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Final study guide
Identify the choice that best completes the statement or answers the question.
1. What you give up to obtain an item is called your
a. opportunity cost.
b. explicit cost.
c. monetary cost.
d. direct cost.
2. Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for
$6200. Bill discovers that he needs to do an additional $2400 of work to make the car worth $6200 to
potential buyers. He could also sell the car now, without completing the additional work, for $3800. What
should he do?
a. He should sell the car now for $3800.
b. He should keep the car since it wouldnt be rational to spend $6400 restoring a car and
then sell it for only $6200.
c. He should complete the additional work and sell the car for $6200.
d. It does not matter if Bill sells the car now or completes the work and then sells it at the
higher price because the outcome will be the same either way.
3. Rick buys a 1966 Mustang for $3,000, planning to restore and sell the car. He goes on to spend $9,000
restoring the car. At this point he can sell the car for $10,000. As an alternative, he can spend an additional
$3,000 replacing the engine. With a new engine the car would sell for $13,000. Rick should
a. complete the repairs and sell the car for $13,000.
b. sell the car now for $10,000.
c. never try such an expensive project again.
d. be indifferent between (i) selling the car now and (ii) replacing the engine and then
4. You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a
rational consumer you should make your choice by comparing
a. the benefits from eating all three bowls of ice cream to how much three bowls of ice
b. the benefits from eating all three bowls of ice cream to how much one more bowl of ice
c. the benefits from eating one more bowl of ice cream to how much three bowls of ice
d. the benefits from eating one more bowl of ice cream to how much one more bowl of ice
5. People are likely to respond to a policy change
a. only if they think the policy is a good one.
b. only if the policy change changes the costs of their behavior.
c. only if the policy change changes the benefits of their behavior.
d. if the policy changes either the costs or benefits of their behavior.
6. Trade between the United States and India
a. benefits both the United States and India.
b. is a losing proposition for the United States because India has cheaper labor.
c. is a losing proposition for India because capital is much more abundant in the U.S. than
d. is a losing proposition for India because U.S. workers are more productive.
7. In communism, central planners decide which of the following?
a. what goods and services will be produced
b. how much will be produced
c. who produced and consumed the goods and services
d. All of the above are correct.
8. A friend of yours asks you why market prices are better than government-determined prices. Because you
understand economic principles, you say that market-determined prices are better because they generally
a. the value of a good to society, but not the cost of making it.
b. the cost of making a good to society, but not its value.
c. both the value of a good to society and the cost of making it.
d. neither the value of a good to society nor the cost of making it.
9. The primary determinant of a country’s standard of living is
a. the countrys ability to prevail over foreign competition.
b. the countrys ability to produce goods and services.
c. the total supply of money in the economy.
d. the average age of the country’s labor force.
10. A worker in Equador can earn $3 per day making cotton cloth on a hand loom. A worker in the United States
can earn $70 per day making cotton cloth with a mechanical loom. What accounts for the difference in
a. U.S. textile workers belong to a union.
b. There is little demand for cotton cloth in Equador and great demand in the U.S.
c. Labor is more productive making cotton cloth with a mechanical loom than with a hand
d. Equador has a low-wage policy to make its textile industry more competitive in world
11. In which of the following decades was there both high inflation and rapid money supply growth in the US?
a. the 1970s and the 1990s
b. the 1970s but not the 1990s
c. the 1990s but not the 1970s
d. neither the 1970s nor the 1990s
12. Which of the following would a permanent increase in the growth rate of the money supply change
c. both inflation and unemployment
d. neither inflation nor unemployment
13. In the short run, an increase in the money supply is likely to lead to
a. lower unemployment and lower inflation.
b. lower unemployment and higher inflation.
c. higher unemployment and lower inflation.
d. higher unemployment and higher inflation.
14. Sir Isaac Newton’s development of the theory of gravity after observing an apple fall from a tree is an
a. a controlled experiment that lead to the formulation of a scientific theory.
b. being in the right place at the right time.
c. an idea whose time had come.
d. the interplay between observation and theory in science.
