marginal principle.
  4. D) the law of supply and demand.

Answer:  C

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

Recall Application 2, “How Fast to Sail?” to answer the following questions:

 

34) Based on the Application, the marginal benefit of sailing a ship faster is:

  1. A) more cargo delivered per year.
  2. B) more fuel cost incurred.
  3. C) less fuel costs incurred.
  4. D) less cargo delivered per year.

Answer:  A

Diff: 1

Topic:  Application 2, How Fast to Sail

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

35) Based on the Application, the marginal cost of sailing a ship faster is:

  1. A) more cargo delivered per year.
  2. B) more fuel cost incurred.
  3. C) less fuel costs incurred.
  4. D) less cargo delivered per year.

Answer:  B

Diff: 1

Topic:  Application 2, How Fast to Sail

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

36) Based on the Application, a ship captain will decide to sail a ship slower if:

  1. A) the marginal benefit of a faster sail is less than the marginal cost.
  2. B) the marginal benefit of a faster sail is more than the marginal cost.
  3. C) the marginal benefit of a faster sail is equal than the marginal cost.
  4. D) the marginal benefit of a faster sail is positive.

Answer:  A

Diff: 1

Topic:  Application 2, How Fast to Sail

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

37) Based on the Application, if the total cost of sailing a ship faster exceeds the total benefit of sailing the ship faster, then:

  1. A) the captain ship sail the ship faster.
  2. B) the captain should sail the ship slower.
  3. C) should keep the speed the same.
  4. D) None of the answers above are correct.

Answer:  D

Diff: 1

Topic:  Application 2, How Fast to Sail

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

38) When Jimmy produces one guitar his costs total $250. When he produces two guitars his total costs are $400. This means that Jimmy’s marginal cost of producing the second guitar is $200.

Answer:  FALSE

Diff: 2

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

39) Economists argue that individuals should continue to consume until total benefit equals total cost.

Answer:  FALSE

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

40) If a company’s total costs per day increase from $500 to $600 by adding another worker, but its additional benefits are $150, it is sensible to add that additional worker.

Answer:  TRUE

Diff: 2

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

41) When applying the marginal principle, you should pick the level at which the activity’s marginal benefit equals its marginal cost.

Answer:  TRUE

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

42) Basically, the marginal principle teaches us to evaluate the factors involved in taking an action to decide if the action it is worth the effort.

Answer:  TRUE

Diff: 1

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

43) Increase the level of an activity if its marginal benefit exceeds its marginal cost; reduce the level of an activity if its marginal cost exceeds its marginal benefit. This is known as the ________.

Answer:  marginal principle

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

44) Different people eat different amounts of food when they go to buffet restaurants, even though they all pay the same price. Explain how this relates to the marginal principle.

Answer:  The marginal monetary cost of eating more is zero, so people will eat until they would not enjoy eating other bite. There is an implicit cost of eating more once you are full (extra weight gain and physical discomfort). Therefore, people will eat until marginal benefit equals marginal cost, and this will occur at different amounts of food for different people.

Diff: 2

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

45) Farmer Bill grows corn on his 27-acre farm. To increase production, he puts more and more fertilizer on the corn. What does the marginal principle say will happen?

Answer:  Eventually the marginal benefit of adding fertilizer will decrease. In fact, eventually the fertilizer will begin to burn the plants, so the marginal benefit of fertilizer will become negative.

Diff: 1

Topic:  The Marginal Principle

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

46) Consider a firm that is trying to determine how many hours to remain open in a day. How would the firm make this decision?

Answer:  The firm would continue to stay open as long as the incremental benefit of staying open (say, the increased revenues) each extra hour exceeds (or at least equals) the incremental costs (e.g., electricity, wages, etc.) incurred from staying open that hour.

Diff: 2

Topic:  The Marginal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

47) The additional cost resulting from a one unit increase in the production of a good is known as the ________.

Answer:  marginal cost

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

48) Marginal cost is the additional cost resulting from a large or small increase in some activity.

Answer:  small

Diff: 1

Topic:  The Marginal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

2.3   The Principle of Voluntary Exchange

 

1) When people interact in markets for their own self interest, it is described as the:

  1. A) principle of supply and demand.
  2. B) principle of voluntary exchange.
  3. C) laws of each state.
  4. D) principle of scarcity.

Answer:  B

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

2) When two people engage in voluntary trade:

  1. A) one will necessarily lose.
  2. B) both will necessarily lose.
  3. C) both will expect to be made better off.
  4. D) each will expect to lose.

Answer:  C

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

3) When you voluntarily accept a job and exchange your labor for money:

  1. A) you and your employer expect to be better off.
  2. B) you and your employer expect to be worse off.
  3. C) you expect to be better off while your employer expect to be worse off.
  4. D) you expect to be worse off while your employer expect to be better off.

Answer:  A

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

4) Firms expect to make money on repeat business because:

  1. A) they think they can put one over on their customers.
  2. B) all firms are monopolists.
  3. C) firms have more power than customers.
  4. D) the management of the firm expects both the firm and their customers to be made better off by their exchange.

Answer:  D

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

5) The economic reason why you voluntarily pay tuition to get into the university/college that you are in right now is because:

  1. A) you believe the value of education is higher than the tuition costs.
  2. B) the marginal benefit of education is positive.
  3. C) the marginal benefit of money is zero.
  4. D) you believe the value of education is lower than the tuition costs.

Answer:  A

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

6) The economic reason why some individuals choose keep their tuition money and not to go to school is:

  1. A) they believe the value of education is higher than the tuition costs.
  2. B) the marginal cost of education is zero.
  3. C) the marginal benefit of money is zero.
  4. D) they believe the value of education is lower than the tuition costs.

Answer:  D

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Recall Application 3, “Jasper Johns and House Painting,” to answer the following questions:

 

7) According to the application, if Jasper Johns earns $5,000 per day painting art and $1,500 per day painting houses, he should:

  1. A) only paint art.
  2. B) only paint houses.
  3. C) paint both houses and art.
  4. D) paint art on the side of his house.

Answer:  A

Diff: 1

Topic:  Application 3, Jasper Johns and House Painting

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

8) Suppose that a house painter can earn $200 per day painting houses and painting Jasper Johns’ house requires 25 days of labor. According to the application, if Jasper Johns earns $5,000 per day painting art, then he must:

  1. A) paint his house if he can paint it in less than a day.
  2. B) switch occupations and paint houses only.
  3. C) never paint his house.
  4. D) paint his house if he can paint it in less than 25 days.

Answer:  A

Diff: 1

Topic:  Application 3, Jasper Johns and House Painting

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

9) Suppose that a house painter can earn $200 per day painting houses while Jasper Johns earns $5,000 per day painting art. According to the application, Jasper Johns should:

  1. A) paint his house if he can paint his house at least 25 times faster than a house painter.
  2. B) never hire a house painter.
  3. C) never paint his house.
  4. D) paint his house if he can paint it in less than 25 days.

Answer:  A

Diff: 1

Topic:  Application 3, Jasper Johns and House Painting

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

10) The principle of voluntary exchange is the concept that a voluntary exchange between two people makes both people better off.

Answer:  TRUE

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

11) When two parties engage in voluntary exchange, one must be made worse off.

Answer:  FALSE

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

12) Two parties engage in exchange when each one expects to be made better off by the exchange.

Answer:  TRUE

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

13) Firms that make their customers better off get more repeat business and make earn more profits.

Answer:  TRUE

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

14) People acting in their own self interest try to gain at the expense of others in exchange leads to someone necessarily losing in a voluntary exchange.

Answer:  FALSE

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

15) When you have a job and your employer compensates you for your time with money, resulting in both of you being better off, it is an example of a voluntary exchange.

Answer:  TRUE

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

16) A “market” is an arrangement that enables people to exchange goods and services.

Answer:  TRUE

Diff: 1

Topic:  Exchange and Markets

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

17) Being self-sufficient in the production of everything we need is efficient.

Answer:  FALSE

Diff: 1

Topic:  Exchange and Markets

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

18) The only way individuals can cope with scarcity is by being self-sufficient.

Answer:  FALSE

Diff: 1

Topic:  Exchange and Markets

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

19) If each of us could produce everything we needed for ourselves, we would be considered to be ________.

Answer:  self-sufficient

Diff: 1

Topic:  Exchange and Markets

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

20) When does voluntary exchange take place?

Answer:  When both parties expect to be made better off by the exchange.

Diff: 1

Topic:  The Principle of Voluntary Exchange

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

2.4   The Principle of Diminishing Returns

 

1) The principle of diminishing returns implies that when one input increases while the other inputs are held fixed, output: beyond some point will exhibit:

  1. A) increases at an increasing rate.
  2. B) increases at a decreasing rate.
  3. C) decreases at a decreasing rate.
  4. D) decreases at an increasing rate.

Answer:  B

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

2) The principle that “as one input increases while the other inputs are held fixed, output beyond some point will exhibit increases at a decreasing rate” is known as the:

  1. A) marginal principle.
  2. B) principle of opportunity cost.
  3. C) principle of diminishing returns.
  4. D) spillover principle.

Answer:  C

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

3) Diminishing returns occurs because:

  1. A) not enough people have jobs.
  2. B) one of the inputs to the production process is fixed.
  3. C) consumers do not buy enough of the products produced.
  4. D) people have not satisfied their self-interests.

Answer:  B

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

4) According to the principle of diminishing returns, if all factors of production but one are held constant and if that one factor is doubled, then eventually output will most likely:

  1. A) double too.
  2. B) less than double.
  3. C) more than double.
  4. D) none of the above

Answer:  B

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

5) A firm produces its product using both capital and labor. When it does not change its capital usage, but doubles its labor input, its output increases by less than 50%. Which of the following is the most likely explanation of this finding?

  1. A) the principle of opportunity cost
  2. B) the principle of diminishing returns
  3. C) the marginal principle
  4. D) the spillover principle

Answer:  B

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

6) According to the principle of diminishing returns, if the number of workers is increased beyond the point of diminishing returns, then the additional worker:

  1. A) increases total output by the same amount as previous workers.
  2. B) increases total output by more than the amount of previous workers.
  3. C) increases total output by less than the amount of previous workers.
  4. D) decreases total output.

Answer:  C

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

7) The principle of diminishing returns occurs:

  1. A) when there is only one input.
  2. B) when there are two or more inputs and at least one input is held fixed.
  3. C) when there are two or more inputs and all inputs are held fixed.
  4. D) when there are two or more inputs and all inputs are allowed to vary.

Answer:  B

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

Table 2.3

 

8) The firm depicted in Table 2.3 is facing diminishing returns because:

  1. A) capital and labor are both fixed.
  2. B) capital and labor are both variable.
  3. C) capital is fixed.
  4. D) the number of workers can only be increased to 5.

Answer:  C

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

9) Refer to Table 2.3. The marginal product of the 4th worker is:

  1. A) 100 units of output.
  2. B) 80 units of output.
  3. C) 60 units of output.
  4. D) 40 units of output.

Answer:  D

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

10) Refer to Table 2.3. The marginal product of the 3rd worker is:

  1. A) 100 units of output.
  2. B) 80 units of output.
  3. C) 60 units of output.
  4. D) 40 units of output.

Answer:  C

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

11) Refer to Table 2.3. The marginal product of the 1st worker is:

  1. A) 100 units of output.
  2. B) 80 units of output.
  3. C) 60 units of output.
  4. D) 40 units of output.

Answer:  A

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

12) Refer to Table 2.3. The marginal product of the 2nd worker is:

  1. A) 100 units of output.
  2. B) 80 units of output.
  3. C) 60 units of output.
  4. D) 40 units of output.

Answer:  B

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

13) Refer to Table 2.3. The principle of diminishing returns sets in with the addition of the ________ worker.

  1. A) 1st
  2. B) 2nd
  3. C) 3rd
  4. D) 4th

Answer:  B

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

Table 2.4

 

14) The firm depicted in Table 2.4 is likely to face diminishing returns because:

  1. A) the amount of fertilizer can only be increased to 5.
  2. B) land and fertilizer are both fixed.
  3. C) land and fertilizer are both variable.
  4. D) land is fixed but fertilizer is variable.

Answer:  D

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

15) Refer to Table 2.4. The marginal product of the 3rd tank of fertilizer is:

  1. A) 29.33 truckloads of fruit.
  2. B) 1.67 truckloads of fruit.
  3. C) 20 truckloads of fruit.
  4. D) 5 truckloads of fruit.

Answer:  D

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

16) Refer to Table 2.4. The marginal product of the 2nd tank of fertilizer is:

  1. A) 41.5 truckloads of fruit.
  2. B) 10 truckloads of fruit.
  3. C) 20 truckloads of fruit.
  4. D) 5 truckloads of fruit.

Answer:  C

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

17) Refer to Table 2.4. The principle of diminishing returns sets in with the addition of the ________ tank of fertilizer.

  1. A) 2nd
  2. B) 3rd
  3. C) 4th
  4. D) 5th

Answer:  B

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

18) The principle of diminishing returns does not apply to labor when all inputs are allowed to vary because:

  1. A) a firm can build an additional production facility so each worker’s share of the facility doesn’t necessarily decrease.
  2. B) eventually the marginal product of labor will begin to increase again.
  3. C) a firm can fire inefficient workers.
  4. D) None of the above, diminishing returns always apply.

Answer:  A

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Recall Application 4, “Fertilizer and Crop Yields” to answer the following questions:

 

19) According to the application, the corn production exhibited the principle of diminishing returns because:

  1. A) the size of the land and the amount of machinery were held constant.
  2. B) the type of soil was held constant.
  3. C) the type of fertilizer was held constant.
  4. D) the amount of nitrogen in each bag is decreasing.

Answer:  A

Diff: 2

Topic:  Application 4, Fertilizer and Crop Yields

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

20) As bags of nitrogen applied went from 0 to 1 to 2 to 3 to 4, crop yield went from 85 to 120 to 135 to 144 to 147 bushels per acre. The results show that as more bags of nitrogen were added, holding all other inputs constant, output:

  1. A) fell.
  2. B) rose but at a declining rate.
  3. C) rose but at an increasing rate.
  4. D) stayed the same.

Answer:  B

Diff: 2

Topic:  Application 4, Fertilizer and Crop Yields

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

21) Table 2.1 in the application showed that when the bags of nitrogen applied went from 0 to 1 to 2 to 3 to 4, crop yield went from 85 to 120 to 135 to 144 to 147 bushels per acre. The principles of diminishing return began to take effect on the ________ bag of fertilizer per acre.

  1. A) 1st
  2. B) 2nd
  3. C) 3rd
  4. D) 4th

Answer:  A

Diff: 2

Topic:  Application 4, Fertilizer and Crop Yields

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

22)  As bags of nitrogen applied went from 0 to 1 to 2 to 3 to 4, crop yield went from 85 to 120 to 135 to 144 to 147 bushels per acre or production exhibited:

  1. A) increasing returns to fertilizer.
  2. B) constant returns to land.
  3. C) diminishing returns to fertilizer.
  4. D) decreasing returns to land.

Answer:  C

Diff: 2

Topic:  Application 4, Fertilizer and Crop Yields

Skill:  Conceptual

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

23) According to the principle of diminishing returns, an additional worker decreases total output.

Answer:  FALSE

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

24) As more and more of a variable input is combined with some fixed inputs, additions to the total output decline.

Answer:  TRUE

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

25) The marginal output of labor is the amount of output that can be produced if one more unit of labor is added.

Answer:  TRUE

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

26) You are running a small yard maintenance business for the summer. What do you expect to happen to the number of yards you can maintain in a day as you add workers if you don’t purchase more capital equipment (like mowers and leaf blowers)?

Answer:  It is likely that as you add workers, you will get incrementally less output out of each additional worker. Holding constant your materials, such as trucks, lawnmowers, etc., you’ll almost surely be able to maintain more yards per day. But as you hire more workers, there might be waits for the use of the tools, or for transportation to the next job.

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

27) When a firm hired its tenth worker, its factory output increased by four units per month. Would you expect the firm’s output to increase by eight more units per month if the firm hired two more workers?

Answer:  No. The principle of diminishing marginal returns suggests that after some point of increasing returns, each incremental worker should have a progressively lower level of marginal productivity.

Diff: 2

Topic:  The Principle of Diminishing Returns

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

28) Producing more output in an existing production facility by increasing the number of workers sharing the facility will bring into effect the principle of ________.

Answer:  diminishing returns

Diff: 1

Topic:  The Principle of Diminishing Returns

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

2.5   The Real-Nominal Principle

 

1) The real-nominal principle states that:

  1. A) people respond more to explicit, or real, costs than to implicit costs.
  2. B) people respond more to implicit costs than to explicit costs.
  3. C) what matters to people is the face value of money or income.
  4. D) what matters to people is the purchasing power of money or income.

Answer:  D

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

2) The principle that what matters to people is the real value or purchasing power of money is the:

  1. A) marginal principle.
  2. B) principle of diminishing returns.
  3. C) spillover principle.
  4. D) real-nominal principle.

Answer:  D

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

3) The face value of money or income is called its ________ value.

  1. A) real
  2. B) marginal
  3. C) nominal
  4. D) external

Answer:  C

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

4) The value of money or income in terms of the quantity of goods the money can buy is called its:

  1. A) real value.
  2. B) marginal value.
  3. C) nominal value.
  4. D) implicit value.

Answer:  A

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

5) The real value of money:

  1. A) is another word for the face value.
  2. B) reflects the purchasing power of the sum of money.
  3. C) matters less to people than its nominal value.
  4. D) Both B and C are correct.

Answer:  B

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

6) If real salaries increase but nominal salaries do not, this means that:

  1. A) the purchasing power of money has decreased.
  2. B) prices have not changed.
  3. C) prices have risen.
  4. D) prices have fallen.

Answer:  D

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

7) If real salaries decrease but nominal salaries do not, this means that:

  1. A) the purchasing power of money has increased.
  2. B) prices have not changed.
  3. C) prices have risen.
  4. D) prices have fallen.

Answer:  C

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

8) A major league baseball player signs a contract that pays $50 million over five years. The $50 million is its ________ value.

  1. A) real
  2. B) implicit
  3. C) external
  4. D) nominal

Answer:  D

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

9) Suppose your bank pays you 6% interest per year on your savings account, so that $100 grows to $106 over a one-year period. If prices increase by 3% per year over that time, approximately how much real value do you gain by keeping $100 in the bank for a year?

  1. A) $0
  2. B) $1
  3. C) $3
  4. D) $4

Answer:  C

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

10) Suppose your bank pays you 6% interest per year on your savings account. If prices increase by 3% per year over that time, approximately how much nominal value do you gain by keeping $100 in the bank for a year?

  1. A) $6
  2. B) $0
  3. C) $3
  4. D) $106

Answer:  A

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

11) Suppose your bank pays you 5% interest per year on your savings account. If prices increase by 3% per year over that time, approximately how much real value do you gain by keeping $100 in the bank for a year?

  1. A) $0
  2. B) $2
  3. C) $3
  4. D) $6

Answer:  B

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

12) Suppose your bank pays you 5% interest per year on your savings account while prices increase by 3% per year over that time. Approximately how much nominal value do you gain by keeping $100 in the bank for a year?

  1. A) $5
  2. B) $2.50
  3. C) $0
  4. D) $2.00

Answer:  A

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

13) Suppose prices increase by 4% per year. What nominal percentage return on your savings account would you require to get a 1% real return?

  1. A) 0%
  2. B) 2%
  3. C) 5%
  4. D) 7%

Answer:  C

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

14) Suppose prices increase by 3% per year. What nominal percentage return on your savings account would you require to get a 3% real return?

  1. A) 3%
  2. B) 6%
  3. C) 8%
  4. D) 9%

Answer:  B

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

15) Suppose that you lend $1,000 to a friend and he or she pays you back one year later. What is the opportunity cost of lending the money?

