Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space at the bottom of page 6.

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1 Econ 101, Section 1, F09, Schroeter Exam #1, Red Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space at the bottom of page When a society cannot produce all of the goods and services people wish to have, it is said that the economy is experiencing *. scarcity. b. surpluses. c. market failures. d. inflation. 2. refers to the size of the economic pie; refers to how the pie is divided. *. Efficiency; equality. b. Equality; efficiency. c. Rationality; externality. d. Externality; rationality. 3. In a zero-sum game, a. each individual player is worse off at the end of the game than at the beginning. b. each individual player can do no better than breaking even. *. the winners' gains are exactly offset by the losers' losses. d. there can be at most one winner. 4. After graduating from college with a Bachelors degree, you have to choose between a job offer as a civil engineer with the Iowa Department of Transportation (DOT), and an offer of admission to a one-year graduate program leading to a Masters degree. Which of the following should not be included in your calculation of the opportunity cost of enrolling in the graduate program? a. the cost of tuition and books to attend the graduate program. b. the $48,000 salary that you could have earned in your first year working for the DOT. c. the value of the health insurance coverage and other benefits that you would have received in your first year working for the DOT. *. the $10,000 increase in annual salary that you expect to get after completing your Masters. 5. Communist countries, like the Soviet Union, operated on the premise that a. markets are the best way to organize economic activity. b. resource allocation should be left to the decisions of households and firms interacting in markets. c. Adam Smith was correct in his observations about the "invisible hand." *. None of the above.

2 2 Questions 6 through 10 are based on the following information. Two small countries, Keokuk and Wapello, 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 Keokuk Wapello The resource cost of 1 unit of agricultural goods in Keokuk is a units of manufactured goods. * hours. c. 4 units of manufactured goods. d. 4 hours. 7. The opportunity cost of 1 unit of agricultural goods in Wapello is a units of manufactured goods. b units of manufactured goods. c units of manufactured goods. *. None of the above. 8. Which of the following is true? a. Wapello has the absolute advantage in the production of manufactured goods. b. Wapello has the comparative advantage in the production of manufactured goods. c. Keokuk has the comparative advantage in the production of agricultural goods. *. All of the above are true. 9. Suppose that there were international markets in manufactured goods and agricultural goods in which the terms of trade were 0.5 units of manufactured goods per unit of agricultural goods. At these terms of trade, a. Keokuk would want to buy agricultural goods. *. Keokuk would want to buy manufactured goods. c. Wapello would want to buy manufactured goods. d. None of the above. 10. Suppose that there were international markets in manufactured goods and agricultural goods in which the terms of trade were 1 unit of manufactured goods per unit of agricultural goods. At these terms of trade, *. both countries would want to buy manufactured goods. b. both countries would want to buy agricultural goods. c. Keokuk would want to buy manufactured goods and Wapello would want to buy agricultural goods. d. Wapello would want to buy manufactured goods and Keokuk would want to buy agricultural goods.

3 3 11. The scientific method is a. the use of computers to understand the way the world works. b. the use of controlled laboratory experiments to understand the way the world works. *. the dispassionate development and testing of theories about how the world works. d. the process of collecting and cataloging observations of how the world works. 12. Which of the following statements about models is correct? a. The more details a model includes, the better the model. *. The quality of a model is judged by its predictive power. c. Economic models are useful for teaching purposes but not for research. d. All of the above are correct. 13. An economy's resources can be used to produce cars and computers. If all of the economy's resources are devoted to computer production, the result will be an output of 10,000 computers/month (and no cars). The economy's production possibility frontier is a straight line, reflecting the fact that the opportunity cost of a car is constant at a value of 8 computers/car. What is the maximum number of cars that the economy can produce per month? a. 80,000 cars/month. b. 12,500 cars/month. c. 8,000 cars/month. *. 1,250 cars/month. 14. Which of the following is a normative statement? a. The U.S. spends more on health care per capita than any other country. b. There are 40 countries that have lower infant mortality rates than the U.S. c. Private health insurance premiums have been increasing in the U.S. at an average rate of 8% per year. *. None of the above. 15. In lecture's "farmer/rancher" example, after specialization and trade, the consumption bundles of the farmer and rancher were a. both on their respective production possibilities frontiers (ppfs). b. both inside their respective ppfs. *. both outside of their respective ppfs. d. inside the ppf, in the case of the farmer, and outside of the ppf, in the case of the rancher. 16. The quantity demanded of a good or service is determined by *. those who buy the good or service. b. the government. c. those who sell the good or service. d. the technology of production of the good or service.

