PART 1: MULTIPLE CHOICE -- 90 POINTS Choose the single best answer for the following 30 questions. PLEASE PLACE YOUR ANSWER ON THE FRONT OF THE ATTACHED SCANNER SHEET STARTING WITH NUMBER 1. Circle your answer on this sheet for your own information. 1 Which of the following best illustrates the fallacy of composition? a. If the price of a product rises, the quantity supplied will decline. b. The average wage rate tends to increase at approximately the same rate as inflation; hence, wage increases must cause inflation. c. Resources are scarce; therefore, there is no such thing as a free lunch. d. If I stand up at football stadium, I get a better view of the game. However, if everybody stands up, I don't get a better view of the game. 2. Which of the following is a positive economic statement? a. Thoughtful people oppose farm subsidies. b. Rapid growth of the money supply will cause inflation. c. The sales tax on food should be repealed. d. The increase in the cost of medical care must be slowed. 3. (I) Resources used for producing goods are limited, but the human desire for goods is virtually unlimited. (II) Although there is no hope of eliminating scarcity, we may someday be able to win the war against poverty. a. I is true; II is false. b. I is false; II is true. c. Both are true. d. Both are false. 4. Which of the following things are scarce? a. pleasant working conditions. b. low-cost housing. c. free time for recreation. d. all of the above. 5. The economic way of thing stresses that a. Changes in personal costs and benefits generally fail to exert much impact on behavior. b. Incentives matter when an option becomes more expensive, people will be less likely to choose it. c. If one individual gains from an economic activity, then someone else must lose and in the same proportion. d. If a good is free, its production will not consume valuable resources. 6. What is the best test of an economic theory? a. Its eloquence. b. The plausibility of its assumptions. c. Its ability to predict real world events, patterns, and changes. d. Whether it produces implications favored by the researcher.
1 7. Every year the football season opens and, within a few month, winter starts. The opening of the football season causes winter. These statements reflect a. the fallacy of composition. b. a failure to recognize that association is causation. c. a failure to consider the problem of secondary effects. d. sound economic reasoning. 8. A private owner of a resource has a strong incentive to a. conserve the resource for the future, particularly if it is expected to increase in value. b. use the resource today even if its value is expected to rise substantially in the future. c. employ the resource in ways that impose measurable harm to others. d. exploit the resource and ignore the wishes of others. 9. An airline ticket from Tallahassee to New York costs $760. A bus ticket costs $360. Traveling by plane will take 6 hours, compared to 26 hours by bus. Other things constant, an individual will gain from choosing air travel if, and only if, her time is valued at more than a. $18 per hour. b. $20 per hour. c. $38 per hour. d. $44 per hour. 10. If the Internet makes it easier for sellers to find buyers and makes it easier for buyers to learn about the products that are available for sale, we would expect that a. the volume of trade will decline. b. transaction costs will rise. c. the gains from trade will increase. d. buyers and sellers will be worse off. 11. If Kim can either wash 10 cars or wax 2 cars during a day, and Vince can either wash 17 cars or wax 2 cars during a day, then according to the law of comparative advantage, a. Vince's opportunity cost of waxing a car is less than Kim's. b. their aggregate output can be expanded if Kim specializes in waxing and Vince in washing. c. their aggregate output can be expanded if Kim specializes in washing and Vince in waxing. d. it would be impossible for Vince and Kim to increase their total output through specialization and mutual exchange. 12. Which of the following is the best example of the voice method of communicating messages? a. You express your dissatisfaction with the service you received at Ralph's restaurant by selling your shares of Ralph's stock. b. You received a bad haircut at Jane's Hair Salon and now get your haircuts at Joan's Hair Salon. c. You write a letter to Tim's Laundry complaining that your clothes were not cleaned properly. d. You indicate your unhappiness with your local government officials by moving to a nearby city.
2 13. Which of the following would most likely cause the production possibilities curve for breadfruit and fish to shift from AA to BB in the figure shown? a. an increase in the labor force b. choosing more fish and less breadfruit c. choosing more breadfruit and fewer fish d. a decrease in the capital stock 14. Given freedom of movement for both goods and resources, if Florida producers specialize in oranges and Georgia producers specialize in peaches, then it would be reasonable to conclude a. the opportunity cost of growing oranges is higher in Florida than in Georgia. b. Georgia has a comparative advantage in producing peaches. c. Florida has a comparative advantage in producing peaches. d. aggregate output will be expanded when Georgia allocates more resources to producing oranges and Florida allocates more resources to producing peaches. 15. Ceteris paribus, an increase in the price of a good will cause the a. quantity demanded of the good to increase. b. quantity supplied of the good to decrease. c. consumer surplus derived from of the good to decrease. d. supply of the good to increase. 16. The price of steel increases. Purchasers of steel will probably a. Reduce their purchases more in the long run than in the short run. b. Reduce their purchases more in the short run than in the long run. c. Reduce their purchases equally in both the short and long runs. d. Increase their purchases, since the higher steel price will increase supply.