  1. A) There is no cost.
  2. B) the real interest rate that would have been earned on the money
  3. C) the nominal interest rate that would have been earned on the money
  4. D) the implicit cost of the money

Answer:  B

Diff: 3

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

16) You borrow money to buy a house in 2006 at a fixed interest rate of 6.5%. By 2009, the inflation rate has risen to 8.5%. Considering only your mortgage, is inflation good news or bad news for you?

  1. A) bad news, because inflation hurts everyone
  2. B) bad news, because it makes the real value of your mortgage payments increase
  3. C) good news, because it makes the real value of your mortgage payments decrease
  4. D) bad news, because it makes the nominal value of your mortgage payments increase

Answer:  C

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

17) You borrow money to buy a house in 2006 at a variable interest rate of 6.5%. Your interest rate is always 2% more than the rate of inflation. By 2009, the inflation rate has risen to 8.5%. Considering only your mortgage, is inflation good news or bad news for you?

  1. A) bad news, because inflation hurts everyone
  2. B) good news, because it makes the real value of your mortgage payments decrease
  3. C) bad news, because it makes the nominal value of your mortgage payments increase
  4. D) neither, because your interest rate is tied to the rate of inflation

Answer:  D

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

18) What is the real value of money?

  1. A) its face value
  2. B) its compounded earnings in banks
  3. C) the quantity of goods and services it can buy
  4. D) the amount of it you have

Answer:  C

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

19) What is the nominal value of money?

  1. A) what can be purchased with the money
  2. B) discounts taken by multiple purchases
  3. C) savings by shopping on specific days of the week
  4. D) its actual face value

Answer:  D

Diff: 1

Topic:  Nominal Value of Money

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

20) If the nominal minimum wage is unchanged while prices rise, then the real minimum wage:

  1. A) rises.
  2. B) declines.
  3. C) stays the same.
  4. D) is unaffected.

Answer:  B

Diff: 1

Topic:  The Value of the Minimum Wage

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

21) If the nominal minimum wage is unchanged while prices fall, then the real minimum wage:

  1. A) rises.
  2. B) falls.
  3. C) stays the same.
  4. D) is unaffected.

Answer:  A

Diff: 1

Topic:  The Value of the Minimum Wage

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

22) The weekly income earned in 1974 at that time could buy ________ standard baskets of goods and services in 2011.

  1. A) 1.70
  2. B) 1.16
  3. C) 1.54
  4. D) 2.81

Answer:  A

Diff: 1

Topic:  The Value of the Minimum Wage

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

23) The weekly income earned in 2011 at that time could buy ________ standard baskets of goods and services.

  1. A) 1.70
  2. B) 1.29
  3. C) 1.54
  4. D) 2.81

Answer:  B

Diff: 1

Topic:  The Value of the Minimum Wage

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

24) If the weekly income from 1974 to 2011 increased from $80 to $290, but the number of standard baskets of goods that the weekly income decreased from 1.70 to 1.29 in 2011, then we can conclude that:

  1. A) prices decreased faster than the wage increase between 1974 and 2011.
  2. B) prices increased faster than the wage increase between 1974 and 2011.
  3. C) prices increased slower than the wage increase between 1974 and 2011.
  4. D) prices decreased slower than the wage increase between 1974 and 2011.

Answer:  B

Diff: 1

Topic:  The Value of the Minimum Wage

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Recall Application 5, “Repaying Student Loans,” to answer the following questions:

 

25) According to the application, if you are a debtor who owes student loans, you are helped in paying back your student loans by:

  1. A) unexpected deflation.
  2. B) unexpected inflation.
  3. C) expected inflation.
  4. D) expectedly deflation.

Answer:  B

Diff: 2

Topic:  Application 6, Repaying Student Loans

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

26) The application shows that high inflation results in fewer years to pay back student loans because:

  1. A) when inflation is high, the nominal value of the loan increases.
  2. B) when inflation is high, the nominal value of wages decreases.
  3. C) when inflation is high, the nominal value of the loan decreases.
  4. D) when inflation is high, the nominal value of the wages decrease.

Answer:  B

Diff: 2

Topic:  Application 6, Repaying Student Loans

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

27) When prices rise, increases in real income are greater than increases in nominal income.

Answer:  FALSE

Diff: 2

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

28) What matters to people is the face value of money or income.

Answer:  FALSE

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

29) If the price level falls faster than the wage rate, then the real wage decreases.

Answer:  FALSE

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

 

30) From 1974 to 2011, as the nominal minimum wage rose from $2 to $5.85, the real minimum wage fell.

Answer:  FALSE

Diff: 2

Topic:  The Value of the Minimum Wage

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

31) The government uses the buying power of wages rather than face value or nominal value in reporting changes in “real wages” in the economy.

Answer:  TRUE

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

32) Is it possible for nominal wages to decrease while real wages increase?

Answer:  Yes, though unlikely. This would imply that prices have fallen, and that the decrease is sufficiently negative to offset any losses in nominal wages.

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

33) People are interested in how much their money can buy. This is called the ________.

Answer:  real-nominal principle

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

34) What does an increase in prices in retails stores do to the real value of the money you earn as wages?

Answer:  An increase in prices in retail stores reduces what you can purchase and thus the real value of earnings.

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

35) If your salary increases and the cost of goods in stores increase at the same rate, does a unit of money have more or less buying power?

Answer:  Since prices have risen in stores, each unit, i.e. dollar, can buy less and its purchasing power is less.

Diff: 1

Topic:  The Real-Nominal Principle

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

36) Suppose you earn $50,000 per year in 2009. If your income increases by 8 percent while inflation increases by 10% in 2010, then calculate how much your real income has increased between 2009 and 2010.

Answer:  Because inflation increased by 10 percent while nominal income increased only by 8 percent, then the real growth in income between 2009 and 2010 is approximately -2 percent (a loss). A 2 percent loss in real income is approximately $1,000.

 

To get the actual amount of the loss:

Your income grows by 8 percent to $54,000. Because inflation went up by 10 percent, then the real value of your income in 2009 dollars is $54,000/1.10 = 49,090.90, or a loss in real income of $909.10.

Diff: 3

Topic:  The Real-Nominal Principle

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Identify the basic principles of economics and explain how to think like an economist.

 

Macroeconomics: Prin., Apps, & Tools, 8e (O’Sullivan) TB2

Chapter 4   Demand, Supply, and Market Equilibrium

 

4.1   The Demand Curve

 

1) A perfectly competitive market is a market that has:

  1. A) many buyers.
  2. B) many sellers.
  3. C) no single buyer or seller who can affect the price.
  4. D) All of the above are correct.

Answer:  D

Diff: 1

Topic:  Supply and Demand

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

2) If a competitive market operates perfectly, it relies on:

  1. A) the number of people buying goods.
  2. B) the laws of supply and demand.
  3. C) how many products can be produced for sale.
  4. D) how much people are willing to pay for the products.

Answer:  B

Diff: 1

Topic:  Supply and Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

3) The quantity of a product that consumers are willing and able to buy at a given price is called the:

  1. A) quantity demanded.
  2. B) quantity supplied.
  3. C) demand for a good.
  4. D) demand schedule.

Answer:  A

Diff: 1

Topic:  The Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

4) Quantity demanded is defined as the:

  1. A) quantity of a product that consumers are willing and able to buy at a given price.
  2. B) quantity of a product that sellers are willing and able to buy at a given level of income.
  3. C) quantity of a product that consumers and producers are willing and able to buy, given their level of preference.
  4. D) quantity of a product that consumers are willing and able to sell at a given price.

Answer:  A

Diff: 1

Topic:  The Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

5) A change in the quantity demanded of a product is the result of a change in:

  1. A) the price of the product.
  2. B) the price of related goods.
  3. C) consumer income.
  4. D) the cost of producing the product.

Answer:  A

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

6) A change in the quantity demanded of a product cannot be the result of a change in:

  1. A) the buyer’s preference.
  2. B) the price of related goods.
  3. C) consumer income.
  4. D) All of the above are correct.

Answer:  D

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

7) When a demand curve is drawn, which of the following is held constant?

  1. A) people’s income
  2. B) people’s preferences
  3. C) prices of related goods
  4. D) All of the above are held constant when constructing a demand curve.

Answer:  D

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

8) When a demand curve is drawn, which of the following is not held constant?

  1. A) people’s income
  2. B) people’s preferences
  3. C) prices of related goods
  4. D) the price of the good

Answer:  D

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

9) A demand curve is defined as the relationship between:

  1. A) the price of a good and the quantity of that good that consumers are willing to buy.
  2. B) the price of a good and the quantity of that good that producers are willing to sell.
  3. C) the income of consumers and the quantity of a good that consumers are willing to buy.
  4. D) the income of consumers and the quantity of a good that producers are willing to sell.

Answer:  A

Diff: 1

Topic:  The Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

10) The law of demand states that the quantity demanded of a product increases as:

  1. A) consumer income rises.
  2. B) the prices of other products fall.
  3. C) the price of the product rises.
  4. D) the price of the product falls.

Answer:  D

Diff: 1

Topic:  The Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

11) Typically, a demand curve will represent what relationship?

  1. A) the current desire for purchases of fad products as opposed to other products
  2. B) how much the products costs and the quantity of it produced
  3. C) how many people are willing to buy and the quantities each will purchase
  4. D) the price and the quantity demanded by the buyers

Answer:  D

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

12) The law of demand can be defined as:

  1. A) a lot of people wanting the same thing.
  2. B) the higher the price, the smaller the quantity demanded, ceteris paribus.
  3. C) people are willing to make limited sacrifices to acquire products.
  4. D) none of the above.

Answer:  B

Diff: 2

Topic:  The Individual Demand Curve and the Law of Demand

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

13) In considering the relationships between price and quantity demanded, ceteris paribus means economists assume that:

  1. A) price increases affect quantity.
  2. B) quantity increases affect prices.
  3. C) either price or quantity can affect demand.
  4. D) all other variables remain unchanged.

Answer:  D

Diff: 2

Topic:  The Individual Demand Curve and the Law of Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

14) When there is a change in the quantity demanded it means that the:

  1. A) hours the customer can buy products each day have increased.
  2. B) number of products in inventory have increased.
  3. C) quantity a consumer is willing to buy changes when the price changes.
  4. D) selling price of the products has not changed.

Answer:  C

Diff: 2

Topic:  The Individual Demand Curve and the Law of Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

15) The market demand curve:

  1. A) shows the relationship between the price of a good and the quantity that all consumers together are willing to buy.
  2. B) is drawn assuming that variables such as income and tastes are fixed.
  3. C) is drawn assuming that the number of consumers is fixed.
  4. D) all of the above.

Answer:  D

Diff: 1

Topic:  From Individual Demand to Market Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

16) Suppose that there are only three consumers of a product. At a price of $3 per unit, the first consumer would buy 6 units of the product, the second consumer would buy 5 units, and the third consumer would buy 7 units of the product. If you drew a market demand curve for this product, the quantity demanded at a price of $3 would be:

  1. A) 18 units.
  2. B) 11 units.
  3. C) 13 units.
  4. D) unable to be determined based on the information provided.

Answer:  A

Diff: 1

Topic:  From Individual Demand to Market Demand

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

17) The market demand curve is:

  1. A) negatively sloped.
  2. B) upward sloping.
  3. C) always vertical
  4. D) always horizontal.

Answer:  A

Diff: 2

Topic:  From Individual Demand to Market Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

18) The market demand curve is:

  1. A) downward sloping and is flatter than an individual’s demand curve.
  2. B) upward sloping and is flatter than an individual’s demand curve.
  3. C) downward sloping and is steeper than an individual’s demand curve.
  4. D) upward sloping and is steeper than an individual’s demand curve.

Answer:  A

Diff: 2

Topic:  From Individual Demand to Market Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

Figure 4.1

 

19) Refer to Figure 4.1 that shows Mary and Tom’s individual demand curves for meals per week at Fratelli’s Italian Restaurant. Assuming Mary and Tom are the only consumers in the market, what is the market quantity demanded at a price of $15?

  1. A) 1
  2. B) 2
  3. C) 3
  4. D) 9

Answer:  C

Diff: 2

Topic:  From Individual Demand to Market Demand, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

20) Refer to Figure 4.1 that shows Mary and Tom’s individual demand curves for meals per week at Fratelli’s Italian Restaurant. Assuming Mary and Tom are the only consumers in the market, what is the market quantity demanded at a price of $10?

  1. A) 2
  2. B) 4
  3. C) 6
  4. D) 8

Answer:  C

Diff: 2

Topic:  From Individual Demand to Market Demand, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

21) Refer to Figure 4.1 that shows Mary and Tom’s individual demand curves for meals per week at Fratelli’s Italian Restaurant. Assuming Mary and Tom are the only consumers in the market, if the market quantity demanded is 6, the price must be:

  1. A) $5.
  2. B) $10.
  3. C) $15.
  4. D) $20.

Answer:  B

Diff: 2

Topic:  From Individual Demand to Market Demand, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

22) Refer to Figure 4.1 that shows Mary and Tom’s individual demand curves for meals per week at Fratelli’s Italian Restaurant. Assuming Mary and Tom are the only consumers in the market, if the market quantity demanded is 3 the price must be:

  1. A) $5.
  2. B) $10.
  3. C) $15.
  4. D) $20.

Answer:  C

Diff: 2

Topic:  From Individual Demand to Market Demand, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

23) Refer to Figure 4.1 that shows Mary and Tom’s individual demand curves for meals per week at Fratelli’s Italian Restaurant. Assuming Mary and Tom are the only consumers in the market, if the market quantity demanded is 9 the price must be:

  1. A) $5.
  2. B) $10.
  3. C) $15.
  4. D) $20.

Answer:  A

Diff: 2

Topic:  From Individual Demand to Market Demand, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

Recall Application 1, “Law of Demand and Cigarettes,” to answer the following questions:

 

24) In the application, what was the reason why the government decreased the tax rates of cigarettes?

  1. A) to discourage smuggling of cigarettes from the United States
  2. B) to encourage smoking
  3. C) to discourage smoking
  4. D) to give in to consumer demands of lower taxes in the country

Answer:  A

Diff: 1

Topic:  Application 1, Law of Demand and Cigarettes

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

25) In the application, what was/were the reason(s) why a lower price of cigarettes will increase the quantity demanded for cigarettes?

  1. A) Lower prices make current smokers smoke more cigarettes.
  2. B) Lower prices encourage people to start smoking.
  3. C) Lower prices encourage people to quit smoking.
  4. D) A and B are both correct.

Answer:  D

Diff: 2

Topic:  Application 1, Law of Demand and Cigarettes

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

26) In the application, when the government lowered the price of cigarettes by lowering the tax rates, the response of the consumer was:

  1. A) an increase in quantity demanded.
  2. B) an increase in demand.
  3. C) a decrease in demand.
  4. D) a decrease in quantity demanded.

Answer:  A

Diff: 2

Topic:  Application 1, Law of Demand and Cigarettes

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

27) The model of supply and demand is the most important tool of economic analysis.

Answer:  TRUE

Diff: 1

Topic:  Supply and Demand

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

28) As the price of a product rises, the demand for the product falls.

Answer:  FALSE

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

29) The substitution effect of a price change implies that as the price of a good falls, people are likely to buy less of the good whose price has fallen.

Answer:  FALSE

Diff: 2

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

30) On the “demand side” of a market, consumers indicate to producers what they are willing to buy, in what quantity, and at what price.

Answer:  TRUE

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

31) The market demand curve shows the relationship between the price and the quantity demanded by all consumers, everything else being equal.

Answer:  TRUE

Diff: 2

Topic:  From Individual Demand to Market Demand

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

32) Suppose that the price of apples decreases and the quantity of apples in the market decreases. Suggest two reasons why this might have happened.

Answer:  The most likely explanation is that the demand for apples decreased. This could be due to the price of oranges falling, or perhaps due to concerns about the safety of apples (i.e., pesticide use).

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

33) What is a “change in quantity demanded”? How is a “change in quantity demanded” illustrated in a demand diagram?

Answer:  A “change in quantity demanded” refers to a change in the amount that consumers are willing to buy as a result of a change in the price. According to the law of demand, a higher price will decrease the quantity demanded while a lower price will decrease the quantity demanded.

 

In a demand diagram, the “change in the quantity demanded” is illustrated as a movement upward or downward along the same demand curve.

Diff: 2

Topic:  The Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

34) What is the “law of demand”?

Answer:  The “law of demand” states that there is a negative relationship between the price and the quantity demanded, ceteris paribus. According to the law of demand, a higher price will decrease the quantity demanded while a lower price will decrease the quantity demanded.

Diff: 2

Topic:  The Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

35) What is the difference between an “individual demand curve” and a “market demand curve”?

Answer:  An individual demand curve is a curve that shows the relationship between the price of a good and quantity demanded by an one consumer, ceteris paribus. A market demand curve is a curve showing the relationship between price and quantity demanded by all consumers, ceteris paribus.

Diff: 2

Topic:  From Individual Demand to Market Demand

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

36) Between an “individual demand curve” and a “market demand curve,” which one has a steeper slope?

Answer:  An individual demand curve is usually steeper, because for the same change in the price, the individual demand curve will change quantity demanded by a smaller amount.

Diff: 2

Topic:  From Individual Demand to Market Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

4.2   The Supply Curve

 

1) A supply curve is defined as the relationship between:

  1. A) the price of a good and the quantity that consumers are willing to buy.
  2. B) the price of a good and the quantity that producers are willing to sell.
  3. C) the income of consumers and the quantity of a product that consumers are willing to buy.
  4. D) the income of consumers and the quantity of a product that producers are willing to sell.

Answer:  B

Diff: 1

Topic:  The Supply Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

2) A table that shows the price of a product and the quantity of that product that a seller is willing to sell is called the:

  1. A) supply schedule.
  2. B) supply curve.
  3. C) demand schedule.
  4. D) demand curve.

Answer:  A

Diff: 1

Topic:  The Supply Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

3) The law of supply states that:

  1. A) firms supply more of a product as consumer income rises.
  2. B) firms supply more of a product as consumer income falls.
  3. C) firms supply more of a product as the price of the product rises.
  4. D) firms supply more of a product as the price of the product falls.

Answer:  C

Diff: 1

Topic:  The Supply Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

4) If the law of supply holds, then the supply curve can never:

  1. A) slope downwards.
  2. B) be concave.
  3. C) shift to the right.
  4. D) shift to the left.

Answer:  A

Diff: 2

Topic:  The Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

5) When a supply curve is drawn, which of the following is held constant?

  1. A) the amount of taxes or subsidies that a firm pays or receives
  2. B) the number of sellers in a market
  3. C) prices of inputs
  4. D) All of the above are held constant when constructing a supply curve.

Answer:  D

Diff: 1

Topic:  The Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

6) When a supply curve is drawn, which of the following is not held constant?

  1. A) taxes and subsidies
  2. B) the state of production technology
  3. C) prices of inputs
  4. D) the price of the good

Answer:  D

Diff: 1

Topic:  The Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

7) A minimum supply price is defined as:

  1. A) the lowest price at which a product is made available for sale.
  2. B) the lowest price at which a product is bought.
  3. C) the lowest cost to produce a good.
  4. D) the lowest price at which other sellers also want to sell the good.

Answer:  A

Diff: 2

Topic:  The Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

8) If a computer company will sell a laptop only if the price is $400 or higher, then $400 is known as:

  1. A) the minimum supply price.
  2. B) the input cost price.
  3. C) the minimum production cost.
  4. D) the minimum average cost.

Answer:  A

Diff: 2

Topic:  The Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

9) The market supply curve for a particular good:

  1. A) shows the relationship between the price of the good and the quantity that all producers together are willing to sell.
  2. B) is drawn assuming that the other variables besides product price that affect supply are fixed.
  3. C) is drawn assuming that the number of producers is fixed.
  4. D) all of the above

Answer:  D

Diff: 1

Topic:  From Individual Supply to Market Supply

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

10) If at a price of $1000, 8 different laptop manufacturers are willing to sell 20 laptops each. If the 8 manufacturers are the only sellers of laptops in the market, then at a price of $1000, there are ________ laptops supplied in the market.