15. For economists, substitutes for laboratory experiments often come in the form of
a. natural experiments offered by history.
b. untested theories.
c. rules of thumb and other such conveniences.
d. reliance upon the wisdom of elders in the economics profession.
16. Which types of models are built with assumptions?
a. economic models, but not models in other disciplines such as physics and biology
b. economic models as well as models in other disciplines such as physics and biology
c. models that are built for teaching purposes but not for research purposes
d. bad models
17. In the circular-flow diagram, which of the following items flows from households to firms through the
markets for goods and services?
a. goods and services
b. dollars paid to land, labor, and capital
c. dollars spent on goods and services
d. wages, rent, and profit
18. Refer to Figure 2-1. Which arrow represents the flow of spending by households?
19. Refer to Figure 2-3. Unemployment could cause this economy to produce at which point(s)?
a. J, L
b. J, L, M
c. K, N
20. Refer to Figure 2-4. Suppose this economy is producing at point W. Which of the following statements
would best explain this situation?
a. The economy lacks the resources to produce at a more desirable point.
b. The economys available technology prevents it from producing at a more desirable
c. There is widespread unemployment in the economy.
d. Any of the above statements would be a legitimate explanation for this situation.
21. Refer to Figure 2-5. The opportunity cost of this economy moving from point D to point B is
b. 50 soccer balls.
c. 60 sweaters.
d. 50 soccer balls and 60 sweaters.
22. Refer to Figure 2-6. Efficient production is represented by which point(s)?
a. A, B
b. A, B, C, F, G
c. C, F, G
23. Refer to Figure 2-11. The shift of the production possibilities frontier from A to B can best be described as
a. a downturn in the economy.
b. economic growth.
c. an enhancement of equality.
d. an improvement in the allocation of resources.
Cookies (in dozens)
Coffee (in pounds)
24. Refer to Table 2-5. Table 2-5 shows one set of production possibilities. Which of the following statements is
a. The opportunity cost of a dozen cookies does not depend on how many pounds of coffee
are being produced.
b. The opportunity cost of a dozen cookies increases as more cookies are produced.
c. The opportunity cost of a dozen cookies decreases as more cookies are produced.
d. The opportunity cost of a pound of coffee decreases as more coffee is produced.
25. Normative statements are not
c. claims about how the world should be.
d. made by economists speaking as policy advisers.
26. John Maynard Keynes observed that during rare times of deep financial and economic crisis, when the
invisible hand has temporarily ceased to function,
a. there is a more urgent need for government to play an active role in restoring markets to
their healthy function.
b. government should avoid intervening in the market and wait patiently for proper market
function to return.
c. economists need to re-evaluate all of their basic principles.
d. the economy can rely on entrepreneurs to take creative actions to end the crisis.
27. Which of the following statements is correct about the extent of disagreement among economists?
a. There is a great deal of agreement among economists on virtually every economic issue.
b. There is a great deal of agreement among economists on many important economic
c. All disagreements among economists are attributable to differences in their values.
d. All disagreements among economists are attributable to the fact that different economists
have different degrees of faith in the validity of alternative economic theories.
28. Almost all economists agree that local and state governments should
a. eliminate subsidies to professional sports franchises.
b. increase subsidies to professional sports franchises.
c. copy economic policy from Washington, D.C.
d. prevent companies from outsourcing work.
29. If Erins income decreases and, as a result, she chooses to buy fewer milkshakes per month at each price, then
her demand curve will
a. shift to the right.
b. shift to the left.
c. not shift; instead, Erin will move along her demand curve downward and to the right.
d. not shift; instead, Erin will move along her demand curve upward and to the left.
30. The slope of a line that passes through the points (15, 10) and (7, 30) is
31. An economys production possibilities frontier is also its consumption possibilities frontier
a. under all circumstances.
b. under no circumstances.
c. when the economy is self-sufficient.
d. when the rate of tradeoff between the two goods being produced is constant.
