Economics 2306-5 & 7H Name___________________________

Principles of Economics

Professor James Henderson

Spring 1996

I. Multiple Choice. Answer the following on your Scan-tron.

1. Scarcity
a. exists because people have wants that are unlimited relative to the availability of resources to satisfy those wants.
b. creates a desire in society to ration goods according to some set of criteria.
c. means that society and individuals must make choices.
d. creates a desire to put a positive price on virtually all goods and services.
e. All of the above.

2. Economics can best be defined as the study of
a. how individuals decide to use scarce resources in an attempt to satisfy unlimited wants.
b. how to make money.
c. how the government should deal with unemployment and inflation.
d. how to eliminate the problem of scarce resources.
e. how to run a business.

3. Which of the following is a normative statement?
a. The rate of unemployment in the United States was higher in 1992 than it was in 1988.
b. Savings accounts earn interest, whereas checking accounts do not.
c. Congress must recognize that the government budget deficit is the most serious problem that the country faces.
d. Unemployment rates increase when the percentage of the labor force without jobs increases.
e. President Clinton is a draft evader.

4. Five people disagree over a positive statement. What would be the best way to resolve the disagreement?
a. A random solution, such as tossing a coin.
b. Locate an educated opinion.
c. Hire a consultant to evaluate the factual evidence.
d. Determine the solution based on the current accepted "morality" of the society.
e. Hire a lawyer to negotiate an agreement.

5. Jennifer learns that the price of cassette tapes will be going up 10 percent next week. She usually buys three cassettes per week. What happens to Jennifer's demand for cassettes this week?
a. It does not change, because only quantity demanded changes when price changes.
b. It increases, because the price will be lower next week.
c. It decreases, because the price will be higher next week.
d. It increases, because the price will be higher next week.
e. It decreases, because the price will be lower next week.

6. The difference between normal and inferior goods is that
a. normal goods are of better quantity than inferior goods.
b. an increase in price will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward.
c. if the price of a normal good increases, individuals who buy it are poorer; with inferior goods, the opposite is true.
d. an inferior good is something that will not be demanded until quantities of the normal good have been exhausted.
e. an increase in income will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward.

7. Velcro is becoming more and more popular for a variety of uses, including as fasteners for shoes. What should happen to the equilibrium price and quantity for shoelaces as a result?
a. Both price and quantity should increase.
b. Both price and quantity should decrease.
c. Price should increase and quantity decrease.
d. Price should decrease and quantity increase.
e. Nothing

8. Restricting imports of Brazilian shoes will tend to
a. raise the price of both Brazilian and domestically produced shoes.
b. raise the price of Brazilian shoes but lower the price of domestically produced shoes.
c. lower the price of Brazilian shoes but raise the price of domestically produced shoes.
d. lower the price of both Brazilian and domestically produced shoes.
e. benefit the producers of shoes in Brazil.

9. If Baylor University increases tuition in order to increase its revenue,
a. it will not be successful if the demand curve slopes downward.
b. it will be successful if demand is elastic.
c. it will be successful if demand is inelastic.
d. it will be successful if supply is elastic.
e. it will be successful if supply is inelastic.

10. Which of the following describes a situation in which demand must be elastic?
a. The price of pens rises by 10 cents, and quantity of pens demanded falls by 50.
b. The price of pens rises by 10 cents, and total revenue rises.
c. A 20 percent increase in the price of pens leads to a 20 percent decrease in the quantity of pens demanded.
d. Total revenue does not change when the price of pens rises.
e. Total revenue decreases when the price of pencils rises.

11. Which of the following is likely to yield the greatest consumer surplus?
a. gold
b. a diamond necklace
c. a yacht
d. food
e. water

12. If the Money Store earns a normal profit this year, its
a. economic profit is equal to its accounting profit.
b. economic profit is zero.
c. economic profit is equal to the average accounting profit in other industries.
d. accounting profit is zero.
e. accounting profit is less than its economic profit.

13. The total revenue curve for a perfectly competitive firm
a. is a horizontal line.
b. is a vertical line.
c. rises at a diminishing rate, reaches a maximum, and then falls.
d. rises at an increasing rate.
e. is a straight line, rising at a constant rate.

14. Suppose a monopolist has zero marginal costs and is selling at a price where demand is elastic. To increase profits (or reduce losses), this form should
a. try to increase marginal cost.
b. lower price.
c. raise price.
d. raise price until demand is inelastic.
e. lower price to $0.

15. Suppose that a price-discriminating monopolist divides its market into two segments. In each market segment price is determined by finding the level of output where that market's
a. average revenue equals average total cost.
b. average revenue equals average variable cost.
c. marginal revenue equals average total cost.
d. marginal revenue equals marginal cost.
e. marginal cost equals average total cost.