  1. A) 160
  2. B) 8
  3. C) 20
  4. D) 820

Answer:  A

Diff: 1

Topic:  From Individual Supply to Market Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

11) At a price of $1000, Dell Computer Co. is willing to sell 20 laptops and Compaq is willing to sell 40 laptops. IBM will only sell laptops if the price is $1300 or higher. At $1000, the market supply for laptops is:

  1. A) 60.
  2. B) 800.
  3. C) 20.
  4. D) 40.

Answer:  A

Diff: 1

Topic:  From Individual Supply to Market Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

12) At a price of $1000, Dell Computer Co. is willing to sell 20 laptops and Compaq is willing to sell 40 laptops. IBM will only sell laptops if the price is $1300 or higher. From the point of view of IBM, $1300 is the:

  1. A) minimum supply price.
  2. B) minimum cost.
  3. C) the equilibrium price.
  4. D) minimum loss price.

Answer:  A

Diff: 1

Topic:  From Individual Supply to Market Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

13) The market supply curve is:

  1. A) negatively sloped.
  2. B) upward sloping.
  3. C) always vertical
  4. D) always horizontal.

Answer:  B

Diff: 2

Topic:  From Individual Supply to Market Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

14) The market supply curve is:

  1. A) downward sloping and is flatter than an individual’s supply curve.
  2. B) upward sloping and is flatter than an individual’s supply curve.
  3. C) downward sloping and is steeper than an individual’s supply curve.
  4. D) upward sloping and is steeper than an individual’s supply curve.

Answer:  B

Diff: 2

Topic:  From Individual Supply to Market Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

15) Why is the market supply curve positively sloped?

  1. A) At a higher price, more firms enter the market willing to sell the product or service.
  2. B) At a higher price, fewer firms enter the market willing to sell the product or service.
  3. C) At a higher price, the firms already in the market and are willing to sell a larger quantity of the product or service.
  4. D) Both A and C are correct.

Answer:  D

Diff: 2

Topic:  Why is the Market Supply Curve Positively Sloped?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

16) Suppose that the price for fully electric vehicle made by Toyota increases. The quantity of fully electric cars sold in the market will:

  1. A) increase, because Toyota would be willing to sell more fully electric vehicles.
  2. B) decrease, because Toyota believes that to maintain the higher prices, it must sell a smaller quantity.
  3. C) increase, because other auto manufacturers would want to enter the market and also sell fully electric vehicles.
  4. D) Both A and C are correct.

Answer:  D

Diff: 2

Topic:  Why is the Market Supply Curve Positively Sloped?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

Recall Application 2, “Law of Supply and Woolympics,” to answer the following questions:

 

17) According to the Application, which of the following is the most likely reason for the falling prices of wool worldwide?

  1. A) lower demand for wool.
  2. B) the Law of Supply.
  3. C) higher demand for wool.
  4. D) lower quantity supplied of wool.

Answer:  A

Diff: 2

Topic:  Application 2, Law of Supply and Woolympics

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

18) According to the Application, which of the following is the result of the falling prices of wool worldwide?

  1. A) lower demand for wool.
  2. B) higher demand for synthetic fibers.
  3. C) higher demand for wool.
  4. D) lower quantity supplied of wool.

Answer:  D

Diff: 2

Topic:  Application 2, Law of Supply and Woolympics

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

19) According to the Application, the policies proposed to help raise the price of wool focuses on:

  1. A) lowering the demand for wool.
  2. B) raising the supply for synthetic fibers.
  3. C) raising the demand for wool.
  4. D) raising the supply for wool.

Answer:  D

Diff: 2

Topic:  Application 2, Law of Supply and Woolympics

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

20) According to the Application, why might introducing sheep shearing not be an effective policy to raise wool prices?

  1. A) Increased sheep shearing might decrease the demand for wool.
  2. B) Increased sheep searing might increase the demand for wool substitutes.
  3. C) Increased sheep shearing will definitely increase the demand for wool, causing the prices to drop.
  4. D) Increased sheep shearing will definitely increase the supply of wool, causing the prices to drop.

Answer:  D

Diff: 2

Topic:  Application 2, Law of Supply and Woolympics

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

21) As the price of a product rises, the quantity supplied increases.

Answer:  TRUE

Diff: 1

Topic:  The Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

22) On the “supply side” of a market, producers indicate to consumers what they are willing to sell, in what quantity, and at what price.

Answer:  TRUE

Diff: 1

Topic:  The Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

4.3   Market Equilibrium: Bringing Demand and Supply Together

 

1) Suppose that the quantity supplied of pizza exceeds the quantity demanded for pizza. We would expect that:

  1. A) the price of pizza will increase.
  2. B) the price of pizza will decrease.
  3. C) the supply will decrease to meet the demand.
  4. D) the demand will increase to meet the supply.

Answer:  B

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

2) If we observe that the price is rising in the sugar market, it could be due to:

  1. A) an excess supply of sugar.
  2. B) an excess demand for sugar.
  3. C) an increase in the supply of sugar.
  4. D) a decrease in the demand for sugar.

Answer:  B

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

3) When consumers are willing to buy more than producers are willing to sell:

  1. A) there is excess supply of the product in the market.
  2. B) there is excess demand for the product in the market.
  3. C) the market is in equilibrium.
  4. D) the demand curve will shift until the quantity supplied equals the quantity demanded.

Answer:  B

Diff: 1

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

4) What happens if the price of a product is below the equilibrium price?

  1. A) The buyers will stop purchasing a “cheap” product.
  2. B) The producer will lower the price to make more profit.
  3. C) There will be an excess demand for the product.
  4. D) none of the above

Answer:  C

Diff: 1

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

5) Suppose that the current price in a market for Pizza is $9. At that price, the quantity demanded is 519 and the quantity supplied is 400. At the current price, the market is experiencing:

  1. A) an excess demand of 119 pizzas.
  2. B) an equilibrium.
  3. C) an excess supply of $119.
  4. D) an excess demand of 500 pizzas.

Answer:  A

Diff: 1

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

6) Suppose that the current price in a market for Pizza is $9. At that price, the quantity demanded is 519 and the quantity supplied is 400. In this market, we would expect that:

  1. A) the price of pizzas would increase.
  2. B) the price of pizzas would decrease.
  3. C) buyers would want to buy more pizza in the future.
  4. D) sellers would want to sell fewer pizzas in the future.

Answer:  A

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

7) Suppose that the quantity demanded for cars exceeds the quantity supplied of cars. We would expect that:

  1. A) the price of cars will increase.
  2. B) the price of cars will decrease.
  3. C) the supply will increase to meet the demand.
  4. D) the demand will decrease to meet the supply.

Answer:  A

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

8) Suppose that the quantity supplied of cars exceeds the quantity of cars demanded. We would expect that:

  1. A) the price of cars will increase.
  2. B) the price of cars will decrease.
  3. C) the supply will increase to meet the demand.
  4. D) the demand will decrease to meet the supply.

Answer:  B

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

9) Suppose that a market for a product is in equilibrium at a price of $5 per unit. At any price above $5 per unit:

  1. A) there will be an excess demand for the product.
  2. B) there will be an excess supply of the product.
  3. C) the quantity supplied of the product will be greater than the quantity demanded of that product.
  4. D) both B and C.

Answer:  D

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

10) Suppose that a market for a product is in equilibrium at a price of $5 per unit. At any price below $5 per unit:

  1. A) there will be an excess demand for the product.
  2. B) there will be an excess supply of the product.
  3. C) the quantity supplied of the product will be greater than the quantity demanded of that product.
  4. D) both B and C.

Answer:  A

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

Figure 4.2

 

11) In Figure 4.2, which of the panels depicts a market in which there is an excess demand for a product?

  1. A) Panel A
  2. B) Panel B
  3. C) Panel C
  4. D) None of the panels depicts a market in which there is an excess demand for a product.

Answer:  B

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

12) In Figure 4.2, which of the panels depicts a market in which there is an excess supply of a product?

  1. A) Panel A
  2. B) Panel B
  3. C) Panel C
  4. D) None of the panels depicts a market in which there is an excess supply of a product.

Answer:  C

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

13) Figure 4.2 depicts three market situations. Which of the panels depicts a market in which the price is likely to rise?

  1. A) Panel A
  2. B) Panel B
  3. C) Panel C
  4. D) None of the panels depicts a market in which the price is likely to rise.

Answer:  B

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

14) Figure 4.2 depicts three market situations. Which of the panels depicts a market in which the price is likely to fall?

  1. A) Panel A
  2. B) Panel B
  3. C) Panel C
  4. D) None of the panels depicts a market in which the price is likely to fall.

Answer:  C

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

Figure 4.3

 

15) Figure 4.3 illustrates the supply and demand for blue jeans. If the actual price of blue jeans is $30, there is:

  1. A) excess demand of 40 pairs of blue jeans.
  2. B) excess supply of 40 pairs of blue jeans.
  3. C) excess demand of 50 pairs of blue jeans.
  4. D) excess supply of 50 pairs of blue jeans.

Answer:  A

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

16) Figure 4.3 illustrates the supply and demand for blue jeans. If the actual price of blue jeans is $50, there is:

  1. A) excess demand of 40 pairs of blue jeans.
  2. B) excess supply of 40 pairs of blue jeans.
  3. C) excess demand of 50 pairs of blue jeans.
  4. D) excess supply of 50 pairs of blue jeans.

Answer:  D

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

17) Figure 4.3 illustrates the supply and demand for blue jeans. If the actual price of blue jeans is $30, we would expect the price of blue jeans to ________, the quantity demanded of blue jeans to ________, and the quantity supplied of blue jeans ________.

  1. A) increase; increase; increase
  2. B) increase; decrease; increase
  3. C) decrease; increase; decrease
  4. D) decrease; decrease; increase

Answer:  B

Diff: 3

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

18) Figure 4.3 illustrates the supply and demand for blue jeans. If the actual price of blue jeans is $50, we would expect the price of blue jeans to ________, the quantity demanded of blue jeans to ________, and the quantity supplied of blue jeans to ________.

  1. A) increase; increase; increase
  2. B) increase; decrease; increase
  3. C) decrease; increase; decrease
  4. D) decrease; decrease; increase

Answer:  C

Diff: 3

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

19) Figure 4.3 illustrates the supply and demand for blue jeans. If the actual price of blue jeans is $30, we would expect that:

  1. A) demand will decrease until quantity demanded equals quantity supplied.
  2. B) supply will increase until quantity demanded equals quantity supplied.
  3. C) price will increase until quantity demanded equals quantity supplied.
  4. D) there will be no change since the market is in equilibrium.

Answer:  C

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

20) Figure 4.3 illustrates the supply and demand for blue jeans. If the actual price of blue jeans is $50, we would expect that:

  1. A) demand will increase until quantity demanded equals quantity supplied.
  2. B) supply will decrease until quantity demanded equals quantity supplied.
  3. C) price will decrease until quantity demanded equals quantity supplied.
  4. D) no change will occur since the market is in equilibrium.

Answer:  C

Diff: 2

Topic:  Market Equilibrium: Bringing Demand and Supply Together, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

21) A government sometimes creates an excess supply of a product by setting a minimum price at which the product may be sold to consumers. This is sometimes called a:

  1. A) price ceiling.
  2. B) price floor.
  3. C) tax.
  4. D) none of the above

Answer:  B

Diff: 1

Topic:  Excess Supply Causes the Price to Drop

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

 

22) Rent control is an example of the government imposing:

  1. A) a price ceiling.
  2. B) an equilibrium price.
  3. C) a price floor.
  4. D) a minimum supply price.

Answer:  A

Diff: 1

Topic:  Excess Demand Causes the Price to Rise

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

23) If the government imposes a price ceiling that is above the equilibrium price, then the market will experience:

  1. A) an equilibrium.
  2. B) a shortage.
  3. C) an excess supply.
  4. D) no scarcity.

Answer:  A

Diff: 1

Topic:  Excess Demand Causes the Price to Rise

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

24) If the government imposes a price ceiling that is below the equilibrium price, then the market will experience:

  1. A) an equilibrium.
  2. B) a shortage.
  3. C) an excess supply.
  4. D) no scarcity.

Answer:  B

Diff: 3

Topic:  Excess Demand Causes the Price to Rise

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

 

25) If the government imposes a price floor that is below the equilibrium price, then the market will experience:

  1. A) an equilibrium.
  2. B) a shortage.
  3. C) an excess supply.
  4. D) no scarcity.

Answer:  A

Diff: 3

Topic:  Excess Supply Causes the Price to Drop

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

26) If the government imposes a price floor that is above the equilibrium price, then the market will experience:

  1. A) an equilibrium.
  2. B) a shortage.
  3. C) an excess supply.
  4. D) an increase in demand.

Answer:  C

Diff: 2

Topic:  Excess Supply Causes the Price to Drop

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

27) Suppose that the equilibrium rent for apartments in San Francisco is $1200 per month. If the City of San Francisco legislates that apartment owners cannot charge rent higher than $1000, then the apartment market in San Francisco will experience:

  1. A) an equilibrium.
  2. B) a shortage.
  3. C) an excess supply.
  4. D) an increase in supply.

Answer:  B

Diff: 2

Topic:  Excess Demand Causes the Price to Rise

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

 

28) Suppose that the equilibrium rent for apartments in San Francisco is $1200 per month. If the City of San Francisco legislates that apartment owners cannot charge rent higher than $1900, then the apartment market in San Francisco will experience:

  1. A) an equilibrium.
  2. B) a shortage.
  3. C) an excess supply.
  4. D) an increase in supply.

Answer:  A

Diff: 2

Topic:  Excess Demand Causes the Price to Rise

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

Recall Application 3, “Shrinking Wine Lakes,” to answer the following questions:

 

29) From the Application, we can infer that the presence of wine lakes indicate that the market is experiencing:

  1. A) an equilibrium.
  2. B) a shortage.
  3. C) a surplus.
  4. D) All of the above are correct.

Answer:  C

Diff: 2

Topic:  Application 3, Shrinking Wine Lakes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

30) From the Application, we can infer that if the government stops intervening in the market, then the:

  1. A) prices will drop.
  2. B) prices will rise.
  3. C) the supply will decrease.
  4. D) the demand will increase.

Answer:  A

Diff: 2

Topic:  Application 3, Shrinking Wine Lakes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

31) From the Application, we can infer that the wine lakes will grow faster if:

  1. A) the government set minimum prices further above the equilibrium.
  2. B) the government set maximum prices further below the equilibrium.
  3. C) the government set maximum prices further above the equilibrium.
  4. D) the government set minimum prices further below the equilibrium.

Answer:  A

Diff: 2

Topic:  Application 3, Shrinking Wine Lakes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

32) From the Application, we can infer that the wine lakes will disappear if:

  1. A) the government set the price at the equilibrium.
  2. B) the government set minimum prices below the equilibrium.
  3. C) the government set maximum prices above the equilibrium.
  4. D) All of the above are correct.

Answer:  D

Diff: 3

Topic:  Application 3, Shrinking Wine Lakes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

33) From the Application, we can infer that the wine lakes will disappear if:

  1. A) the government set the minimum price below the equilibrium.
  2. B) the government set minimum prices above the equilibrium.
  3. C) the government takes over the production of wine.
  4. D) All of the above are correct.

Answer:  A

Diff: 3

Topic:  Application 3, Shrinking Wine Lakes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

34) Minimum wage laws are examples of:

  1. A) price ceilings.
  2. B) equilibrium prices.
  3. C) price floors.
  4. D) minimum supply prices.

Answer:  C

Diff: 1

Topic:  Excess Supply Causes the Price to Drop

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

35) Excess supply in an unregulated market will cause the price of a product to fall.

Answer:  TRUE

Diff: 1

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

36) Excess demand in an unregulated market will cause the price of a product to fall.

Answer:  FALSE

Diff: 1

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

37) If a market is in equilibrium, there is not any pressure to change the price upward or downward. Is this a true or false assumption?

Answer:  TRUE

Diff: 1

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

38) Governments occasionally get involved in creating a market equilibrium by setting a maximum price that is less than the equilibrium price, resulting in a permanent excess demand for the products.

Answer:  TRUE

Diff: 1

Topic:  Excess Demand Causes the Price to Rise

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

39) ________ occurs in a market when consumers are willing to buy more than producers are willing to sell, or can supply

Answer:  Excess demand

Diff: 1

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

40) When the quantity of a product demanded by buyers equals the quantity supplied, it is called ________.

Answer:  market equilibrium

Diff: 1

Topic:  Market Equilibrium: Bringing Demand and Supply Together

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

41) If a government creates an excess demand for a product by setting a maximum price, it is sometimes called a ________.

Answer:  price ceiling

Diff: 1

Topic:  Excess Demand Causes the Price to Rise

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

42) A surplus occurs when producers are willing to sell more than consumers are willing to buy. This is called an ________.

Answer:  excess supply

Diff: 1

Topic:  Excess Supply Causes the Price to Drop

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

43) A permanent excess supply of a product is possible when the government sets a minimum price that is ________ than the equilibrium price.

Answer:  greater

Diff: 1

Topic:  Excess Supply Causes the Price to Drop

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

44) Explain how an excess supply would lead to a decrease in prices in an unregulated market.

Answer:  With an excess supply, the quantity available for sale exceeds the amount that buyers are willing to buy at that price. If sellers are anxious to sell the product, then they know that they have to lower prices in order to entice more individuals to buy that product. If they do not lower the price, the excess supply would persist.

Diff: 1

Topic:  Excess Supply Causes the Price to Drop

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

45) Explain how an excess demand would lead to an increase in prices in an unregulated market.

Answer:  With an excess demand, the quantity available for sale is less the amount that buyers are willing to buy at that price. If buyers are anxious to buy the few goods available for sale, then they know that they have to bid up the prices. If they do not bid up the price, the excess demand would persist.

Diff: 1

Topic:  Excess Demand Causes the Price to Rise

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

4.4   Market Effects of Changes in Demand

 

1) Judy demands more peanuts as her income increases. From this, we can conclude that, for Judy:

  1. A) peanuts are a normal good.
  2. B) peanuts are an inferior good.
  3. C) peanuts are a complementary good.
  4. D) peanuts are a substitute good.

Answer:  A

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

2) When Mary’s income increases, she purchases fewer hamburgers. We can conclude that for Mary, hamburger is a(n) ________ good.

  1. A) normal
  2. B) inferior
  3. C) substitute
  4. D) complementary

Answer:  B

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

3) When Tom’s income decreases, he purchases more hamburgers. We can conclude that for Tom, hamburger is a(n) ________ good.

  1. A) substitute
  2. B) complementary
  3. C) normal
  4. D) inferior

Answer:  D

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

4) Becky demands more raisins as her income increases. From this, we can conclude that, for Becky:

  1. A) raisins are an inferior good.
  2. B) raisins are a complementary good.
  3. C) raisins are a normal good.
  4. D) raisins are a substitute good.

Answer:  C

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

5) A normal good is defined as a good for which demand decreases when:

  1. A) the price increases.
  2. B) income increases.
  3. C) the price decreases.
  4. D) income decreases.

Answer:  D

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

6) Two goods are substitutes if:

  1. A) the supply of one good decreases when the price of the other increases.
  2. B) the supply of one good decreases when the price of the other decreases.
  3. C) the demand for one good decreases when the price of the other increases.
  4. D) the demand for one good decreases when the price of the other decreases.

Answer:  D

Diff: 2

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

7) The effect of income on the demand for normal goods is such that:

  1. A) as the price of a normal good falls, people are likely to buy less of the good.
  2. B) as the price of a good falls, people are likely to buy more of all normal goods.
  3. C) as the price of a good falls, people are likely to buy less of all normal goods.
  4. D) both A and C.

Answer:  B

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

8) If an increase in income results in a decrease in the demand for Honda Civics, then Honda Civics are considered:

  1. A) normal goods.
  2. B) inferior goods.
  3. C) substitute goods.
  4. D) complementary goods.

Answer:  B

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

9) If an increase in income results in an increase in the demand for Honda Civics, then Honda Civics are considered:

  1. A) normal goods.
  2. B) inferior goods.
  3. C) substitute goods.
  4. D) complementary goods.

Answer:  A

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

10) If incomes increase and Honda Civics are considered normal goods, then:

  1. A) the demand for Honda Civics will increase.
  2. B) the quantity demanded for Honda Civics will increase.
  3. C) the demand for Honda Civics will decrease.
  4. D) the quantity demanded for Honda Civics will decrease.