Perrys Production Possibilities Frontier
Jordans Production Possibilities Frontier
32. Refer to Figure 3-4. If Perry and Jordan each divides their time equally between writing novels and writing
poems, then total production is
a. 2 novels and 6 poems.
b. 3 novels and 12 poems.
c. 4 novels and 12 poems.
d. 6 novels and 24 poems.
33. Refer to Figure 3-4. Suppose Perry is willing to trade 4 poems to Jordan for each novel that Jordan writes
and sends to Perry. Which of the following combinations of novels and poems could Jordan then consume,
assuming Jordan specializes in novel production and Perry specializes in poem production?
a. 1 novel and 14 poems
b. 2 novels and 8 poems
c. 3 novels and 6 poems
d. 4 novels and 2 poems
34. Refer to Figure 3-4. Perry has an absolute advantage in the production of
a. novels and Jordan has an absolute advantage in the production of poems.
b. poems and Jordan has an absolute advantage in the production of novels.
c. novels and Jordan has an absolute advantage in the production of neither good.
d. neither good and Jordan has an absolute advantage in the production of novels.
Maxines Production Possibilities Frontier
Daisys Production Possibilities Frontier
35. Refer to Figure 3-6. If Maxine and Daisy each divides her time equally between making pies and making
tarts, then total production is
a. 6 pies and 10 tarts.
b. 7.5 pies and 3 tarts.
c. 7.5 pies and 10 tarts.
d. 13.5 pies and 13 tarts.
36. Refer to Figure 3-6. If the production possibilities frontiers shown are each for one day of work, then which
of the following combinations of pies and tarts could Maxine and Daisy together not make in a given day?
a. 2 pies and 25 tarts
b. 10 pies and 22 tarts
c. 12 pies and 15 tarts
d. 15 pies and 16 tarts
Alice and Bettys Production Possibilities in one 8-hour day.
Alices Production Possibilities Frontier
Bettys Production Possibilities Frontier
37. Refer to Figure 3-10. If Alice produces only lemonade, she can produce
a. 200 pitchers per day.
b. 300 pitchers per day.
c. 400 pitchers per day.
d. 450 pitchers per day.
38. Refer to Figure 3-10. Which of the following statements is correct regarding comparative advantage?
a. Alice has a comparative advantage in the production of both lemonade and pizzas.
b. Betty has a comparative advantage in the production of both lemonade and pizzas.
c. Alice has a comparative advantage in the production of pizzas while Betty has a
comparative advantage in the production of lemonade.
d. Alice has a comparative advantage in the production of lemonade while Betty has a
comparative advantage in the production of pizzas.
39. If he devotes all of his available resources to cantaloupe production, a farmer can produce 120 cantaloupes. If
he sacrifices 1.5 watermelons for each cantaloupe that he produces, it follows that
a. if he devotes all of his available resources to watermelon production, then he can produce
b. he cannot have a comparative advantage over other farmers in producing cantaloupes.
c. his opportunity cost of one watermelon is 2/3 of a cantaloupe.
d. his production possibilities frontier is bowed-out.
40. Which of the following statements is not correct?
a. Trade allows for specialization.
b. Trade has the potential to benefit all nations.
c. Trade allows nations to consume outside of their production possibilities curves.
d. Absolute advantage is the driving force of specialization.
Assume that the farmer and the rancher can switch between producing meat and producing potatoes at a
Labor Hours Needed
to Make 1 Pound of
in 24 Hours
41. Refer to Table 3-4. The opportunity cost of 1 pound of potatoes for the farmer is
a. 1/4 pound of meat.
b. 2 hours of labor.
c. 4 pounds of meat.
d. 8 hours of labor.
Assume that Huang and Min can switch between producing parasols and producing porcelain plates at a
Labor Hours Needed
to Make 1
in 36 Hours
42. Refer to Table 3-8. The opportunity cost of 1 parasol for Huang is
a. 1/3 plate.
b. 1/2 plate.
c. 3 plates.
d. 6 plates.