3 17. Refer to the above graph. Which of the following would cause the change in the demand for coffee illustrated by the shift from D1 to D2? a. a decrease in the price of tea b. an increase in consumer incomes c. an increase in the price of sugar d. a technological improvement in the production of coffee 18. Which of the following would most likely increase the demand for peanut butter? a. a decrease in the price of bread, a good that is often used with peanut butter b. a discovery that the average daily consumption of peanut butter decreases one's life span by 15 years c. crop failures that raise the price of peanuts d. a decrease in the price of all substitute protein products 19. The short run is a time period such that a. the existing firms in the market do not have sufficient time to change the amounts of any of the inputs that they employ. b. the existing firms in the market do not have sufficient time to either increase or decrease their current rate of output. c. the existing firms in the market do not have sufficient time to increase the size of their existing plant or build a new factory. d. new firms may build plants and enter the industry.
4 20. A technological advance that reduces the production costs of DVD players by 50 percent would be reflected in the market model by a. an increase in the supply of DVD players. b. an increase in the demand for DVD players. c. a decrease in the supply of DVD players. d. a decrease in the demand for DVD players. 21. Which of the following would most likely both increase the price of DVD players and increase the quantity of DVD players sold? a. an increase in the demand for DVD players. b. a decrease in the demand for DVD players. c. a decrease in the supply of DVD players. d. an increase in the supply of DVD players. 22. If a large percentage increase in the price of a good results in a small percentage reduction in the quantity demanded of the good, demand is said to be a. of unitary elasticity. b. relatively inelastic. c. relatively elastic. d. infinitely elastic. 23. If the demand for beer increased, what would be the effect on the equilibrium price and quantity of beer? a. Price would increase; quantity would decrease. b. Price would decrease; quantity would decrease. c. Price would increase; quantity would increase. d. Price would decrease; quantity would increase. 24. Other things constant, how will a decrease in the wages of teenagers affect the market for hamburgers? a. The supply of McDonald's hamburgers will increase, leading to a reduction in the price of McDonald's hamburgers. b. The supply of McDonald's hamburgers will decrease, leading to an increase in the price of McDonald's hamburgers. c. The demand for McDonald's hamburgers will increase, leading to an increase in the price of McDonald's hamburgers. d. The demand for McDonald's hamburgers will decrease, leading to a reduction in the price of McDonald's hamburgers. 25. If Americans suddenly increase their desire for British goods, other things constant, the dollar price of the British pound will a. increase; British imports will become less expensive, and domestic exports will become more expensive to British citizens. b. decrease; British imports will become less expensive, and domestic exports will become more expensive to British citizens. c. increase; British imports will become more expensive, and domestic exports will become less expensive to British citizens. d. decrease; British imports will become more expensive, and domestic exports will become less expensive to British citizens.
5 26. Which of the following will result from rent controls that reduce rents below market equilibrium? a. The quality of existing housing will deteriorate. b. The future supply of rental housing will decrease. c. Discrimination against minorities and persons with unconventional lifestyles will be more likely in the housing market. d. All of the above are correct. 27. Which of the following is true? a. An increase in the minimum wage will increase the training opportunities available to inexperienced workers. b. The minimum wage is an example of a price ceiling. c. Most minimum wage workers are employed part-time, and they are generally either a spouse or a teenage member of a household with an income well above the poverty level. d. Both b and c are true. 28. Which of the following statements is true? a. In both black and normal markets, supply and demand determine price. b. The quality of products sold in black and normal markets are similar. c. The price of products in black markets tends to be the same as those in normal markets for otherwise identical products. d. The rate of violence is similar in black markets and normal markets. 29. If a $2 tax per bottle of wine is imposed on wine producers, which of the following will occur? a. The price of wine will increase, fewer bottles will be purchased, and there will be a deadweight loss from this tax. b. The price of wine will increase, more bottles will be purchased, and consumers will gain as the result of this tax. c. The price of wine will decrease, more bottles will be purchased, and there will be a deadweight loss from this tax. d. The supply of wine will increase, and the price of wine will be unchanged. 30. The more elastic the supply of a product is, the more likely it is that the burden of a tax will a. fall on the sellers. b. fall on the buyers. c. fall equally on both buyers and sellers. d. be borne by the public sector and not by market participants.
6 PART II: ESSAY -- 10 POINTS. 1. A terrible storm wipes out 70 percent of the peanut crop. What do you expect to happen to the equilibrium price and quantity of peanut butter. Explain your answer using both words and a diagram. 2. Suppose consumer incomes rise. What do you expect to happen to the equilibrium price and quantity of DVD players? Explain your answer using both words and a diagram.
7 Answer Key MULTIPLE CHOICE 1. d. 2. b. 3. c. 4. d. 5. b. 6. c. 7. b. 8. a. 9. b. 10. c. 11. b. 12. c. 13. a. 14. b. 15. c. 16. a. 17. b. 18. a. 19. c. 20. a. 21. a. 22. b. 23. c. 24. a. 25. c. 26. d. 27. c. 28. a. 29. a. 30. b. SHORT ANSWER 1. The decrease peanut supply will raise the price of peanuts, which is an important component in the production of peanut butter. This will shift the supply curve for peanut butter to the left and raise the equilibrium price and lower equilibrium quantity. 2. The increased conumer income will increase the demand for DVD players. This will raise both the equilibrium price and equilibrium quantity.