Answer:  A

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

11) Relative to hotdogs, hotdog buns are considered:

  1. A) complements.
  2. B) substitutes.
  3. C) inputs.
  4. D) luxury goods.

Answer:  A

Diff: 1

Topic:  Market Effects of Changes in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

12) Which of the following are most likely to be considered substitutes to pizzas?

  1. A) hamburgers
  2. B) cheese
  3. C) pepperoni
  4. D) soda

Answer:  A

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

13) Which of the following is the least likely complement for hamburgers?

  1. A) beef
  2. B) cheese
  3. C) hamburger buns
  4. D) soda

Answer:  A

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

14) Which of the following is the most likely complement for hamburgers?

  1. A) soda
  2. B) beef
  3. C) hamburger buns
  4. D) All of the above are complements.

Answer:  A

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

15) If incomes increase and Honda Civics are considered inferior goods, then:

  1. A) the demand for Honda Civics will increase.
  2. B) the quantity demanded for Honda Civics will increase.
  3. C) the demand for Honda Civics will decrease.
  4. D) the quantity demanded for Honda Civics will decrease.

Answer:  C

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

16) As consumers prefer smaller and more fuel-efficient cars, the:

  1. A) demand for SUVs will decrease.
  2. B) quantity demanded for SUVs will rise.
  3. C) demand for SUVs will increase.
  4. D) quantity demanded for SUVs will fall.

Answer:  A

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

17) Assume that butter and margarine are substitutes. When the price of butter increases:

  1. A) the demand for margarine increases.
  2. B) the demand for margarine decreases.
  3. C) the supply of margarine increases.
  4. D) the supply of margarine decreases.

Answer:  A

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

18) When the price of apples goes up:

  1. A) the demand for apples will decrease.
  2. B) the demand for apples will increase.
  3. C) the quantity demanded for apples will decrease.
  4. D) the quantity demanded for apples will increase.

Answer:  C

Diff: 1

Topic:  Change in Quantity Demand versus Change in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

19) Assume that chicken and beef are substitutes. When the price of beef increases:

  1. A) the demand for chicken decreases.
  2. B) the demand for chicken increases.
  3. C) the supply of chicken increases.
  4. D) the supply of chicken decreases.

Answer:  B

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

20) When the price of peanuts falls:

  1. A) the demand for peanuts decreases.
  2. B) the demand for peanuts increases.
  3. C) the quantity demanded of peanuts decreases.
  4. D) the quantity demanded of peanuts increases.

Answer:  D

Diff: 1

Topic:  Change in Quantity Demand versus Change in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

21) Assume that compact discs and compact disc players are complements. When the price of compact disc players decreases:

  1. A) the demand for compact discs increases.
  2. B) the demand for compact discs decreases.
  3. C) the supply of compact discs increases.
  4. D) the supply of compact discs decreases.

Answer:  A

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

22) Suppose that a product benefits from a successful advertising campaign. The result is that:

  1. A) the demand for the product increases.
  2. B) the demand for the product decreases.
  3. C) the supply of the product increases.
  4. D) the supply of the product decreases.

Answer:  A

Diff: 3

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

23) Suppose that consumers expect that the price of a product will increase in the future. The result is that:

  1. A) the current demand for the product increases.
  2. B) the current demand for the product decreases.
  3. C) the current supply of the product increases.
  4. D) the current supply of the product decreases.

Answer:  A

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

24) Two goods are complements if:

  1. A) the supply of one good decreases when the price of the other increases.
  2. B) the supply of one good decreases when the price of the other decreases.
  3. C) the demand for one good decreases when the price of the other increases.
  4. D) the demand for one good decreases when the price of the other decreases.

Answer:  C

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

25) Suppose you have 2 goods, X and Y. If the price of X increases and you buy more Y, then X and Y are:

  1. A) substitutes.
  2. B) normal goods.
  3. C) complements.
  4. D) inferior goods.

Answer:  A

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

26) Suppose you have 2 goods, X and Y. If the price of X decreases and you buy more Y, then X and Y are:

  1. A) substitutes.
  2. B) normal goods.
  3. C) complements.
  4. D) inferior goods.

Answer:  C

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

27) Suppose that consumption of oat bran is found to reduce cholesterol and improve health. The result is that:

  1. A) the demand for oat bran decreases.
  2. B) the demand for oat bran increases.
  3. C) the supply of oat bran increases.
  4. D) Both A and C are correct.

Answer:  B

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

28) Suppose that consumers expect the price of a product to decrease in the future. The result is that:

  1. A) the current demand for the product increases.
  2. B) the current demand for the product decreases.
  3. C) the current supply of the product increases.
  4. D) the current supply of the product decreases.

Answer:  B

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

Figure 4.4

 

29) Figure 4.4 illustrates the demand for guitars. An increase in the demand for guitars is represented by the movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  D

Diff: 1

Topic:  Change in Quantity Demand versus Change in Demand, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

30) Figure 4.4 illustrates the demand for guitars. A decrease in the demand for guitars is represented by the movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  C

Diff: 1

Topic:  Change in Quantity Demand versus Change in Demand, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

31) Figure 4.4 illustrates the demand for guitars. Assume guitars are a normal good. An increase in income would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  D

Diff: 2

Topic:  Market Effects of Changes in Demand, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

32) Figure 4.4 illustrates the demand for guitars. Assume guitars are an inferior good. An increase in income would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  C

Diff: 2

Topic:  Decreases in Demand Shift the Demand Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

33) Figure 4.4 illustrates the demand for guitars. Assume that guitars and guitar strings are complements. An increase in the price of guitar strings would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  C

Diff: 2

Topic:  Decreases in Demand Shift the Demand Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

34) Figure 4.4 illustrates the demand for guitars. Assume that guitars and guitar strings are complements. A decrease in the price of guitar strings would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  D

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

35) Figure 4.4 illustrates the demand for guitars. Assume that guitars and banjos are substitutes. A decrease in the price of banjos would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  C

Diff: 2

Topic:  Decreases in Demand Shift the Demand Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

36) Figure 4.4 illustrates the demand for guitars. An increase in the number of guitar players in the market would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  D

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

37) Figure 4.4 illustrates the demand for guitars. An increase in price of guitars would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  B

Diff: 2

Topic:  Change in Quantity Demand versus Change in Demand, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

38) Figure 4.4 illustrates the demand for guitars. A decrease in price of guitars would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  A

Diff: 2

Topic:  Change in Quantity Demand versus Change in Demand, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

39) Figure 4.4 illustrates the demand for guitars. A successful advertising campaign to sell guitars would bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  D

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

40) Figure 4.4 illustrates the demand for guitars. If people expect the price of guitars to decrease in the near future, this would most likely bring about a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) D1to D0.
  4. D) D1to D2.

Answer:  C

Diff: 2

Topic:  Decreases in Demand Shift the Demand Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

41) Assume that tortilla chips and salsa are complements. When the price of tortilla chips decreases:

  1. A) the demand for salsa increases.
  2. B) the demand for salsa decreases.
  3. C) the supply of salsa decreases.
  4. D) the demand for tortilla chips decreases.

Answer:  A

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

42) An inferior good is defined as a good for which demand decreases when:

  1. A) the price increases.
  2. B) income increases.
  3. C) the price decreases.
  4. D) income decreases.

Answer:  B

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

43) When the price of one product decreases, what does it do to the demand of its complementary product?

  1. A) It decreases.
  2. B) It increases.
  3. C) They balance each other.
  4. D) none of the above

Answer:  B

Diff: 1

Topic:  Increases in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

44) If the population increases, what will this do for the market demand for most products?

  1. A) no change
  2. B) decrease
  3. C) increase
  4. D) none of the above

Answer:  C

Diff: 1

Topic:  Increases in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

45) If the U.S. population increases, then:

  1. A) the demand for electricity increases.
  2. B) the demand for electricity decreases.
  3. C) the quantity demanded for electricity decreases.
  4. D) the quantity demanded for electricity increases.

Answer:  A

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

46) If incomes increase and electricity is a normal good, then:

  1. A) the demand for electricity increases.
  2. B) the demand for electricity decreases.
  3. C) the quantity demanded for electricity decreases.
  4. D) the quantity demanded for electricity increases.

Answer:  A

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

47) If incomes decrease and electricity is a normal good, then:

  1. A) the demand for electricity increases.
  2. B) the demand for electricity decreases.
  3. C) the quantity demanded for electricity decreases.
  4. D) the quantity demanded for electricity increases.

Answer:  B

Diff: 2

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

48) If incomes increase and hotdogs are inferior goods, then:

  1. A) the demand for hotdogs increases.
  2. B) the demand for hotdogs decreases.
  3. C) the quantity demanded for hotdogs decreases.
  4. D) the quantity demanded for hotdogs increases.

Answer:  B

Diff: 2

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

49) If the price of hotdogs are expected to increase in the future, then:

  1. A) the current demand for hotdogs will increase.
  2. B) the current demand for hotdogs will decrease.
  3. C) the current quantity demanded for hotdogs will decrease.
  4. D) the current quantity demanded for hotdogs will increase.

Answer:  A

Diff: 2

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

50) If the price of hotdogs are expected to decrease in the future, then:

  1. A) the current demand for hotdogs will increase.
  2. B) the current demand for hotdogs will decrease.
  3. C) the current quantity demanded for hotdogs will decrease.
  4. D) the current quantity demanded for hotdogs will increase.

Answer:  B

Diff: 2

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

51) The purpose of advertising products to consumers is to:

  1. A) reduce costs for producers.
  2. B) decrease the demand for the product.
  3. C) increase the price of the product.
  4. D) change consumers’ tastes toward the product.

Answer:  D

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

52) If consumers have an expectation of a product’s price increasing in the near future, they will usually:

  1. A) wait to see if the price really increases.
  2. B) purchase more at the current price.
  3. C) wait for the new price and compare.
  4. D) none of the above

Answer:  B

Diff: 1

Topic:  Increases in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

53) When a consumer’s income decreases, the consumer:

  1. A) has less to spend.
  2. B) buys a smaller quantity of normal goods.
  3. C) buys more of inferior goods.
  4. D) all of the above

Answer:  D

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

54) Decreases in the demand for products can be caused by which of the following?

  1. A) decreases in income
  2. B) decreases in population
  3. C) decreases in the prices of substitute goods
  4. D) all of the above

Answer:  D

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

55) A decrease in demand for coffee can be caused by:

  1. A) an increase in demand for substitute products by younger populations.
  2. B) a decrease in demand due to changing preferences for healthier products.
  3. C) an increase in income and coffee is an inferior good.
  4. D) all of the above.

Answer:  D

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

56) When the price of a product decreases, the demand for a substitute product:

  1. A) decreases.
  2. B) increases.
  3. C) changes to balance the price change.
  4. D) none of the above

Answer:  A

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 


Recall Application 4, “Chinese Demand and Pecan Pies,” to answer the following questions:

 

57) According to the Application, which determinant of demand is responsible for the increase in the demand for pecans?

  1. A) preferences
  2. B) income
  3. C) price of substitutes
  4. D) price of complements

Answer:  A

Diff: 2

Topic:  Application 4, Chinese Demand and Pecan Pies

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

58) From the Application, which of the following would we observe in the market for pecans as a result of an increase in the demand for pecans?

  1. A) higher equilibrium price and equilibrium quantity of pecans
  2. B) higher equilibrium price and equilibrium quantity of pecan pies
  3. C) lower equilibrium price and equilibrium quantity of pecans
  4. D) higher equilibrium price and lower equilibrium quantity of pecans

Answer:  A

Diff: 2

Topic:  Application 4, Chinese Demand and Pecan Pies

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

59) Can we infer that pecans are normal and inferior goods, just purely from reading the Application?

  1. A) No. The Application made no mention of changes in income.
  2. B) No. The Application did not mention the quality of the pecans.
  3. C) Yes, pecans are inferior goods.
  4. D) Yes, pecans are normal goods.

Answer:  A

Diff: 2

Topic:  Application 4, Chinese Demand and Pecan Pies

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

60) An increase in demand will cause the equilibrium price and quantity to rise.

Answer:  TRUE

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

61) Two goods are substitutes if an increase in the price of one good leads to an increase in demand for the other.

Answer:  TRUE

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

62) People will buy more of a normal good when their income decreases.

Answer:  FALSE

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

63) Two goods are complements if an increase in the price of one good leads to an increase in demand for the other.

Answer:  FALSE

Diff: 1

Topic:  Decreases in Demand Shift the Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

64) People will buy more of an inferior good when their income decreases.

Answer:  TRUE

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

65) If the cost of producing a product goes down, this will cause the equilibrium price of the product to go down and the equilibrium quantity of the product to go up.

Answer:  TRUE

Diff: 2

Topic:  A Decrease in Demand Decreases the Equilibrium Price

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

66) Complementary goods are goods that are normally consumed together.

Answer:  TRUE

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

67) An increase or decrease in population will increase or decrease demand.

Answer:  TRUE

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

68) Use the supply and demand model to explain why it is difficult to find an on-campus parking space during peak mid-day times, although it is much easier to find a parking space during less popular evening hours.

Answer:  The supply of parking spaces is fixed and is the same during peak and off-peak times (if anything, the supply is greater during off-peak times, if fewer spaces are reserved!). But the demand is much higher during peak hours than during off-peak hours.

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

69) Why do the demand curves for inferior goods slope downward, even though the law of demand is driven in part by the income effect?

Answer:  Remember that there are two effects of a price change. The income effect states that as the price of the product decreases, people buy more of normal goods and less of inferior goods. But there is also a substitution effect associated with the price change. The inferior good is relatively cheaper than other goods now, and this leads people to buy more of the inferior good than before. In the overwhelming number of cases, this substitution effect outweighs the income effect.

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

70) What is the difference between a “shift in the demand curve” and a “movement along the demand curve”?

Answer:  Movement along the demand curve (upwards or downwards) is caused by only one thing, i.e., a change in the price of the good right now. If any other variable changes that may also affect the demand, then this will result in a shift of the demand curve to the left or to the right. For example, a change in the price of related goods or a change in preference can shift the demand curve.

Diff: 2

Topic:  Change in Quantity Demand versus Change in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

71) Name at least three variables that can affect the demand for a product and the market equilibrium.

Answer:  buyers’ incomes, the prices of other goods, advertising, the number of buyers, and the tastes of buyers

Diff: 1

Topic:  Change in Quantity Demand versus Change in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

72) In economics, a change in preferences for the product causes a ________.

Answer:  change in demand

Diff: 1

Topic:  Change in Quantity Demand versus Change in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

73) When a consumer’s income increases, that consumer tends to buy more ________.

Answer:  normal goods

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

74) Define an “inferior good” as it relates to markets.

Answer:  A good that a consumer would buy more of when his or her income decreases.

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

75) When a consumer’s income decreases, that consumer tends to buy more ________.

Answer:  inferior goods

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

76) Define a “normal good” as it relates to markets.

Answer:  A good that a consumer buys more of when his or her income increases.

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

77) What does an increase in population do to the demand for a product?

Answer:  It increases the demand for the product.

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

78) When consumers find their incomes increasing, they tend to buy more ________.

Answer:  normal goods

Diff: 1

Topic:  Increases in Demand Shift the Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

79) What does a decrease in population do to the demand for a product?

Answer:  It decreases demand.

Diff: 1

Topic:  Decreases in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

4.5   Market Effects of Changes in Supply

 

1) Hops are used to produce beer. If the price of hops decreases:

  1. A) the demand for beer increases.
  2. B) the demand for beer decreases.
  3. C) the supply of beer increases.
  4. D) the supply of beer decreases.

Answer:  C

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

2) If the number of beer producers decreases:

  1. A) the demand for beer increases.
  2. B) the demand for beer decreases.
  3. C) the supply of beer increases.
  4. D) the supply of beer decreases.

Answer:  D

Diff: 1

Topic:  Decreases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

3) The price of oranges has risen dramatically. Which of the following is likely to happen?

  1. A) The quantity of oranges supplied will increase.
  2. B) The quantity of oranges supplied will decrease.
  3. C) The supply of oranges will decrease.
  4. D) The supply of oranges will increase.

Answer:  A

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

4) The price of compact discs has fallen dramatically. Which of the following is likely to happen?

  1. A) The quantity supplied of compact discs will decrease.
  2. B) The quantity supplied of compact discs will increase.
  3. C) The supply of compact discs will decrease.
  4. D) The supply of compact discs players will increase.

Answer:  A

Diff: 1

Topic:  Change in Quantity Supplied versus Change in Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

5) Flour is used to produce bread. If the price of flour increases:

  1. A) the demand for bread increases.
  2. B) the demand for bread decreases.
  3. C) the supply of bread increases.
  4. D) the supply of bread decreases.

Answer:  D

Diff: 1

Topic:  Decreases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

6) If a technological advance makes it possible to produce bananas at a lower cost:

  1. A) the demand for bananas increases.
  2. B) the demand for bananas decreases.
  3. C) the supply of bananas increases.
  4. D) the supply of bananas decreases.

Answer:  C

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

7) Which of the following can increase the number of pizzas a seller is willing to sell at a given price?

  1. A) The cost of inputs such as pepperoni and cheese goes up.
  2. B) The number of workers working in the pizza factory decreases.
  3. C) The amount of subsidies that pizza makers receive from the government decreases.
  4. D) A new technology is developed that allows producers to make the same sized pizza using less cheese and dough.

Answer:  D

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

8) If the price of crude oil (an input to the production of gasoline) increases, then we will expect to see:

  1. A) a movement along the supply curve for gasoline upwards.
  2. B) a movement along the supply curve for gasoline downwards.
  3. C) a shift in the supply of gasoline to the left.
  4. D) a shift in the supply of gasoline to the right.

Answer:  C

Diff: 1

Topic:  Decreases in Supply Shift the Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

9) If the price of crude oil (an input to the production of gasoline) decreases, then we will expect to see:

  1. A) a movement along the supply curve for gasoline upwards.
  2. B) a movement along the supply curve for gasoline downwards.
  3. C) a shift in the supply of gasoline to the left.
  4. D) a shift in the supply of gasoline to the right.

Answer:  D

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

10) A decrease in the tuition (i.e., price) that a public university charges would result in:

  1. A) an upward movement along the supply curve for college classes.
  2. B) an downward movement along the supply curve for college classes.
  3. C) a shift in the supply of college classes to the left.
  4. D) a shift in the supply of college classes to the right.

Answer:  B

Diff: 1

Topic:  Change in Quantity Supplied versus Change in Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

11) An increase in the amount of subsidies that a public university receives would result in:

  1. A) an upward movement along the supply curve for college classes.
  2. B) an downward movement along the supply curve for college classes.
  3. C) a shift in the supply of college classes to the left.
  4. D) a shift in the supply of college classes to the right.

Answer:  D

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

12) A decrease in the amount of subsidies that a public university receives would result in:

  1. A) an upward movement along the supply curve for college classes.
  2. B) an downward movement along the supply curve for college classes.
  3. C) a shift in the supply of college classes to the left.
  4. D) a shift in the supply of college classes to the right.

Answer:  C

Diff: 1

Topic:  Decreases in Supply Shift the Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

 

13) If the number of banana producers increases:

  1. A) the demand for bananas increases.
  2. B) the demand for bananas decreases.
  3. C) the supply of bananas increases.
  4. D) the supply of bananas decreases.

Answer:  C

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

Figure 4.5

 

14) Figure 4.5 illustrates the supply of guitars. An increase in the supply of guitars is represented by a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) S1to S0.
  4. D) S1to S2.

Answer:  C

Diff: 1

Topic:  Change in Quantity Supplied versus Change in Supply, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

15) Figure 4.5 illustrates the supply of guitars. A decrease in the supply of guitars is represented by a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) S1to S0.
  4. D) S1to S2.