Assume that Falda and Varick can switch between producing wheat and producing cloth at a constant rate.
Quantity Produced in 1 Hour
Bushels of Wheat Yards of Cloth
43. Refer to Table 3-11. Falda has an absolute advantage in the production of
c. both goods.
d. neither good.
44. Refer to Table 3-11. Falda has a comparative advantage in the production of
c. both goods.
d. neither good.
Perus Production Possibilities Frontier
45. Refer to Figure 3-2. Suppose Peru decides to increase its production of emeralds by 2. What is the
opportunity cost of this decision?
a. 30 rubies
b. 40 rubies
c. 60 rubies
d. 120 rubies
Arturos Production Possibilities Frontier
Dinas Production Possibilities Frontier
46. Refer to Figure 3-3. If Arturo and Dina switch from each person dividing their time equally between the
production of tacos and burritos to each person spending all of their time producing the good in which they
have a comparative advantage, then total production of burritos will increase by
Hosnes Production Possibilities Frontier
Merves Production Possibilities Frontier
47. Refer to Figure 3-5. Hosne has a comparative advantage in the production of
a. purses and Merve has a comparative advantage in the production of wallets.
b. wallets and Merve has a comparative advantage in the production of purses.
c. both goods and Merve has a comparative advantage in the production of neither good.
d. neither good and Merve has a comparative advantage in the production of both goods.
48. Refer to Figure 3-5. At which of the following prices would both Hosne and Merve gain from trade with
a. 5 wallets for 1.25 purses
b. 5 wallets for 2.5 purses
c. 5 wallets for 3.75 purses
d. Hosne and Merve could not both gain from trade with each other at any price.
Uzbekistans Production Possibilities Frontier
Azerbaijans Production Possibilities Frontier
49. Refer to Figure 3-9. Azerbaijans opportunity cost of one bolt is
a. 1/4 nail and Uzbekistans opportunity cost of one bolt is 1/2 nail.
b. 1/4 nail and Uzbekistans opportunity cost of one bolt is 2 nails.
c. 4 nails and Uzbekistans opportunity cost of one bolt is 1/2 nail.
d. 4 nails and Uzbekistans opportunity cost of one bolt is 2 nails.
50. Refer to Figure 3-9. Azerbaijan has an absolute advantage in the production of
a. bolts and a comparative advantage in the production of bolts.
b. bolts and a comparative advantage in the production of nails.
c. nails and a comparative advantage in the production of bolts.
d. nails and a comparative advantage in the production of nails.
51. The quantity demanded of a good is the amount that buyers are
a. willing to purchase.
b. willing and able to purchase.
c. willing, able, and need to purchase.
d. able to purchase.
52. The line that relates the price of a good and the quantity demanded of that good is called the demand
a. schedule, and it usually slopes upward.
b. schedule, and it usually slopes downward.
c. curve, and it usually slopes upward.
d. curve, and it usually slopes downward.
53. When quantity demanded decreases at every possible price, the demand curve has
a. shifted to the left.
b. shifted to the right.
c. not shifted; rather, we have moved along the demand curve to a new point on the same
d. not shifted; rather, the demand curve has become flatter.
54. A market demand curve shows
a. the relationship between price and the number of buyers in a market.
b. how quantity demanded changes when the number of sellers changes.
c. the sum of all prices that individual buyers are willing and able to pay for each possible
quantity of the good.
d. how much of a good all buyers are willing and able to buy at each possible price.
55. Refer to Table 4-1. If the market consists of Michelle and Hillary only and the price falls by $1, the quantity
demanded in the market increases by
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.
56. Refer to Figure 4-4. Which of the following would cause the demand curve to shift from Demand C to
Demand A in the market for tennis balls in the United States?
a. an increase in the price of tennis balls
b. a decrease in the price of tennis racquets
c. an expectation by buyers that their incomes will increase in the very near future
d. a decrease in the number of people in the United States under age 70
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