16. At the profit-maximizing output level, the firm represented in the exhibit above experiences
a. a loss of $3,200.
b. a profit of $6,000.
c. a profit of $3,200.
d. zero profit or loss.
e. a loss of $6,000.

17. An industry will earn normal profits in the long run
a. if firms can freely enter or leave the market.
b. if firms don't try to maximize profit.
c. only if the industry is perfectly competitive.
d. whenever products are not differentiated.
e. if barriers to entry exist.

18. Economies of scale result in
a. declining average cost.
b. declining marginal cost.
c. declining total cost.
d. diminishing average returns.
e. increasing marginal revenue.

19. Which of the following represents a perfectly competitive farmer's demand curve for hired hands?
a. His ATC curve
b. His AVC curve
c. His MRP curve
d. His MRC curve
e. His AFC curve

20. Of the following, who would probably have the highest income?
a. A couple both of whom have high school educations and work at Wal-Mart
b. A husband who has a high-school degree and a middle-management job and his wife, who is a full-time mother
c. A couple, both of whom have high school educations; he is a high school teacher and she is a librarian.
d. A husband who has a college degree and is a high school teacher and his wife, who has an MBA and works as a insurance company executive
e. A couple both of whom have college degrees and are high school teachers

21. To determine comparative advantage, the cost is measured in
a. foreign currency.
b. domestic currency.
c. gold only.
d. units of weight and measure.
e. opportunity cost.

22. As a result of a tariff on an imported good,
a. domestic producers are better off because they sell more goods at the same price.
b. domestic producers are better off because they sell more goods at a higher price.
c. domestic producers are better off because they sell the same quantity of goods at a higher price.
d. domestic consumers are better off because they are more domestically produced goods available.
e. domestic consumers are neither better off nor worse off because imports do not change.

23. An effective import quota tends to
a. lower the price of imports.
b. lower the price of domestic goods competing with imports.
c. increase the variety of goods available to the consumer.
d. increase tax revenues.
e. lower the quantity demanded of the imported good.

Spain France

Wheat (bushels) 5 3

Grapes (bushels) 2 4

Note: Each entry in the table refers to the number of units of the good produced by one worker in each country.

24. Given the information in the above exhibit, which of the following is true concerning comparative advantage?
a. Spain has the comparative advantage in the production of both wheat and grapes.
b. Frances has the comparative advantage in the production of both wheat and grapes.
c. Neither country has the comparative advantage in the production of wheat.
d. Frances has the comparative advantage in the production of wheat.
e. France has the comparative advantage in the production of grapes.

25. Given the information in the above exhibit, which of the following is true?
a. It is impossible for the two countries to achieve mutual gains from trade because Spain has the absolute advantage in the production of both goods.
b. It is impossible for the two countries to achieve mutual gains from trade because France has the absolute advantage in the production of both goods.
c. Mutual gains from trade can be achieved only if France produces both goods.
d. Mutual gains from trade can be achieved only if France produces wheat and Spain produces grapes.
e. Mutual gains from trade can be achieved if Spain produces wheat and France produces grapes.

II. Answer True, False, or Uncertain. Explain. (Use an appropriate graph in your answer and get one point extra credit.)

1. Absolute advantage is based on opportunity cost.

2. Farm income has fallen in part because demand for farm products is price inelastic and income inelastic.

3. For a perfectly competitive firm, price and marginal revenue are different at every quantity.

4. If a firm is in a perfectly competitive labor market, the firm's marginal labor cost slopes downward.

5. Unions can affect the demand for labor for but not the supply of labor.

III. Short Answer

1. Apply the "art of economic analysis" to your decision to attend college. What roles did rational self-interest, marginal analysis, and opportunity cost play in the decision-making process?

2. State the law of diminishing marginal utility and give a real-life example of it.

3. Explain the difference between accounting and economic profit. How does this distinction relate to the focus of economists on how a society allocates scarce resources?

IV. Market for Peanut Butter

Show the stated impact on the graph provided and establish the effect on equilibrium price and quantity.

+ increase

- decrease

NC no change

U uncertain

1. A decrease in the price of peanuts.

P

Price __________

Quantity __________

Q

2. A decrease in the price of peanut butter.

P

Price __________

Quantity __________

Q

3. Sellers expect the price of peanut butter to increase next month.

P

Price __________

Quantity __________

Q

4. A price ceiling is set below the equilibrium price.

P

Price __________

Quantity __________

Q

5. The peanut harvest is poor due to drought and at the same time peanut butter is determined to reduce the affects of aging on the skin.

P

Price __________

Quantity __________

Q