Answer:  D

Diff: 1

Topic:  Change in Quantity Supplied versus Change in Supply, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

16) Figure 4.5 illustrates the supply of guitars. An increase in the price of rosewood, which is used to make guitars, would most likely cause a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) S1to S0.
  4. D) S1to S2.

Answer:  D

Diff: 2

Topic:  Decreases in Supply Shift the Supply Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

17) Figure 4.5 illustrates the supply of guitars. A technological advancement that makes guitars cheaper to produce would most likely cause a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) S1to S0.
  4. D) S1to S2.

Answer:  C

Diff: 2

Topic:  Increases in Supply Shift the Supply Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

18) Figure 4.5 illustrates the supply of guitars. An increase in the number of guitar manufacturers would most likely cause a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) S1to S0.
  4. D) S1to S2.

Answer:  C

Diff: 2

Topic:  Increases in Supply Shift the Supply Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

19) Figure 4.5 illustrates the supply of guitars. If the government offered a subsidy to guitar manufacturers for each guitar they produce, this would most likely cause a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) S1to S0.
  4. D) S1to S2.

Answer:  C

Diff: 2

Topic:  Increases in Supply Shift the Supply Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

20) Figure 4.5 illustrates the supply of guitars. If firms expect the price of guitars to go up after Christmas, then before Christmas this would most likely cause a movement from:

  1. A) point B to point C.
  2. B) point B to point A.
  3. C) S1to S0.
  4. D) S1to S2.

Answer:  D

Diff: 2

Topic:  Decreases in Supply Shift the Supply Curve, graph

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

21) An increase in supply of a product results when:

  1. A) more companies produce the product.
  2. B) the companies that produce the product have reduced input costs.
  3. C) technological innovations are introduced in the manufacturing.
  4. D) all of the above.

Answer:  D

Diff: 1

Topic:  Change in Quantity Supplied versus Change in Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

22) If there is an advance in the technology used to produce a product, what is the likely effect it may have on the supply?

  1. A) The company would not change its manufacturing.
  2. B) More people would be needed to produce the product.
  3. C) It would decrease the supply.
  4. D) It would increase the supply.

Answer:  D

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

23) Suppose that the government requires that farms use only animals instead of machinery when planting and harvesting corn. This will result in a(n):

  1. A) decrease in the supply of corn.
  2. B) decrease in the quantity supplied of corn.
  3. C) increase in the supply of corn.
  4. D) increase in the quantity supplied of corn.

Answer:  A

Diff: 1

Topic:  Decreases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

24) If sellers have an expectation of higher future prices:

  1. A) the current supply of that good will decrease.
  2. B) the current demand for that good will increase.
  3. C) the current supply of that good will increase.
  4. D) the current demand for that good will decrease.

Answer:  A

Diff: 1

Topic:  Decreases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

25) If sellers have an expectation of lower future prices:

  1. A) the current supply of that good will decrease.
  2. B) the current demand for that good will increase.
  3. C) the current supply of that good will increase.
  4. D) the current demand for that good will decrease.

Answer:  C

Diff: 1

Topic:  Increases in Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

26) Bananas and apples are substitutes. When the price of bananas falls and a technological advancement in apple production occurs at the same time:

  1. A) the equilibrium price of apples rises and the equilibrium quantity of apples falls.
  2. B) the equilibrium price of apples rises and the equilibrium quantity of apples rises.
  3. C) the equilibrium price of apples rises and the equilibrium quantity of apples might rise or fall.
  4. D) the equilibrium price of apples falls and the equilibrium quantity of apples might rise or fall.

Answer:  D

Diff: 3

Topic:  Simultaneous Changes in Demand and Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

27) Bananas and apples are substitutes. When the price of bananas rises and a technological advance in apple production occurs at the same time:

  1. A) the equilibrium price of apples rises and the equilibrium quantity of apples falls.
  2. B) the equilibrium price of apples rises and the equilibrium quantity of apples rises.
  3. C) the equilibrium price of apples rises and the equilibrium quantity of apples might rise or fall.
  4. D) the equilibrium quantity of apples rises and the equilibrium price of apples might rise or fall.

Answer:  D

Diff: 3

Topic:  Simultaneous Changes in Demand and Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

28) Peaches and cream are complements. When the price of peaches falls and the price of raw milk (used to make cream) rises:

  1. A) the equilibrium price of cream rises and the equilibrium quantity of cream might rise or fall.
  2. B) the equilibrium price of cream falls and the equilibrium quantity of cream might rise or fall.
  3. C) the equilibrium price of cream falls and the equilibrium quantity of cream falls.
  4. D) the equilibrium price of cream falls and the equilibrium quantity of cream rises.

Answer:  A

Diff: 3

Topic:  Simultaneous Changes in Demand and Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

29) Peaches and cream are complements. When the price of peaches rises and the price of raw milk (used to make cream) rises:

  1. A) the equilibrium price of cream rises and the equilibrium quantity of cream might rise or fall.
  2. B) the equilibrium price of cream falls and the equilibrium quantity of cream might rise or fall.
  3. C) the equilibrium price of cream falls and the equilibrium quantity of cream rises.
  4. D) the equilibrium quantity of cream falls and the equilibrium price of cream might rise or fall.

Answer:  D

Diff: 3

Topic:  Simultaneous Changes in Demand and Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

30) Suppose that a new advertising campaign extolling the virtues of apple juice is successful and a major freeze destroys half of the country’s apple crop. What happens to the price and quantity of apple juice?

  1. A) The equilibrium price of apple juice might rise or fall and the equilibrium quantity of apple juice falls.
  2. B) The equilibrium price of apple juice might rise or fall and the equilibrium quantity of apple juice rises.
  3. C) The equilibrium price of apple juice rises and the equilibrium quantity of apple juice might rise or fall.
  4. D) The equilibrium price of apple juice falls and the equilibrium quantity of apple juice might rise or fall.

Answer:  C

Diff: 3

Topic:  Simultaneous Changes in Demand and Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

31) Suppose that a new study is released stating that consumption of orange juice (a substitute for apple juice) reduces the risk of cancer and a major freeze destroys half of the country’s apple crop. What happens to the price and quantity of apple juice?

  1. A) The price of apple juice might rise or fall and the quantity of apple juice falls.
  2. B) The price of apple juice might rise or fall and the quantity of apple juice rises.
  3. C) The price of apple juice falls and the quantity of apple juice falls.
  4. D) The quantity of apple juice might rise or fall and the price of apple juice rises.

Answer:  A

Diff: 3

Topic:  Simultaneous Changes in Demand and Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

Figure 4.7

 

32) If demand increases in Figure 4.7, then the equilibrium:

  1. A) price and quantity rise.
  2. B) price rises and quantity falls.
  3. C) price falls and quantity rises.
  4. D) price and quantity fall.

Answer:  A

Diff: 2

Topic:  Market Effects of Simultaneous Changes in Demand and Supply, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

33) If demand falls in Figure 4.7, then the equilibrium:

  1. A) price and quantity rise.
  2. B) price rises and quantity falls.
  3. C) price falls and quantity rises.
  4. D) price and quantity fall.

Answer:  D

Diff: 2

Topic:  Market Effects of Simultaneous Changes in Demand and Supply, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

34) If supply increases in Figure 4.7, then the equilibrium:

  1. A) price and quantity rise.
  2. B) price rises and quantity falls.
  3. C) price falls and quantity rises.
  4. D) price and quantity fall.

Answer:  C

Diff: 2

Topic:  Market Effects of Simultaneous Changes in Demand and Supply, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

35) If supply decreases in Figure 4.7, then the equilibrium:

  1. A) price and quantity rise.
  2. B) price rises and quantity falls.
  3. C) price falls and quantity rises.
  4. D) price and quantity fall.

Answer:  B

Diff: 2

Topic:  Market Effects of Simultaneous Changes in Demand and Supply, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

36) If demand and supply rise in Figure 4.7, then the equilibrium:

  1. A) price rises.
  2. B) price falls.
  3. C) quantity rises.
  4. D) quantity falls.

Answer:  C

Diff: 2

Topic:  Market Effects of Simultaneous Changes in Demand and Supply, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

37) If demand and supply decrease in Figure 4.7, then the equilibrium:

  1. A) price rises.
  2. B) price falls.
  3. C) quantity rises.
  4. D) quantity falls.

Answer:  D

Diff: 2

Topic:  Market Effects of Simultaneous Changes in Demand and Supply, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

38) If demand decreases and supply increases in Figure 4.7, then the equilibrium:

  1. A) price rises.
  2. B) price falls.
  3. C) quantity rises.
  4. D) quantity falls.

Answer:  B

Diff: 2

Topic:  Market Effects of Simultaneous Changes in Demand and Supply, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

39) If demand increases and supply decreases in Figure 4.7, then the equilibrium:

  1. A) price rises.
  2. B) price falls.
  3. C) quantity rises.
  4. D) quantity falls.

Answer:  A

Diff: 2

Topic:  Market Effects of Simultaneous Changes in Demand and Supply, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

Recall Application  5, “Honeybees and the Price of Ice Cream,” to answer the following questions:

 

40) According to the application, the increase in the price of ice cream is caused by:

  1. A) a decrease in the output of fruit trees caused by the decline in the number of honey bees that pollinate these fruit trees.
  2. B) an increase in the output of fruit trees caused by the decline in the number of honey bees that pollinate these fruit trees.
  3. C) a decrease in the output of fruit trees caused by the rise in the number of honey bees that pollinate these fruit trees.
  4. D) an increase in the output of fruit trees caused by the rise in the number of honey bees that pollinate these fruit trees.

Answer:  A

Diff: 2

Topic:  Application 5, Honeybees and the Price of Ice Cream

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

41) Using supply and demand analysis, the increase in the price of ice cream can be illustrated as:

  1. A) a leftward shift in the supply curve for ice cream caused by more expensive ingredients.
  2. B) a rightward shift in the supply curve for ice cream caused by more expensive ingredients.
  3. C) a leftward shift in the demand curve for ice cream caused by more expensive ingredients.
  4. D) a rightward shift in the demand curve for ice cream caused by more expensive ingredients.

Answer:  A

Diff: 2

Topic:  Application 5, Honeybees and the Price of Ice Cream

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

42) Using supply and demand analysis, if the “colony collapse disorder (CCD)” of honey bees caused a leftward shift of the supply curve for ice cream, then which of the following must be true?

  1. A) The equilibrium price of ice cream increased and the equilibrium quantity decreased.
  2. B) The equilibrium price of ice cream decreased and the equilibrium quantity decreased.
  3. C) The equilibrium price of ice cream increased and the equilibrium quantity increased.
  4. D) The equilibrium price of ice cream decreased and the equilibrium quantity increased.

Answer:  A

Diff: 2

Topic:  Application 5, Honeybees and the Price of Ice Cream

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

43) If the cost of producing a product goes down, this will cause the equilibrium price of the product to go down and the equilibrium quantity of the product to go up.

Answer:  TRUE

Diff: 2

Topic:  An Increase in Supply Decreases the Equilibrium Price

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

44) A decrease in supply will cause the equilibrium price and quantity of a good to fall.

Answer:  FALSE

Diff: 1

Topic:  A Decrease in Supply Increases the Equilibrium Price

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

45) A major freeze in Florida has reduced the orange yield this winter. What will be the effect of this freeze on the price and quantity in the orange market and also in the peach market? (Assume that oranges and peaches are substitutes.)

Answer:  The Florida freeze results in decreased supply. Assuming nothing happens to orange demand, the result is that the price of oranges increases and the quantity of oranges decreases. Nothing happens to the peach supply, but the peach demand increases when the price of the substitute (oranges) goes up. Therefore, the price and quantity of peaches both increase.

Diff: 1

Topic:  A Decrease in Supply Increases the Equilibrium Price

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

46) Suppose that the price of oranges increases and the quantity of oranges in the market decreases. Suggest two reasons why this might have happened.

Answer:  This could have been caused by any number of reasons. The most straightforward answer is that the supply curve shifted to the left. This could have been due to, for instance, a freeze in Florida or maybe an increase in the wages of migrant orange pickers.

Diff: 1

Topic:  A Decrease in Supply Increases the Equilibrium Price

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

47) What is the difference between a “shift in the supply curve” and a “movement along the supply curve”?

Answer:  Movement along the supply curve (upwards or downwards) is caused by only one thing, i.e., a change in the price of the good right now. If any other variable changes that may also affect the supply, then this will result in a shift of the supply curve to the left or to the right. For example, a change in the price of inputs or an increase in the amount of subsidies received by the firm will cause the supply curve to shift.

Diff: 2

Topic:  Change in Quantity Supplied versus Change in Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

48) What is the difference between “an increase in supply” and “an increase in quantity supplied” of a good?

Answer:  An increase in supply is caused by an increase in the price of the good right now. It is represented graphically as a movement upward along the supply curve. If any other variable changes that may make a seller want to sell more at the current price, then this will increase supply and is illustrated as a shift of the supply curve to the right. For example, a decrease in the price of inputs or an increase in the amount of subsidies received by the firm will cause the supply to increase.

Diff: 2

Topic:  Change in Quantity Supplied versus Change in Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

49) Using a graph, illustrate the effect that an increase in production costs will have on the equilibrium price and quantity of a good.

Answer:

The graph shows a decrease in supply. The supply curve shifts to the left, causing equilibrium price to rise and equilibrium quantity to fall.

Diff: 1

Topic:  A Decrease in Supply Increases the Equilibrium Price

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

50) A decrease in the cost of labor or some other input will make the production of a product less costly and more profitable at a given price, so producers will supply more of it. This is an example of ________.

Answer:  an increase in supply caused by a decrease in input costs

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

51) When a government pays a company for producing a product or good with the result that selling the product is more profitable regardless of the price so that the company will produce more of it, it is called a ________.

Answer:  subsidy

Diff: 1

Topic:  Increases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

 

52) If a government imposes a tax on a product produced by a company, the tax will ________.

Answer:  make the product more costly and less profitable

Diff: 1

Topic:  Decreases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

53) If a government imposes a tax on the producers of a product, in addition to making the product more costly and less profitable, the tax will ________.

Answer:  decrease supply

Diff: 1

Topic:  Decreases in Supply Shift the Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  List ways in which governments intervene in markets and explain the consequences of such intervention

 

4.6   Predicting and Explaining Market Changes

 

1) The market equilibrium price and quantity can be affected if:

  1. A) supply and demand both increase.
  2. B) supply and demand both decrease.
  3. C) supply increases and demand decreases.
  4. D) all of the above

Answer:  D

Diff: 1

Topic:  Simultaneous Changes in Demand and Supply

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

Figure 4.6

 

2) Figure 4.6 illustrates a set of supply and demand curves for a product. When the market moves from point A to point B, there has been:

  1. A) an increase in supply and an increase in demand.
  2. B) an increase in supply and an increase in quantity demanded.
  3. C) an increase in quantity supplied and an increase in demand.
  4. D) an increase in quantity supplied and an increase in quantity demanded.

Answer:  B

Diff: 3

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

3) Figure 4.6 illustrates a set of supply and demand curves for a product. When the economy moves from point B to point A, there has been:

  1. A) an increase in supply and an increase in demand.
  2. B) an decrease in supply and an decrease in quantity demanded.
  3. C) an increase in quantity supplied and an increase in demand.
  4. D) an increase in quantity supplied and an increase in quantity demanded.

Answer:  B

Diff: 3

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

4) Figure 4.6 illustrates a set of supply and demand curves for a product. When the economy moves from point B to point C, there has been:

  1. A) a decrease in supply and a decrease in demand.
  2. B) a decrease in supply and a decrease in quantity demanded.
  3. C) a decrease in quantity supplied and a decrease in demand.
  4. D) a decrease in quantity supplied and a decrease in quantity demanded.

Answer:  C

Diff: 3

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

5) Figure 4.6 illustrates a set of supply and demand curves for a product. When the economy moves from point C to point E, there has been:

  1. A) an increase in supply and a decrease in quantity demanded.
  2. B) a decrease in supply and a decrease in quantity demanded.
  3. C) a decrease in quantity supplied and a decrease in demand.
  4. D) an increase in quantity supplied and a decrease in quantity demanded.

Answer:  B

Diff: 3

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

6) Figure 4.6 illustrates a set of supply and demand curves for a product. When the economy moves from point E to point A, there has been:

  1. A) an increase in supply and an increase in demand.
  2. B) an increase in supply and an increase in quantity demanded.
  3. C) an increase in quantity supplied and an increase in demand.
  4. D) an increase in quantity supplied and an increase in quantity demanded.

Answer:  C

Diff: 3

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

7) Figure 4.6 illustrates a set of supply and demand curves for a product. Suppose that the market is currently in point A. If the price of the input of the product decreases, the market will move to point:

  1. A) A.
  2. B) B.
  3. C) C.
  4. D) D.

Answer:  B

Diff: 3

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

8) Figure 4.6 illustrates a set of supply and demand curves for a product. If the good were inferior and the consumer’s income decreases, then this can be illustrated as moving from point:

  1. A) A to B.
  2. B) C to B.
  3. C) E to B.
  4. D) B to A.

Answer:  B

Diff: 3

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

9) Bananas and apples are substitutes. When the price of bananas falls, the equilibrium quantity of apples will ________ and the equilibrium price of apples will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  D

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

10) Bananas and apples are substitutes. When the price of bananas rises, the equilibrium quantity of apples will ________ and the equilibrium price of apples will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  A

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

11) Peaches and cream are complements. When the price of peaches falls, the equilibrium quantity of cream will ________ and the equilibrium price of cream will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  A

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

12) Peaches and cream are complements. When the price of peaches rises, the equilibrium quantity of cream will ________ and the equilibrium price of cream will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  D

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

13) Suppose that ramen noodles are an inferior good. When income increases, the equilibrium quantity of ramen noodles will ________ and the equilibrium price of ramen noodles will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  D

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

14) Suppose that ramen noodles are an inferior good. When income decreases, the equilibrium quantity of ramen noodles will ________ and the equilibrium price of ramen noodles will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  A

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

15) Suppose that steak is a normal good. When income increases, the equilibrium quantity of steak will ________ and the equilibrium price of steak will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  A

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

16) Suppose that steak is a normal good. When income decreases, the equilibrium quantity of steak will ________ and the equilibrium price of steak will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  D

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

17) Suppose that the population of a country increases. Assuming that people in that country enjoy eating steak, we would predict that the equilibrium quantity of steak will ________ and the equilibrium price of steak will ________ in that country.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  A

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

18) Suppose that the population of a country decreases. Assuming that people in that country enjoy eating steak, we would predict that the equilibrium quantity of steak will ________ and the equilibrium price of steak will ________ in that country.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  D

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

19) Suppose that the Surgeon General releases a study suggesting that orange juice consumption reduces the risk of cancer. We would predict that the equilibrium quantity of orange juice will ________ and the equilibrium price of orange juice will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  A

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

20) Suppose that the Surgeon General releases a study suggesting that orange juice consumption reduces the risk of cancer. As a result of the study, we could predict that the demand curve for orange juice will ________ and the equilibrium price will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; decrease
  4. D) decrease; increase

Answer:  A

Diff: 1

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

21) Suppose that the Surgeon General releases a study suggesting that orange juice consumption increases the risk for diabetes. As a result of the study, we could predict that the demand curve for orange juice will ________ and the equilibrium price will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; decrease
  4. D) decrease; increase

Answer:  C

Diff: 1

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

22) Suppose that the Surgeon General releases a study suggesting that steak consumption increases the risk of cancer. As a result of this study, we would predict that the equilibrium quantity of steak will ________ and the equilibrium price of steak will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  D

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

23) Suppose that people expect that the price of orange juice will fall next month. We would predict that the equilibrium quantity of orange juice will ________ and the equilibrium price of orange juice will ________ this month.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  D

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

24) Suppose that people expect that the price of orange juice will rise next month. We would predict that the equilibrium quantity of orange juice will ________ and the equilibrium price of orange juice will ________ this month.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  A

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

25) Suppose that the price of fertilizer, an input in the production of corn, falls. We would predict that the equilibrium quantity of corn will ________ and the equilibrium price of corn will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  B

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

26) Suppose that the price of fertilizer, an input in the production of corn, rises. We would predict that the equilibrium quantity of corn will ________ and the equilibrium price of corn will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  C

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

27) Suppose that a technological advancement substantially reduces the cost of producing cheese. We would predict that the equilibrium quantity of cheese will ________ and the equilibrium price of cheese will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  B

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

28) Suppose that a natural disaster substantially increases the cost of producing cheese. We would predict that the equilibrium quantity of cheese will ________ and the equilibrium price of cheese will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer:  C

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

29) Suppose that in October the price of a cup of cafe latte was $1.50 and 400 lattes were consumed. In November the price of a latte was $2.00 and 600 lattes were consumed. What might have caused this change?

