Econ 101, sections 2 and 6, S06 Schroeter Exam #1, Red. Choose the single best answer for each question.

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1 Econ 101, sections 2 and 6, S06 Schroeter Exam #1, Red Choose the single best answer for each question. 1. An important element of the market process is that a. although people trade voluntarily, one party "wins" and the other party "loses." b. the government determines the extent of market activity in order for all parties to benefit. c. people are better off if they are self-sufficient than if they trade with others in the market. * people trade voluntarily and all parties to a trade expect to benefit. 2. The market power that ISU's bookstore has is now limited by a. new federal antitrust laws. b. public goods provided by the government. c. university policies guaranteeing "fair" pricing. * increased access to other booksellers provided by the internet. 3. The impact of one person's actions on the well-being of a bystander is called a. a public good. b. market power. * an externality. d. economic efficiency. 4. The Secretary of Labor states that wage rates in the country rose by 2% in The head of a national labor union states that wage gains should have been higher. The Secretary's statement is a economic statement and the labor leader's statement is a economic statement. a. positive; positive. * positive; normative. c. normative; positive. d normative; normative. 5. Imagine a hypothetical economy with resources that can be used to produce either cars or computers. As we move along the economy's production possibilities frontier in the direction of more cars, the opportunity cost of cars will most likely * increase, because resources are specialized. b. increase, because computers are cheaper, on average, than cars. c. decrease, because computers are more important than cars in the information age. d. decrease, because automobile technology is advancing more slowly than computer technology.

2 2 6. Which of the following is the most accurate statement about economic models? Economic models a. attempt to mirror reality exactly. b. are useful for understanding historical events but not for guiding policy. * omit many details of reality in the interest of tractability. d. are collections of value judgments. 7. Factors of production a. are governmental regulations that affect the way production is carried out. b. describe the engineering relationship between inputs and outputs. c. are the leaders of industry who own and manage the largest manufacturing firms. * are inputs into the production process. 8. In a production possibility graph, an output combination is said to be efficient if a. it lies beyond the production possibility frontier. b. it involves production of the maximum amount of either one good or the other. * it is not possible to produce more of one good without giving up some of the other. d. the economy's resources are less than fully-employed. Questions 9 through 13 are based on the following information. Two small countries, Ashland and Oneida, use their labor resources to produce goods of two types: manufactured goods and agricultural goods. The table below gives the number of hours of labor needed to produce one unit of each type of good in each country. Hours needed to produce one unit of manufactured goods agricultural goods Ashland 4 2 Oneida 3 3/4 9. The resource cost of 1 unit of manufactured goods in Oneida is a. 1/3 hour. b. 3/4 hour. * 3 hours. 10. The opportunity cost of 1 unit of agricultural goods in Ashland is * 1/2 unit of manufactured goods. b. 2 units of manufactured goods. c. 4 units of manufactured goods. 11. Which of the following is true? a. Ashland has the absolute advantage in the production of agricultural goods. * Oneida has the absolute advantage in the production of manufactured goods. c. Oneida has the comparative advantage in the production of manufactured goods. d. Both b and c are true.

3 3 12. Suppose that there are international markets in manufactured goods and agricultural goods. Ashland and Oneida would be able to engage in a mutually beneficial trade with each other if the trade price of one unit of agricultural goods were * 1/3 units of manufactured goods. b. 1 unit of manufactured goods. c. 3 units of manufactured goods. 13. If Ashland were to engage in trade with another country (not necessarily Oneida), what is the greatest number of units of agricultural goods it would be willing to give up for one unit of manufactured goods? a. 1/2 unit of agricultural goods. * 2 units of agricultural goods. c. 4 units of agricultural goods. 14. If Japan can produce each ton of steel using fewer resources than Canada does, then * Japan has an absolute advantage in steel production. b. Japan has a comparative advantage in steel production c. Both a and b. d. Neither a nor b. 15. Which of the following would cause a rightward shift in the demand for a good? a. an increase in the good's own price. * an increase in the price of a substitute good. c. a decrease in income (assuming the good is a normal good). 16. Which of the following would cause a leftward shift in the supply of a good? * an increase in the price of an important factor of production. b. a technological innovation that reduces production costs. c. a decrease in income (assuming the good is a normal good). d. Both a and b. 17. A group of buyers and sellers of a particular good or service is known as a. an industry. b. a sector. c. a cartel. * a market. 18. When the price of good A increases, other things equal, the quantity demanded of good B decreases. We say that goods A and B are a. substitute goods. * complement goods. c. inferior goods. d. normal goods.