4 4 Questions 17, 18, 19, and 20 refer to the following graph of supply and demand curves in a competitive market. ($/unit) Supply p 1 p 2 p 3 Demand Q 1 Q 2 Q 3 Q 4 Q 5 (units/day) 17. Equilibrium price and quantity in this market are a. p 1 and Q 2. b. p 2 and Q 2. *. p 2 and Q 3. d. p 3 and Q At a price of p 1, there would be *. excess supply in quantity Q 5 - Q 2. b. excess supply in quantity Q 3 - Q 2. c. excess demand in quantity Q 3 - Q 2. d. excess demand in quantity Q 4 - Q A change in equilibrium to price p 1 and quantity Q 5 would require *. an increase in demand. b. an increase in supply. c. a decrease in demand. d. a decrease in supply. 20. A change in equilibrium to price p 2 and quantity Q 1 would require *. a decrease in demand and a decrease in supply. b. an increase in demand and an increase in supply. c. a decrease in demand and an increase in supply. d. an increase in demand and a decrease in supply.

5 5 21. "Market-clearing price" is another name for the a. price at which all sellers leave the market. b. highest price that a buyer will pay. c. price at which quantity demanded falls to zero. *. equilibrium price. 22. A competitive market is one in which a. there is only one seller, but there are many buyers. b. there are only a few sellers and only a few buyers. c. firms are continually going bankrupt because of intense price competition. *. there are sufficiently many buyers and sellers so that each has a negligible impact on price. 23. Which of the following is not a determinant of the quantity supplied of a good? a. the good's own price. *. the average household income of consumers of the good. c. the prices of raw materials and labor used to produce the good. d. the technology of the manufacturing process used to produce the good. 24. Which of the following is most likely to be a pair of substitute goods for most people? a. bicycles and bicycle helmets. b. automobiles and automobile insurance. c. gardening tools and work gloves. *. hamburgers and hot dogs. 25. Which of the following would cause a rightward shift in the demand for good X? a. an increase in the price of good Y, a substitute for good X. b. an increase in the income of consumers (assuming that good X is a normal good). c. a decrease in the price of good Z, a complement of good X. *. all of the above. 26. Which of the following would shift the market supply curve for gasoline to the right? a. an increase in the demand for gasoline. b. an increase in the price of gasoline. *. an increase in the number of refineries producing gasoline. d. an increase in the price of crude oil, an input in the production of gasoline. 27. In a competitive market, if price is currently below the equilibrium level, there is *. excess demand and we would expect price to increase over time. b. excess demand and we would expect price to decrease over time. c. excess supply and we would expect price to increase over time. d. excess supply and we would expect price to decrease over time.

6 6 28. Computers and printers are complements, and printers are sold in a competitive market. Then an increase in the price of computers will cause a a. decrease in the demand for printers and a decrease in the supply of printers. b. decrease in the quantity demanded of printers and a decrease in the supply of printers. *. decrease in the demand for printers and a decrease in the quantity supplied of printers. d. decrease in the quantity demanded of printers and an increase in the quantity supplied of printers. 29. You observe that, in the competitive market for beef, a normal good, equilibrium quantity has fallen over time while equilibrium price has remained about the same. Which of the following explanations would be most consistent with this observation? a. The price of chicken has increased. b. Average household income has increased and the price of cattle feed has decreased. *. New medical evidence shows that beef consumption is unhealthy and new environmental regulations have increased the costs of beef production. d. A campaign by animal rights activists has been effective in discouraging beef consumption and advances in cattle breeding have lowered the cost of beef production. 30. In a competitive market, which of the following would lead to an unambiguous increase in equilibrium price? a. an increase in demand and an increase in supply. *. an increase in demand and a decrease in supply. c. a decrease in demand and an increase in supply. d. a decrease in demand and a decrease in supply.