  1. A) The price of tea (a substitute for cafe lattes) fell.
  2. B) The price of tea (a substitute for cafe lattes) rose.
  3. C) The price of coffee beans (an input of production of cafe lattes) rose.
  4. D) The price of coffee beans (an input of production of cafe lattes) fell.

Answer:  B

Diff: 3

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

30) Suppose that in October the price of a cup of cafe latte was $1.50 and 400 lattes were consumed. In November the price of a latte was $2.00 and 200 lattes were consumed. What might have caused this change?

  1. A) The price of tea (a substitute for cafe lattes) fell.
  2. B) The price of tea (a substitute for cafe lattes) rose.
  3. C) The price of coffee beans (an input of production of cafe lattes) rose.
  4. D) The price of coffee beans (an input of production of cafe lattes) fell.

Answer:  C

Diff: 3

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

31) Suppose that in 2006, 8 million cars were purchased at $15,000 each, while in 2007, 10 million cars were purchased at $12,000 each. What might have caused this change?

  1. A) The price of airplane tickets (a substitute for cars) fell.
  2. B) The price of airplane tickets (a substitute for cars) rose.
  3. C) There was an advance in automobile manufacturing technology.
  4. D) There were fewer workers in automobile manufacturing.

Answer:  C

Diff: 3

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

32) Suppose that in 2006, 12 million cars were purchased at $15,000 each, while in 2007, 10 million cars were purchased at $12,000 each. What might have caused this change?

  1. A) The price of airplane tickets (a substitute for cars) fell.
  2. B) The price of airplane tickets (a substitute for cars) rose.
  3. C) Automobile manufacturing technology increased.
  4. D) Automobile manufacturing technology decreased.

Answer:  A

Diff: 3

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

33) If the equilibrium price of a good increases and the equilibrium quantity of the good decreases, we can conclude that:

  1. A) demand increased.
  2. B) demand decreased.
  3. C) supply increased.
  4. D) supply decreased.

Answer:  D

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

34) If the equilibrium price of a good decreases and the equilibrium quantity of the good decreases, we can conclude that:

  1. A) demand increased.
  2. B) demand decreased.
  3. C) supply increased.
  4. D) supply decreased.

Answer:  B

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

35) Lettuce and spinach are substitute goods. All else equal, if a spinach beetle destroys half of the nation’s spinach crop, we predict that the equilibrium price of lettuce will ________ and the equilibrium price of spinach will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  A

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

36) Lettuce and spinach are substitute goods. All else equal, if a spinach beetle destroys half of the nation’s spinach crop, we predict that the equilibrium price of lettuce will ________ and the equilibrium quantity of spinach will ________.

  1. A) rise; rise
  2. B) rise; fall
  3. C) fall; rise
  4. D) fall; fall

Answer:  B

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 


Recall Application  6, “Why Lower Drug Prices?” to answer the following questions:

 

37) In the Application, what did Ted Koppel identify as the explanation for why (illegal) drug prices have been dropping?

  1. A) an increase in the supply
  2. B) an increase in demand
  3. C) a decrease in supply
  4. D) a decrease in demand

Answer:  A

Diff: 2

Topic:  Application 6, Why Lower Drug Prices?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

38) In the Application, what did the Justice Department identify as the explanation for why (illegal) drug prices have been dropping?

  1. A) an increase in the supply
  2. B) an increase in demand
  3. C) a decrease in supply
  4. D) a decrease in demand

Answer:  D

Diff: 2

Topic:  Application 6, Why Lower Drug Prices?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

39) In the Application, what should we observe before we can undoubtedly attribute the lower drug prices to an increase in supply?

  1. A) an increase in the equilibrium quantity
  2. B) a shortage
  3. C) a decrease in the equilibrium quantity
  4. D) a surplus

Answer:  A

Diff: 2

Topic:  Application 6, Why Lower Drug Prices?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

40) In the Application, what should we observe before we can undoubtedly attribute the lower drug prices to a decrease in demand?

  1. A) an increase in the equilibrium quantity
  2. B) a shortage
  3. C) a decrease in the equilibrium quantity
  4. D) a surplus

Answer:  C

Diff: 2

Topic:  Application 6, Why Lower Drug Prices?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

41) If the cost of producing a good goes down, this will cause the equilibrium price of the good to go down and the equilibrium quantity of the good to go up.

Answer:  TRUE

Diff: 2

Topic:  Predicting and Explaining Market Changes

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

42) Additional factors beyond supply and consumer purchasing desire can affect demand.

Answer:  TRUE

Diff: 1

Topic:  Change in Quantity Demand versus Change in Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

 

43) Draw a graph to illustrate the effect of higher gasoline prices on the demand for large SUVs. What is the relationship between gasoline and SUVs?

Answer:

Gasoline and SUVs are complements. When the price of gasoline rises, it becomes more expensive to drive an SUV and so the demand for SUVs is likely to decrease (people may switch to smaller, more fuel-efficient vehicles). Note that as a result of the decrease in demand for SUVs, their price should decrease and so should the quantity of SUVs sold.

Diff: 2

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

44) Draw a graph to illustrate the effect of an increase in demand on the price and quantity in a market.

Answer:

As illustrated in the graph, an increase in demand causes the price and quantity sold of the product to increase.

Diff: 1

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

45) As a result of advances in technology, cellular telephones have become cheaper to produce. Illustrate the effect of this change on the market for cellular telephones.

Answer:

As illustrated in the graph, the decreased cost of production leads to an increase in the supply of cellular telephones, with the result that the price of the product decreases and the quantity sold increases.

Diff: 1

Topic:  Predicting and Explaining Market Changes, graph

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain how supply and demand function in competitive markets.

 

Macroeconomics: Prin., Apps, & Tools, 8e (O’Sullivan) TB2

Chapter 9   Aggregate Demand and Aggregate Supply

 

9.1   Sticky Prices and Their Macroeconomic Consequences

 

1) Following Keynes’ work in explaining the Great Depression, economists started to make a distinction between:

  1. A) nominal and real GDP.
  2. B) recessions and booms.
  3. C) GDP in the short run and in the long run.
  4. D) positive and normative economics.

Answer:  C

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

2) Auction prices are prices that adjust ________ while custom prices are prices that adjust ________.

  1. A) quickly; slowly
  2. B) quickly, quickly
  3. C) slowly; slowly
  4. D) slowly; quickly

Answer:  A

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

3) An example of a good that has auction prices is:

  1. A) fresh fish.
  2. B) a Big Mac.
  3. C) a pair of Levi’s jeans.
  4. D) orange juice.

Answer:  A

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

4) Custom prices are also known as:

  1. A) sticky prices.
  2. B) auction prices.
  3. C) flexible prices.
  4. D) equilibrium prices.

Answer:  A

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

5) As a general rule, goods that are perishable tend to have:

  1. A) auction prices.
  2. B) custom prices.
  3. C) prices that never change in the long run.
  4. D) prices that never change in the short run.

Answer:  A

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

6) Rank these three goods in the order of least sticky to most sticky: fresh fish, used cars, steel rods.

  1. A) fresh fish, used cars, steel rods
  2. B) steel rods, fresh fish, used cars
  3. C) used cars, fresh fish, steel rods
  4. D) steel rods, cars, fresh fish

Answer:  A

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

7) Rank these three wage rates in the order of least sticky to most sticky: minimum wage workers, nurses, movie stars.

  1. A) movie stars, nurses, minimum wage workers
  2. B) minimum wage workers, nurses, movie stars
  3. C) movie stars, minimum wage workers, nurses
  4. D) minimum wage workers, movie stars, nurses

Answer:  A

Diff: 3

Topic:  Flexible and Sticky Prices

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

8) An example of a good/service that has custom prices is:

  1. A) oil.
  2. B) labor.
  3. C) steel rods.
  4. D) gasoline.

Answer:  B

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

9) Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded are known as:

  1. A) sticky prices.
  2. B) fixed prices.
  3. C) regulatory prices.
  4. D) market prices.

Answer:  A

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

10) Steel rod prices are an example of:

  1. A) auction prices.
  2. B) regulated prices.
  3. C) custom prices.
  4. D) personal prices.

Answer:  C

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

11) Sticky prices are a result of:

  1. A) labor union influence.
  2. B) government regulation of the economy.
  3. C) economic coordination problems.
  4. D) lack of coordination between auction prices and custom prices.

Answer:  C

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

12) Sticky prices cause an economic coordination problem for the economy because:

  1. A) they increase the transaction costs in open market auctions.
  2. B) they confuse the system of custom prices.
  3. C) they are likely to cause the CPI to understate the actual increase in the cost of living.
  4. D) they confuse the signal system that brings together consumers and producers.

Answer:  D

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

13) If prices are slow to adjust, then it is possible that:

  1. A) there will be a demand surplus.
  2. B) there will be a supply shortage.
  3. C) some markets will not be in equilibrium.
  4. D) all of the above are true.

Answer:  D

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

14) Suppose an automobile maker producing a certain kind of car suddenly experiences an increase in the demand for the car. In the short run:

  1. A) the demand for steel goes up but the steel prices remain the same.
  2. B) the demand for steel goes up and the price of steel goes up very quickly.
  3. C) the demand for steel goes down and the price of steel goes down.
  4. D) the demand for steel goes down but the price of steel stays the same.

Answer:  A

Diff: 2

Topic:  How Demand Determines Output in the Short Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

15) If an automobile maker producing a certain kind of car suddenly experiences a decrease in the demand for the car. In the short run:

  1. A) the demand for steel goes up but the steel prices remain the same.
  2. B) the demand for steel goes up and the price of steel goes up by a lot.
  3. C) the demand for steel goes down and the price of steel goes down by a lot.
  4. D) the demand for steel goes down but the price of steel stays the same.

Answer:  D

Diff: 2

Topic:  How Demand Determines Output in the Short Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

16) The “short run” in macroeconomics is a period in which prices:

  1. A) change by a lot.
  2. B) are determined by changes in the supply.
  3. C) reflect the equilibrium price.
  4. D) do not change or change very little.

Answer:  D

Diff: 2

Topic:  How Demand Determines Output in the Short Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

17) In the short run, the formal or informal contracts between firms mean that changes in demand will be reflected primarily in changes in ________.

  1. A) prices
  2. B) future price
  3. C) future equilibrium price
  4. D) output

Answer:  D

Diff: 2

Topic:  How Demand Determines Output in the Short Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

18) In the short run, the primary determinant of output of firms is the:

  1. A) level of prices.
  2. B) future price.
  3. C) availability of inputs.
  4. D) level of demand.

Answer:  D

Diff: 2

Topic:  How Demand Determines Output in the Short Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

Recall Application 1, “Measuring Price Stickiness in Consumer Markets,” to answer the following questions:

 

19) According to the application, which of the following goods showed considerable price stickiness?

  1. A) shoes
  2. B) binoculars
  3. C) fishing rod and fly
  4. D) All the goods above showed price stickiness.

Answer:  D

Diff: 1

Topic:  Application 1, Measuring Price Stickiness in Consumer Markets

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

20) According to the application, during periods of high inflation, catalog prices tend to show:

  1. A) more stickiness.
  2. B) no change in stickiness.
  3. C) less stickiness.
  4. D) stickiness equal to the level of inflation.

Answer:  C

Diff: 1

Topic:  Application 1, Measuring Price Stickiness in Consumer Markets

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

21) Based on what you learned from the application, coin-operated laundry prices behave as:

  1. A) custom prices.
  2. B) auction prices.
  3. C) flexible prices
  4. D) custom auction prices.

Answer:  A

Diff: 1

Topic:  Application 1, Measuring Price Stickiness in Consumer Markets

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

22) According to the application, Bils and Klenow found that between 1995-1997, prices in more than half of the 350 goods that they were studying showed frequent price changes. This finding was contrary to Kashyap’s finding because:

  1. A) the inflation during that period was low.
  2. B) the economy during that time was in a recession.
  3. C) unemployment rates during that time were rising.
  4. D) custom auction prices.

Answer:  A

Diff: 1

Topic:  Application 1, Measuring Price Stickiness in Consumer Markets

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

23) According to the application, shocks to aggregate demand are easily anticipated.

Answer:  FALSE

Diff: 2

Topic:  Application 1, Measuring Price Stickiness in Consumer Markets

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

24) If prices are sticky, output in an economy will be mostly determined by the level of demand.

Answer:  TRUE

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

25) Goods and services with custom prices have prices that adjust very quickly.

Answer:  FALSE

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

26) Production inputs such as steel rods have prices that adjust very quickly.

Answer:  FALSE

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

27) Wages are classified as custom prices, because they do not adjust very quickly.

Answer:  TRUE

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

28) For most firms, payments to capital inputs are the biggest cost of doing business in the U.S.

Answer:  FALSE

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

29) For most firms, wage is the largest cost incurred when doing business in the U.S.

Answer:  TRUE

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

30) In the short run, demand and not prices, determine the production of inputs such as steel.

Answer:  TRUE

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

31) Prices of inputs tend to be sticky in the short run because of informal and formal price arrangements between the buyer and seller of inputs.

Answer:  TRUE

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

32) What differentiates the short run from the long run in macroeconomics?

Answer:  The short run in macroeconomics is the period of time in which prices and costs do not change very much. In the macroeconomic short run, aggregate demand determines the level of output in the economy.

Diff: 1

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

33) Why are the prices of some intermediate inputs sticky in the short run? What causes the stickiness in the prices of labor?

Answer:  Firms usually have formal and informal agreements that tend to fix prices in the short run. Fixing prices removes some of the risks that a firm encounters when making a decision of how much to produce in the future. Labor prices tend to be sticky either because of government policies (minimum wage, for example) or because of formal and informal agreements made between workers and firms (labor contracts).

Diff: 2

Topic:  Flexible and Sticky Prices

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

9.2   Understanding Aggregate Demand

 

1) The aggregate demand curve:

  1. A) slopes upward.
  2. B) slopes downward.
  3. C) may slope upward or downward.
  4. D) is horizontal.

Answer:  B

Diff: 1

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

2) When we draw the aggregate demand curve, ________ should be on the x-axis and ________ should be on the y-axis.

  1. A) real GDP; the price level
  2. B) quantity; price
  3. C) price; quantity
  4. D) real GDP; inflation

Answer:  A

Diff: 1

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

3) Can the aggregate demand curve slope upwards?

  1. A) No.
  2. B) Yes, always.
  3. C) Yes, if the economy experiences inflation.
  4. D) Yes, if the aggregate supply curve is downward sloping.

Answer:  A

Diff: 1

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

4) ________ is a curve that shows the relationship between the price level and the quantity of real GDP demanded.

  1. A) The aggregate demand curve
  2. B) The aggregate supply curve
  3. C) The product demand curve
  4. D) The market demand curve

Answer:  A

Diff: 1

Topic:  What is the Aggregate Demand Curve?

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

5) The aggregate demand curve that shows the ________ relationship between the price level and the quantity of real GDP demanded.

  1. A) negative
  2. B) positive
  3. C) linear
  4. D) exponential

Answer:  A

Diff: 1

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

6) The aggregate demand curve slopes downward because at a higher price level:

  1. A) the purchasing power of consumers’ assets declines and consumption increases.
  2. B) producers can get more for what they produce, and they increase production.
  3. C) the purchasing power of consumers’ wealth declines and consumption decreases.
  4. D) the purchasing power of consumers’ wealth increases and consumption increases.

Answer:  C

Diff: 2

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

7) When the general price level rises:

  1. A) consumption falls as a result of the wealth effect.
  2. B) consumption increases as a result of the multiplier effect.
  3. C) investment rises as a result of the wealth effect.
  4. D) investment falls as a result of the consumption link effect.

Answer:  A

Diff: 2

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

8) The curve that depicts aggregate demand slopes downward because:

  1. A) as the overall price level (P) falls, real GDP (y) falls.
  2. B) as the overall price level (P) rises, real GDP (y) falls.
  3. C) as the overall price level (P) rises, real GDP (y) rises.
  4. D) as the overall price level (P) rises, real GDP (y) does not change.

Answer:  B

Diff: 2

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

9) Based on our understanding of the aggregate demand curve, we know that a(n) ________ in the price level causes the quantity of real GDP demanded to ________.

  1. A) increase; increase
  2. B) decrease; increase
  3. C) decrease; remain unchanged
  4. D) decrease; decrease

Answer:  B

Diff: 2

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

10) The aggregate demand curve shows a(n) ________ relationship between the ________.

  1. A) positive; interest rate and investment
  2. B) negative; level of real GDP and investment
  3. C) positive; price level and real GDP
  4. D) negative; price level and real GDP

Answer:  D

Diff: 1

Topic:  What is the Aggregate Demand Curve?

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

11) The four components of the aggregate demand curve are:

  1. A) consumption, investment, government purchases and net exports.
  2. B) land, labor, capital, and technology.
  3. C) consumption, inventories, government purchases and net exports.
  4. D) consumption, inventories, government spending and exports.

Answer:  A

Diff: 1

Topic:  The Components of Aggregate Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

12) The four components of the aggregate demand curve are the same as the:

  1. A) components of real GDP.
  2. B) components of aggregate supply.
  3. C) components of investment.
  4. D) components of market demand.

Answer:  A

Diff: 1

Topic:  The Components of Aggregate Demand

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

13) An increase in the price level results in a decline in aggregate demand because people’s “net worth” decreases and will spend less. This effect is called the:

  1. A) wealth effect.
  2. B) income effect.
  3. C) interest rate effect.
  4. D) trade effect.

Answer:  A

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

14) An increase in the price level results in a decline in aggregate demand because higher prices will cause the nominal interest rates to increase and GDP to drop. This effect is called the:

  1. A) wealth effect.
  2. B) income effect.
  3. C) interest rate effect.
  4. D) trade effect.

Answer:  C

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

15) The ________ is one reason why the aggregate demand curve is downward sloping.

  1. A) natural rate of unemployment
  2. B) wealth effect
  3. C) presence of sticky prices
  4. D) paradox of thrift

Answer:  B

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

16) The international effect explanation of the downward slope of the AD operates through which component of aggregate demand?

  1. A) net exports
  2. B) consumption
  3. C) investment
  4. D) government purchases

Answer:  A

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

17) According to the international effect explanation of the downward slope of the AD curve, a higher price level in the U.S. economy causes:

  1. A) U.S. imports to increase and U.S. exports to decrease.
  2. B) U.S. imports and U.S. exports to decrease.
  3. C) U.S. imports to decrease and U.S. exports to increase.
  4. D) U.S. imports and U.S. exports to increase.

Answer:  A

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

18) According to the international effect explanation of the downward slope of the AD curve, a lower price level in the U.S. economy causes:

  1. A) U.S. imports to increase and U.S. exports to decrease.
  2. B) U.S. imports and U.S. exports to decrease.
  3. C) U.S. imports to decrease and U.S. exports to increase.
  4. D) U.S. imports and U.S. exports to increase.

Answer:  C

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

19) A lower U.S. net exports caused by a higher U.S. price level will cause:

  1. A) a rightward shift in the AD
  2. B) a leftward shift in the AD
  3. C) a movement upward along the AD
  4. D) a movement downward along the AD

Answer:  C

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

Figure 9.1

 

20) Refer to Figure 9.1. A reduction in the money supply causes:

  1. A) the economy to move from Point A to Point B, but will not shift the aggregate demand curve.
  2. B) the aggregate demand curve to shift from to .
  3. C) the aggregate demand curve to shift from to .
  4. D) neither a shift of the aggregate demand curve nor a change in real GDP.