4 4 Questions 19, 20, 21, 22, and 23 refer to the following graph of supply and demand curves in a competitive market. ($/unit) Supply p 3 p 2 p 1 Demand Q 1 Q 2 Q 3 Q 4 Q 5 (units/day) 19. At a price of p 2 the quantity supplied is a. Q 2. * Q 3. c. Q If the price in this market were temporarily at the level of p 1, there would be a. excess demand in the amount Q 4 - Q 3. * excess demand in the amount Q 4 - Q 2. c. excess supply in the amount Q 3 - Q 2. d. excess supply in the amount Q 4 - Q A change in equilibrium to price p 3 and quantity Q 5 would require * an increase in demand. b. a decrease in demand. c. an increase in supply. d. a decrease in supply. 22. A change in equilibrium to price p 1 and quantity Q 1 would require a. increases in both supply and demand. * decreases in both supply and demand. c. an increase in supply and a decrease in demand. d. an increase in demand and a decrease in supply.

5 5 23. Now assume that the graph depicts the current equilibrium in the market for music CDs. Suppose that the price of CD players increases. At the same time, the government imposes costly new regulations on the production of music CDs after the conventional manufacturing process is found to be unfriendly to the environment. These events could bring about a new equilibrium with * price = p 2 and quantity = Q 1. b. price = p 3 and quantity = Q 1. c. price = p 1 and quantity = Q 3. d. price = p 3 and quantity = Q Which of the following is the best example of a pair of substitute goods? a. personal computers and computer software programs. b. milk and cookies. * Dell and Gateway personal computers. d. hot dogs and mustard. 25. Temporary shortages in a market are eliminated by a. decreases in price, which cause quantity supplied to fall and quantity demanded to rise. b. decreases in price, which cause quantity supplied to rise and quantity demanded to fall. c. increases in price, which cause quantity supplied to fall and quantity demanded to rise. * increases in price, which cause quantity supplied to rise and quantity demanded to fall. 26. Suppose that new federal restrictions on pesticide use make it more costly to grow onions at a time when the health benefits of consuming onions were being well publicized. Economists would expect that the equilibrium price of onions would * increase and the equilibrium quantity would either increase, decrease, or stay the same. b. increase and the equilibrium quantity would decrease. c. either increase, decrease, or stay the same, and the equilibrium quantity would increase. d. decrease and the equilibrium quantity would either increase, decrease, or stay the same. 27. Another term for a "surplus" is a. equilibrium quantity. * excess supply. c. excess demand. d. shortage. 28. Which of the following would result in an increase in equilibrium price and an ambiguous change in equilibrium quantity? a. rightward shifts in both demand and supply. b. leftward shifts in both demand and supply. * a rightward shift in demand and a leftward shift in supply. d. a rightward shift in supply and a leftward shift in demand.

6 6 29. In a competitive market, which of the following would cause an increase in equilibrium price and a decrease in equilibrium quantity? a. an increase in demand. b. a decrease in demand. c. an increase in supply. * a decrease in supply. 30. Adam Smith's "invisible hand" metaphor was used to describe which of the following phenomena? a. Government regulations influence the way in which business is conducted. b. Firms abuse advertising to increase sales of substandard products. * Self-interested individuals make choices that result in desirable market outcomes. d. Consumers, acting in collusion, dictate the prices at which products are sold.