Answer:  B

Diff: 2

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

21) Refer to Figure 9.1. An increase in the money supply causes:

  1. A) the economy to move from Point A to Point B, but will not shift the aggregate demand curve.
  2. B) the aggregate demand curve to shift from to .
  3. C) the aggregate demand curve to shift from to .
  4. D) neither a shift of the aggregate demand curve nor a change in real GDP.

Answer:  C

Diff: 2

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

22) Refer to Figure 9.1. An increase in government spending causes:

  1. A) the economy to move from Point A to Point B, but will not shift the aggregate demand curve.
  2. B) the aggregate demand curve to shift from to .
  3. C) the aggregate demand curve to shift from to .
  4. D) neither a shift of the aggregate demand curve nor a change in real GDP.

Answer:  C

Diff: 2

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

23) Refer to Figure 9.1. A reduction in government spending causes:

  1. A) the economy to move from Point A to Point B, but will not shift the aggregate demand curve.
  2. B) the aggregate demand curve to shift from to .
  3. C) the aggregate demand curve to shift from to .
  4. D) neither a shift of the aggregate demand curve nor a change in real GDP.

Answer:  B

Diff: 2

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

24) Refer to Figure 9.1. When the price level rises and causes lower consumption expenditures, it is illustrated as:

  1. A) an aggregate demand curve shift from to .
  2. B) an aggregate demand curve shift from to .
  3. C) a move from Point A to Point B, but not a shift of the aggregate demand curve.
  4. D) a move from Point B to Point A, but not a shift of the aggregate demand curve.

Answer:  D

Diff: 2

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

25) Refer to Figure 9.1. When the price level drops and causes a higher net exports, it is illustrated as:

  1. A) an aggregate demand curve shift from to .
  2. B) an aggregate demand curve shift from to .
  3. C) a move from Point A to Point B, but not a shift of the aggregate demand curve.
  4. D) a move from Point B to Point A, but not shift of the aggregate demand curve.

Answer:  C

Diff: 2

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

26) A decrease in government purchases shifts the ________ curve to the ________.

  1. A) aggregate demand; left
  2. B) aggregate supply; left
  3. C) aggregate demand; right
  4. D) aggregate supply; right

Answer:  A

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

27) The aggregate demand curve would shift to the left if:

  1. A) government spending was increased.
  2. B) taxes were increased.
  3. C) the money supply was increased.
  4. D) the cost of energy was to decrease.

Answer:  B

Diff: 1

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

28) A decrease in personal income taxes will lead to:

  1. A) no change in aggregate demand.
  2. B) an increase in aggregate demand.
  3. C) a decrease in aggregate demand.
  4. D) a decrease in aggregate supply.

Answer:  B

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

29) A rightward shift in the aggregate demand curve can be caused by:

  1. A) an increase in government spending.
  2. B) a decrease in taxes.
  3. C) an increase in the money supply.
  4. D) all of the above.

Answer:  D

Diff: 1

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

30) A rightward shift in the aggregate demand curve cannot be caused by:

  1. A) an increase in government spending.
  2. B) an increase in the money supply.
  3. C) an increase in taxes.
  4. D) an increase in net exports.

Answer:  C

Diff: 1

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

31) A leftward shift in the aggregate demand curve cannot be caused by:

  1. A) a decrease in government spending.
  2. B) a decrease in the money supply.
  3. C) an increase in taxes.
  4. D) a decrease in imports.

Answer:  D

Diff: 1

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

32) The aggregate demand curve shifts to the left if:

  1. A) the government increases spending.
  2. B) household consumption falls.
  3. C) the government decreases taxes.
  4. D) the supply of money rises.

Answer:  B

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

Figure 9.2

 

33) Refer to Figure 9.2. Suppose the economy is at Point A, an increase in the price level causes a movement to Point:

  1. A) E.
  2. B) D.
  3. C) C.
  4. D) B.

Answer:  A

Diff: 1

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

34) Refer to Figure 9.2. Suppose the economy is at Point A, a decrease in the price level causes a movement to Point:

  1. A) B.
  2. B) D.
  3. C) E.
  4. D) C.

Answer:  B

Diff: 1

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

35) Refer to Figure 9.2. Suppose the economy is at Point A, a decrease in taxes causes a movement to Point:

  1. A) B.
  2. B) D.
  3. C) E.
  4. D) C.

Answer:  A

Diff: 2

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

36) Refer to Figure 9.2. Suppose the economy is at Point A, an increase in money supply causes a movement to Point:

  1. A) B.
  2. B) D.
  3. C) C.
  4. D) E.

Answer:  A

Diff: 2

Topic:  Shifts in the Aggregate Demand, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

37) The reason why an increase in government expenditure has a more than proportional impact on aggregate demand is known as:

  1. A) the wealth effect.
  2. B) the multiplier effect.
  3. C) the divider effect.
  4. D) the interest rate effect.

Answer:  B

Diff: 2

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

38) An increase in government expenditure has a multiplier effect on aggregate demand due to:

  1. A) the fact that the marginal propensity to consume is larger than one.
  2. B) the additional spending by consumers stimulated by the actual government expenditure.
  3. C) the autonomous nature of private consumption expenditure.
  4. D) the negative slope of the consumption function.

Answer:  B

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

39) In the consumption function C = Ca + bY, the term b represents:

  1. A) the multiplier effect.
  2. B) the marginal propensity to consume.
  3. C) the autonomous consumption spending.
  4. D) the marginal propensity to save.

Answer:  B

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

40) In the consumption function C = Ca + bY, the term Ca represents:

  1. A) the multiplier effect.
  2. B) the marginal propensity to consume.
  3. C) the autonomous consumption spending.
  4. D) the marginal propensity to save.

Answer:  C

Diff: 2

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

41) If the marginal propensity to consume is 0.2, the value of the multiplier is:

  1. A) 5.
  2. B) 1.25.
  3. C) 2.
  4. D) 0.8.

Answer:  B

Diff: 2

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

42) If the marginal propensity to consume is 0.2, the value of the marginal propensity to save is:

  1. A) 5.
  2. B) 1.25.
  3. C) 2.
  4. D) 0.8.

Answer:  D

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

43) If the marginal propensity to consume is 0.8, the value of the multiplier is:

  1. A) 5.
  2. B) 1.25.
  3. C) 2.
  4. D) 0.8.

Answer:  A

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

44) If the marginal propensity to consume is 0.8, the value of the marginal propensity to save is:

  1. A) 5.
  2. B) 1.25.
  3. C) 0.2.
  4. D) 0.8.

Answer:  C

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

45) As the marginal propensity to consume increases, the value of the multiplier:

  1. A) increases.
  2. B) decreases.
  3. C) stays the same.
  4. D) can increase or decrease.

Answer:  A

Diff: 2

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

46) As the marginal propensity to consume decreases, the value of the multiplier:

  1. A) increases.
  2. B) decreases.
  3. C) stays the same.
  4. D) can increase or decrease.

Answer:  B

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

47) If the marginal propensity to consume is 0.5, an increase in consumption by $200 will shift the aggregate demand curve horizontally to the right by:

  1. A) $400.
  2. B) $100.
  3. C) $200.
  4. D) $200.5.

Answer:  A

Diff: 2

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

48) If the marginal propensity to consume is 0.5, a decrease in consumption by $100 will shift the aggregate demand curve horizontally to the left by:

  1. A) $400.
  2. B) $100.
  3. C) $200.
  4. D) $100.5.

Answer:  C

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

49) If the marginal propensity to consume is 0.2 and there is a $10 million increase in one component of spending, the aggregate demand curve will shift horizontally to the right by:

  1. A) $8 million.
  2. B) $12.5 million.
  3. C) $15 million.
  4. D) $2 million.

Answer:  B

Diff: 2

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

50) If the consumption function is C = 200 + 0.8Y and there is a $10 million increase in investment spending, then the aggregate demand curve will shift horizontally to the right by:

  1. A) $50 million.
  2. B) $8 million.
  3. C) $12.5 million.
  4. D) $2 million.

Answer:  A

Diff: 3

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

51) If the consumption function is C = 200 + 0.75Y and there is a $10 million increase in consumption spending, then the aggregate demand curve will shift horizontally to the right by:

  1. A) $40 million.
  2. B) $75 million.
  3. C) $7.5 million.
  4. D) $750 million.

Answer:  A

Diff: 3

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

52) Suppose there are three economies with 3 different consumption functions:

Country A:  C = 100 + 0.8Y

Country B:  C = 200 + 0.75 Y

Country C:  C = 75 + 0.9Y

 

In which of these countries is autonomous consumption the largest?

  1. A) Country B
  2. B) Country A
  3. C) Country C
  4. D) All countries have the same autonomous consumption levels.

Answer:  A

Diff: 3

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

53) Suppose there are three economies with 3 different consumption functions:

Country A:  C = 100 + 0.8Y

Country B:  C = 200 + 0.75 Y

Country C:  C = 75 + 0.9Y

 

In which of these countries is the marginal propensity to consume the largest?

  1. A) Country B
  2. B) Country A
  3. C) Country C
  4. D) All countries have the same marginal propensity to consume.

Answer:  C

Diff: 3

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

54) Suppose there are three economies with 3 different consumption functions:

Country A:  C = 100 + 0.8Y

Country B:  C = 200 + 0.75 Y

Country C:  C = 75 + 0.9Y

 

In which of these countries is the multiplier the largest?

  1. A) Country B
  2. B) Country A
  3. C) Country C
  4. D) All countries have the same multipliers.

Answer:  C

Diff: 3

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

55) Suppose there are three economies with 3 different consumption functions:

Country A:  C = 100 + 0.8Y

Country B:  C = 200 + 0.75 Y

Country C:  C = 75 + 0.9Y

 

If the government spending increases by 10, in which of these countries would the shift of the AD curve be the largest?

  1. A) Country B
  2. B) Country A
  3. C) Country C
  4. D) All countries have the same shifts in the aggregate demand.

Answer:  C

Diff: 3

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

56) Aggregate demand refers to the demand for a particular good or service.

Answer:  FALSE

Diff: 1

Topic:  What is the Aggregate Demand Curve?

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

57) An increase in the price level lowers the real value of wealth.

Answer:  TRUE

Diff: 1

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

58) The aggregate demand curve is the sum of all demand curves for all goods and services in the economy.

Answer:  FALSE

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

59) Holding other factors constant, an increase in the price level causes the aggregate demand curve to shift to the left.

Answer:  FALSE

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

60) An increase in taxes shifts aggregate demand to the left.

Answer:  TRUE

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

61) A decrease in the price level causes an increase in aggregate quantity demanded.

Answer:  TRUE

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

62) The aggregate demand curve is downward sloping because of the law of demand.

Answer:  FALSE

Diff: 1

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

63) The multiplier is always larger than one because the marginal propensity to consume is always larger than one.

Answer:  FALSE

Diff: 2

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

64) The multiplier is always larger than one.

Answer:  TRUE

Diff: 2

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

65) The marginal propensity to consume is always greater than unity.

Answer:  FALSE

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

66) The marginal propensity to consume can never be equal to zero.

Answer:  TRUE

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

67) A higher marginal propensity to consume results in a larger multiplier.

Answer:  TRUE

Diff: 1

Topic:  How the Multiplier Makes the Shift Bigger

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

68) Briefly explain how the aggregate demand curve is different from the demand curve for a particular good.

Answer:  The relevant price for the demand curve for a particular good is the price of that good compared to prices of other products. The relevant price for the aggregate demand curve is the average price level for the entire economy. As the relative price of a particular good drops, consumers increase their quantity demanded of that good. As the average price for the entire economy drops: households increase spending (consumption increases through the wealth effect), firms increase spending (investment increases through the interest rate effect), and foreigners increase demand for domestic goods (exports increase through the international trade effect.)

Diff: 2

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

69) Briefly explain the “wealth effect” explanation for why aggregate demand curve is downward sloping.

Answer:  The “wealth effect” states that the Aggregate Demand curve is downward sloping because a higher price level causes the real wealth of individuals to decrease. This in turn causes consumption expenditures to decrease, causing the quantity of real GDP demanded to decrease.

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

70) Briefly explain the “interest rate effect” explanation for why aggregate demand curve is downward sloping.

Answer:  The “interest rate effect” states that the Aggregate Demand curve is downward sloping because a higher price level causes the interest rates to rise. This in turn causes investment expenditures to decrease, causing the quantity of real GDP demanded to decrease.

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

71) Briefly explain the “international trade effect” explanation for why aggregate demand curve is downward sloping.

Answer:  The “international trade effect” states that the Aggregate Demand curve is downward sloping because a higher price level causes the domestic currency to appreciate. This in turn causes net exports to decrease as imports increase and exports decrease. Ultimately, this causes the quantity of real GDP demanded to decrease.

Diff: 1

Topic:  Why the Aggregate Demand Slopes Downward

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

72) Explain what the aggregate demand curve shows.

Answer:  The aggregate demand curve shows the negative relationship between equilibrium real GDP and the aggregate price level.

Diff: 1

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

73) Define the aggregate demand curve. Explain the impact of an increase in the price level on the quantity of real GDP demanded.

Answer:  The aggregate demand curve shows the total demand for goods and services in the economy at a given point in time. An increase in the price level decreases aggregate quantity demanded due to several factors including the wealth effect.

Diff: 1

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

74) Comment on the following statement: “An economy’s aggregate demand curve is derived by horizontally summing the market demand curves for all the products consumed in the economy.”

Answer:  The statement is false. An economy’s aggregate demand curve is not derived by horizontally summing the market demand curves for all the products consumed in the economy. The logic that explains why a simple demand curve slopes downward fails to explain why the aggregate demand curve has a negative slope.

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

75) Explain the wealth effect on aggregate demand. Using the wealth effect, summarize how the GDP changes after an increase in the price level.

Answer:  The wealth effect measures the impact of a price change on the purchasing power of wealth and its subsequent effect on consumption and output. An increase in the price level will lower the real value of wealth, which will result in less consumption spending. This will cause less production and an overall decrease in real GDP.

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

76) List three things that could shift the aggregate demand curve to the right.

Answer:  Student responses will vary but may include:

(1) an increase in the money supply

(2) a decrease in taxes

(3) an increase in government spending

(4) an increase in consumption, investment, or net exports

Diff: 2

Topic:  Shifts in the Aggregate Demand Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

9.3   Understanding Aggregate Supply

 

1) The aggregate supply curve depicts the relationship between:

  1. A) the unemployment rate and the total quantity of goods and services that firms supply.
  2. B) the cost of labor and the total quantity of goods and services that firms supply.
  3. C) the cost of inputs and the total quantity of goods and services that firms supply.
  4. D) the level of prices and the total quantity of goods and services that firms supply.

Answer:  D

Diff: 1

Topic:  Understanding Aggregate Supply

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

2) The aggregate supply curve in the short run is different from the aggregate supply curve in the long run because of:

  1. A) the recurring nature of supply shocks.
  2. B) the crowding out effect.
  3. C) the wealth effect.
  4. D) the existence of sticky prices in the short run.

Answer:  D

Diff: 1

Topic:  Understanding Aggregate Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

3) The relationship between the level of prices and the total quantity of goods and services that firms supply in the short run is:

  1. A) similar in the long run and in the short run due to the existence of sticky prices.
  2. B) marginally decreasing.
  3. C) positive.
  4. D) negative.

Answer:  C

Diff: 1

Topic:  Understanding Aggregate Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

Figure 9.3

 

4) Refer to Figure 9.3. Which of the following causes the economy to move from Point A to Point E in the short run?

  1. A) an oil embargo that increases the price of oil sharply
  2. B) technological progress
  3. C) an influx of immigrants
  4. D) an increase in the price level

Answer:  A

Diff: 2

Topic:  Understanding Aggregate Supply

Skill:  Conceptual

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

5) Refer to Figure 9.3. Suppose the economy is at Point A, an increase in the price level moves the economy in the short run to Point:

  1. A) E.
  2. B) D.
  3. C) B.
  4. D)

Answer:  C

Diff: 2

Topic:  Aggregate Supply, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

6) The long run aggregate supply curve assumes that in the long run, the economy:

  1. A) has no unemployment.
  2. B) has no inflation.
  3. C) is at full employment.
  4. D) does not experience supply shocks.

Answer:  C

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

7) In the long run, the aggregate supply curve is:

  1. A) vertical at the full employment level of GDP.
  2. B) downward sloping.
  3. C) horizontal at the full employment level of GDP.
  4. D) upward sloping.

Answer:  A

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

8) Because the long run aggregate supply curve is vertical at the full employment level of GDP, then this would imply that the long run aggregate supply curve:

  1. A) is independent of changes in the price level.
  2. B) increases as the price level increases.
  3. C) decreases as the price level increases.
  4. D) shifts to the right when the price level increases.

Answer:  A

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

9) In the long run, output is determined by:

  1. A) the size of the capital stock.
  2. B) the size of the labor force.
  3. C) the state of technology.
  4. D) all of the above.

Answer:  D

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

10) If the economy is in long run equilibrium at full employment, the level of overall economic activity:

  1. A) is positively affected by changes in the price level.
  2. B) is not affected by changes in the price level.
  3. C) is negatively affected by changes in the price level.
  4. D) is only affected by changes in aggregate demand.

Answer:  B

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

11) If the economy is in long run equilibrium at full employment, the level of overall economic activity is not affected by changes in the price level due to:

  1. A) the fact that prices increase more slowly than input costs.
  2. B) the fact that prices and input costs change simultaneously and in the same direction.
  3. C) the existence of sticky prices.
  4. D) the fact that firms’ profits increase with the price level.

Answer:  B

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

12) If the economy is in equilibrium at full employment, an increase in aggregate demand will:

  1. A) decrease the price level and leave the level of output unchanged in the long run.
  2. B) increase the price level and leave the level of output unchanged in the long run.
  3. C) increase both the price level and the level of output in the long run.
  4. D) decrease both the price level and the level of output in the long run.

Answer:  B

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

13) If the economy is in equilibrium at full employment, a decrease in aggregate demand will:

  1. A) decrease the price level and leave the level of output unchanged in the long run.
  2. B) increase the price level and leave the level of output unchanged in the long run.
  3. C) increase both the price level and the level of output in the long run.
  4. D) decrease both the price level and the level of output in the long run.

Answer:  A

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

14) If the economy is in equilibrium at full employment, an increase in aggregate demand will:

  1. A) decrease the price level and leave the level of output unchanged in the short run.
  2. B) increase the price level and leave the level of output unchanged in the short run.
  3. C) increase both the price level and the level of output in the short run.
  4. D) decrease both the price level and the level of output in the short run.

Answer:  C

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

15) If the economy is in equilibrium at full employment, a decrease in aggregate demand will:

  1. A) decrease the price level and leave the level of output unchanged in the short run.
  2. B) increase the price level and leave the level of output unchanged in the short run.
  3. C) increase both the price level and the level of output in the short run.
  4. D) decrease both the price level and the level of output in the short run.

Answer:  D

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

16) The short run aggregate supply curve assumes that in the short run:

  1. A) the unemployment rate is equal to the natural rate of unemployment.
  2. B) the inflation rate is zero, that is, the economy is stagflated.
  3. C) prices are slow to adjust.
  4. D) the economy does not experience supply shocks.

Answer:  C

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

17) Compared to the long run aggregate supply curve, the short-run aggregate supply curve is relatively:

  1. A) less elastic.
  2. B) more vertical.
  3. C) steeper.
  4. D) flatter.

Answer:  D

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

18) According the short-run aggregate supply curve, the level of overall economic activity:

  1. A) is positively affected by increases in the price level.
  2. B) is not affected by increases in the price level.
  3. C) is negatively affected by increases in the price level.
  4. D) is not affected by increases in aggregate demand.

Answer:  A

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Definition

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

19) Which of the following are the factors that affect the short-run aggregate supply curve?

  1. A) input prices
  2. B) the state of technology
  3. C) taxes and subsidies
  4. D) All of the above can affect the SRAS curve.

Answer:  D

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

20) In the short run, the aggregate supply curve is relatively flat because at any point in time:

  1. A) the labor costs faced by firms are slower to adjust than final prices.
  2. B) firms are assumed to supply all the output demanded with relatively small changes in prices.
  3. C) firms can not face increases in the output demanded without experiencing small reductions in profits.
  4. D) technology advances faster than production costs.

Answer:  B

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Multicultural and Diversity

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

21) In the short run, an increase in the price of a major input such as oil will:

  1. A) decrease the price level and increase the level of output.
  2. B) increase the price level and increase the level of output.
  3. C) increase the price level and decrease the level of output.
  4. D) decrease both the price level and the level of output.

Answer:  C

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

22) In the short run, a decrease in the price of a major input such as oil will:

  1. A) decrease the price level and increase the level of output.
  2. B) increase the price level and increase the level of output.
  3. C) increase the price level and decrease the level of output.
  4. D) decrease both the price level and the level of output.

Answer:  A

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

23) Which of the following would cause the long-run aggregate supply curve to shift to the right?

  1. A) higher energy prices
  2. B) an increase in taxes
  3. C) increases in government regulation
  4. D) an increase in the labor supply

Answer:  D

Diff: 2

Topic:  Supply Shocks

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

Figure 9.4

 

24) Refer to Figure 9.4. The flooding in the Midwest during the summer of 1993 destroyed a large portion of the agricultural crop in the United States. This caused:

  1. A) the aggregate supply curve to shift from to .
  2. B) the aggregate supply curve to shift from to .
  3. C) the economy to move from Point B to Point A along .
  4. D) the economy to move from Point C to Point B along .

Answer:  A

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

25) Refer to Figure 9.4. An increase in aggregate supply is represented by:

  1. A) a movement from Point B to Point A along .
  2. B) a movement from Point C to Point A along .
  3. C) a shift from to .
  4. D) a shift from to .

Answer:  D

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

26) Refer to Figure 9.4. A decrease in aggregate supply is represented by:

  1. A) a movement from Point B to Point A along .
  2. B) a movement from Point B to Point A along .
  3. C) a shift from to .
  4. D) a shift from to .

Answer:  C

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

Figure 9.5

 

27) Refer to Figure 9.5. Suppose the economy is a point B. A large ________ in the price of crude oil leads to a shift from ________ to ________.

  1. A) increase; ;
  2. B) increase; ;
  3. C) increase; ;
  4. D) decrease; ;

Answer:  B

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

28) Refer to Figure 9.5. Suppose the economy is a point B. A large ________ in the supply of labor leads to a shift from ________ to ________.

  1. A) increase; ;
  2. B) decrease; ;
  3. C) decrease; ;
  4. D) increase; ;

Answer:  D

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

29) Refer to Figure 9.5. Suppose the economy is a point B. A large ________ in the price level will move the economy to ________.

  1. A) increase; point C
  2. B) decrease; point C
  3. C) increase; point A
  4. D) decrease; AS0

Answer:  A

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

30) Refer to Figure 9.5. Suppose the economy is a point B. A large ________ in the price level will move the economy to ________.

  1. A) decrease; point C
  2. B) decrease; AS1
  3. C) decrease; point A
  4. D) decrease; AS0

Answer:  C

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

31) A large reduction in oil prices will cause:

  1. A) a rightward shift in the aggregate demand curve.
  2. B) a leftward shift in the aggregate demand curve.
  3. C) a rightward shift in the aggregate supply curve.
  4. D) a leftward shift in the aggregate supply curve.

Answer:  C

Diff: 2

Topic:  Supply Shocks

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

32) An improvement in technology will cause:

  1. A) a rightward shift in the aggregate demand curve.
  2. B) a leftward shift in the aggregate demand curve.
  3. C) a rightward shift in the aggregate supply curve.
  4. D) a leftward shift in the aggregate supply curve.

Answer:  C

Diff: 2

Topic:  Supply Shocks

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

Figure 9.6

 

33) Refer to Figure 9.6. Suppose the equilibrium is at point A. An oil embargo which raises the price of oil would move the equilibrium to:

  1. A) point D.
  2. B) point E.
  3. C) point F.
  4. D) point H.

Answer:  B

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

34) Refer to Figure 9.6. In the short run, a large decrease in oil prices will would move the equilibrium to:

  1. A) point D.
  2. B) point E.
  3. C) point F.
  4. D) point H.

Answer:  D

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

35) Refer to Figure 9.6. In the short run, an improvement in the technology will move the equilibrium to:

  1. A) point D.
  2. B) point E.
  3. C) point F.
  4. D) point H.

Answer:  D

Diff: 2

Topic:  Supply Shocks, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

Recall Application 2, “Two Approaches to Determining the Causes of Recessions,” to answer the following questions:

 

36) According to the application, a recession can be caused by:

  1. A) a decrease in ether aggregate demand or aggregate supply.
  2. B) an increase in aggregate demand or a decrease in aggregate supply.
  3. C) a decrease in aggregate demand or an increase in aggregate supply.
  4. D) an increase in either aggregate demand or aggregate supply.

Answer:  A

Diff: 2

Topic:  Application 2, Two Approaches to Determining the Causes of Recessions

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

37) According to the application, a recession is likely to be caused by a decrease in aggregate demand if:

  1. A) prices change but output does not change in the long run.
  2. B) prices and output change in the long run.
  3. C) prices and output do not change in the long run.
  4. D) prices do not change but output changes in the long run.

Answer:  A

Diff: 2

Topic:  Application 2, Two Approaches to Determining the Causes of Recessions

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

38) According to the application, a recession is likely to be caused by a decrease in aggregate supply if:

  1. A) prices change but output does not change in the long run.
  2. B) both prices and output change in the long run.
  3. C) both prices and output do not change in the long run.
  4. D) prices do not change but output changes in the long run.

Answer:  B

Diff: 2

Topic:  Application 2, Two Approaches to Determining the Causes of Recessions

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

39) According to the application, a recession caused by a decrease in aggregate supply occurred in:

  1. A) 1981.
  2. B) 1979.
  3. C) 1929.
  4. D) All of the above were caused by a decrease in aggregate supply.

Answer:  B

Diff: 2

Topic:  Application 2, Two Approaches to Determining the Causes of Recessions

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

40) According to the application, a recession caused by a decrease in aggregate demand occurred in:

  1. A) 1973.
  2. B) 1979.
  3. C) 1929.
  4. D) All of the above were caused by a decrease in aggregate demand.

Answer:  C

Diff: 2

Topic:  Application 2, Two Approaches to Determining the Causes of Recessions

Skill:  Fact

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

Recall Application 3, “Oil  Supply Disruptions, Speculation and Supply Shocks,” to answer the following questions:

 

41) According to the Application, the changes in the price of oil may be caused by:

  1. A) changes in supply of oil.
  2. B) changes in the worldwide demand for oil.
  3. C) activities of oil speculators.
  4. D) all of the above are correct.

Answer:  D

Diff: 2

Topic:  Application 3, Oil Supply Disruptions, Speculation and Supply Shocks

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

42) According to the Application, the actions of oil speculations will:

  1. A) benefit the economy because it smooths out the changes in the prices of oil.
  2. B) benefit the economy because it increases the prices of oil, causing the development of energy efficient technology.
  3. C) hurt the economy because it causes prices of oil to spike.
  4. D) hurt the economy because it increases the incentives of the economy to import more oil.

Answer:  A

Diff: 2

Topic:  Application 3, Oil Supply Disruptions, Speculation and Supply Shocks

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

43) According to the Application, will the speculators benefit if their incorrect assessment of oil future prices causes the oil prices to fluctuate more?

  1. A) No.
  2. B) Yes, but only in the short run.
  3. C) Yes, if they did not expect the oil prices to fluctuate wildly.
  4. D) Yes, always.

Answer:  A

Diff: 2

Topic:  Application 3, Oil Supply Disruptions, Speculation and Supply Shocks

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

44) The short run aggregate supply curve is upward sloping and very steep.

Answer:  FALSE

Diff: 1

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

45) Along the short run supply curve, when the price level rises, there is an increase in aggregate quantity supplied.

Answer:  TRUE

Diff: 1

Topic:  Understanding Aggregate Supply

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

46) The long run aggregate supply curve is vertical.

Answer:  TRUE

Diff: 1

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

47) A large increase in oil prices will cause the short-run aggregate supply curve to shift left.

Answer:  TRUE

Diff: 1

Topic:  Supply Shocks

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

 

48) A large technological improvement will shift the short-run aggregate supply curve to the right.

Answer:  TRUE

Diff: 1

Topic:  Supply Shocks

Skill:  Analytical

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

Recall Application 3, “Oil  Supply Disruptions, Speculation and Supply Shocks,” to answer the following questions:

 

49) Oil price speculation always hurt the economy and should be banned in the United States.

Answer:  FALSE

Diff: 1

Topic:  Application 3, Oil Supply Disruptions, Speculation and Supply Shocks

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

50) Lutz Kilian’s study showed that a small proportion of the fluctuation of oil prices worldwide is caused by disruptions in the supply of oil.

Answer:  TRUE

Diff: 1

Topic:  Application 3, Oil Supply Disruptions, Speculation and Supply Shocks

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

51) Oil price speculators cause an increase in the price of oil both now and in the future.

Answer:  FALSE

Diff: 1

Topic:  Application 3, Oil Supply Disruptions, Speculation and Supply Shocks

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

52) List three things that could shift the short run aggregate supply curve to the right.

Answer:  Student responses will vary but could include:

(1)  improved technology

(2)  immigration

(3)  an increase in the capital stock (or any resource)

(4)  a large reduction in oil prices (or the price of any resource)

Diff: 2

Topic:  The Short-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

53) Many economists have argued that oil prices have a big impact on the performance of the economy. During the late 1990s, oil prices fell dramatically. Explain the effects of this drop in oil prices in the aggregate demand-aggregate supply model.

Answer:  The drop in oil prices is a beneficial supply shock. It would lead to an increase in short run aggregate supply. The short run aggregate supply curve would shift to the right. This would lead to an increase in real GDP and a decline in the price level.

Diff: 2

Topic:  Supply Shocks

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

54) Many economists have argued that oil prices have a big impact on the performance of the economy. Since 2004, oil prices world wide rose dramatically. Explain the effects of this rise in oil prices in the aggregate demand-aggregate supply model.

Answer:  The increase in oil prices is a detrimental supply shock. It would lead to an decrease in short run aggregate supply and the short run aggregate supply curve would shift to the left. This would lead to an decrease in real GDP and an increase in the price level.

Diff: 2

Topic:  Supply Shocks

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

55) Indicate the effect of an unfavorable aggregate supply shock upon the short run aggregate supply curve.

Answer:  An unfavorable supply shock will result in a leftward shift in the short run aggregate supply curve. A leftward shift means that the price level will now be higher at all levels of output.

Diff: 1

Topic:  Supply Shocks

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

56) Immediately after Hurricane Katrina and Rita hit the U.S. in 2005, the price level in the economy sharply increased. Economists attributed this increase to the very sharp increase in energy inputs, specifically gasoline. Using the Aggregate Supply and Aggregate Demand model, illustrate how the hurricanes affected the output and the price level in the economy.

Answer:

Diff: 2

Topic:  Supply Shocks

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

57) Using the AS-AD diagram, show the effects of an increase in the price of oil in the short run.

Answer:  An increase in the price of oil will cause the short run AS curve to shift to the left,resulting in a decrease in the output level and an increase in the price level.

Diff: 2

Topic:  Output & Prices in the Short Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

58) Using the AS and AD diagram, graphically illustrate how the economy experiences a stagflation.

Answer:  A stagflation occurs when the short run aggregate supply curve shifts left. As the short run aggregate curve shifts left, it increases the equilibrium price level and decreases the equilibrium output. This is usually caused by a negative supply shock, such as an increase in the price of oil.

Diff: 2

Topic:  Aggregate Supply, graphing

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Explain the aggregate supply-aggregate demand model.

 

9.4   From the Short Run to the Long Run

 

1) When the economy is in a boom, the intersection between the:

  1. A) short run AS and the AD occurs at an output level higher than potential output.
  2. B) short run AS and the AD occurs at an output level lower than potential output.
  3. C) long run AS and the AD occurs at an output level higher than potential output.
  4. D) long run AS and the AD occurs at an output level lower than potential output.

Answer:  A

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

2) When the economy is in a recession, the intersection between the:

  1. A) short run AS and the AD occurs at an output level higher than potential output.
  2. B) short run AS and the AD occurs at an output level lower than potential output.
  3. C) long run AS and the AD occurs at an output level higher than potential output.
  4. D) long run AS and the AD occurs at an output level lower than potential output.

Answer:  B

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

3) When output exceeds the full employment level of output, we expect that the:

  1. A) wages and prices increase as the long-run aggregate supply curve shifts downward over time.
  2. B) wages and prices increase as the short-run aggregate supply curve shifts upward over time.
  3. C) wages and prices increase as the long-run aggregate supply curve shifts upward over time.
  4. D) wages and prices decrease as the short-run aggregate supply curve shifts downward over time.

Answer:  B

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

4) When output falls below full employment output, we expect that the:

  1. A) wages and prices decrease as the long run aggregate supply curve shifts downward over time.
  2. B) wages and prices decrease as the short run aggregate supply curve shifts upward over time.
  3. C) wages and prices increase as the long run aggregate supply curve shifts upward over time.
  4. D) wages and prices decrease as short run aggregate supply curve shifts downward over time.

Answer:  D

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

5) The economy moves from a short-run equilibrium to the long-run equilibrium through:

  1. A) improvements in technology.
  2. B) supply shocks.
  3. C) demand shocks.
  4. D) adjustments in wages and prices.

Answer:  D

Diff: 1

Topic:  From the Short Run to the Long Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

6) In the long run, the amount of output that the economy can produce will depend on:

  1. A) the supply of labor and capital.
  2. B) the money supply.
  3. C) the nominal interest rate.
  4. D) the price level.

Answer:  A

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

7) Which of the following will not cause the price level to increase in the long run?

  1. A) a decrease in the money supply
  2. B) a decrease in income taxes
  3. C) an increase in government spending
  4. D) a decrease in the interest rates

Answer:  A

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

8) Which of the following will cause the price level to increase in the long run?

  1. A) a decrease in the money supply
  2. B) an increase in income taxes
  3. C) a decrease in government spending
  4. D) an increase in the interest rates

Answer:  A

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

 

9) Which of the following will cause output to increase in the long run?

  1. A) a decrease in the money supply
  2. B) an increase in income taxes
  3. C) a decrease in government spending
  4. D) None of the above will increase output in the long run.

Answer:  D

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

10) In the long run, an increase in the money supply will cause output:

  1. A) to remain the same.
  2. B) to decrease.
  3. C) to increase.
  4. D) to fluctuate up and down.

Answer:  A

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

11) An increase in the money supply will cause output:

  1. A) to increase in the short run; not change in the long run.
  2. B) to decrease in the short run; decrease in the long run.
  3. C) to increase in the short run; increase in the long run.
  4. D) to decrease in the short run, increase in the long run.

Answer:  A

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

 

12) A decrease in the money supply will cause output:

  1. A) to decrease in the short run; not change in the long run.
  2. B) to decrease in the short run; decrease in the long run.
  3. C) to increase in the short run; increase in the long run.
  4. D) to increase in the short run, decrease in the long run.

Answer:  A

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

13) In the short run, an increase in the money supply will cause output:

  1. A) to remain the same.
  2. B) to decrease.
  3. C) to increase.
  4. D) to become zero.

Answer:  C

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

14) If the economy is in a recession, the prices and wages will ________ causing the short-run AS curve to shift ________ until the economy reaches its long run equilibrium.

  1. A) drop; right
  2. B) drop; left
  3. C) rise; right
  4. D) rise; left

Answer:  A

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

 

15) If the economy is in a boom, the prices and wages will ________ causing the short-run AS curve to shift ________ until the economy reaches its long run equilibrium.

  1. A) drop; right
  2. B) drop; left
  3. C) rise; right
  4. D) rise; left

Answer:  D

Diff: 2

Topic:  From the Short Run to the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

16) In the short run, higher taxes will lead to a higher price level and a higher level of real GDP.

Answer:  FALSE

Diff: 2

Topic:  Output & Prices in the Short Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

17) In the long run, higher taxes will lead to a lower price level and a lower level of real GDP.

Answer:  FALSE

Diff: 2

Topic:  Output & Prices in the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

18) If the economy is in long-run equilibrium at full employment, lowering taxes leads to a higher price level and a higher level of real GDP.

Answer:  FALSE

Diff: 2

Topic:  Output & Prices in the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

 

19) If the economy is in long-run equilibrium at full employment, an increase in the money supply will lead to a higher aggregate demand and a higher price level in the short run.

Answer:  TRUE

Diff: 2

Topic:  Output & Prices in the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

20) If the economy is in long run equilibrium at full employment, an increase in the money supply will lead to a higher aggregate demand and a higher output level in the long run.

Answer:  FALSE

Diff: 2

Topic:  Output & Prices in the Long Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

21) In the short run, an increase in the money supply will lead to a higher aggregate demand and a higher price level.

Answer:  TRUE

Diff: 2

Topic:  Output & Prices in the Short Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

22) Using aggregate supply and aggregate demand curves, indicate the impact of an increase in the money supply on the price level and on the equilibrium level of real GDP in the short run.

Answer:  Aggregate demand will increase and the price level and the equilibrium level of real GDP will increase.

Diff: 2

Topic:  Output & Prices in the Short Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

23) Using aggregate supply and aggregate demand curves, indicate the impact of an increase in government spending on the price level and on the equilibrium level of real GDP in the short run.

Answer:  Aggregate demand will increase and the price level and the equilibrium level of real GDP will increase.

Diff: 2

Topic:  Output & Prices in the Short Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

24) Why is the long-run aggregate supply curve vertical?

Answer:  In the long run the economy tends to move toward full employment. The level of full-employment output depends solely on the supply of capital and labor and the level of technology. Because the level of full-employment output does not depend on the level of prices in the economy, the long-run aggregate supply curve is vertical.

Diff: 2

Topic:  The Long-Run Aggregate Supply Curve

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

25) Using aggregate demand and aggregate supply curves, graphically illustrate the effect of an increase in government spending on the price level and equilibrium level of output in the long run. Assume that the economy is initially in long-run equilibrium at full employment.

Answer:  The long run aggregate supply curve is vertical. An increase in government spending will increase aggregate demand and the price level, but will not change the equilibrium level of real GDP in the long run.

Diff: 3

Topic:  Output & Prices in the Long Run

Skill:  Analytical

AACSB:  Analytic Skills

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

26) Suppose that the economy is at a short-run equilibrium above the potential output. Explain the adjustments that the economy experiences as it moves back to potential output.

Answer:  Because the economy is producing above the potential GDP, the competition for labor and other inputs will cause the prices of the inputs to increase, shifting the short-run AS curve to the left. As the AS moves to the left, the price level increases and equilibrium GDP decreases. The short-run AS shifts left until the short-run AS intersects the aggregate demand at the potential GDP.

Diff: 3

Topic:  Output & Prices in the Long Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

27) Suppose that the economy is at a short-run equilibrium below the potential output. Explain the adjustments that the economy experiences as it moves back to potential output.

Answer:  Because the economy is producing below the potential GDP, the unemployment and underutilization of labor and other inputs will cause the prices of the inputs to decrease, shifting the short-run AS curve to the right. As the AS moves to the right, the price level decreases and equilibrium GDP increases. The short run AS shifts right until the short-run AS intersects the aggregate demand at the potential GDP.

Diff: 3

Topic:  Output & Prices in the Long Run

Skill:  Conceptual

AACSB:  Reflective Thinking

Learning Outcome:  Use the aggregate suppply-aggregate demand model to explain aggregate fluctuations in output and inflation.

 

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