Economics 2306 Name_____________________________

Principles of Economics I

Baylor in Great Britain

I. Multiple Choice. Circle the best answer.

1. Because people's wants are unlimited but resources are scarce,
a. only the rich get everything they want.
b. choices must be made.
c. there will be more services produced than goods.
d. people search for spiritual fulfillment (which is unlimited) rather than material fulfillment.
e. poor people never get anything they want.

2. The expression "There's no such thing as a free lunch" means that
a. services may be free, but goods are never free.
b. even if it has a price of zero, a good or service has a cost.
c. charitable organizations should not serve free lunches to the poor.
d. poor people are really the ones who pay for their allegedly free lunches.
e. someone has to pay the market price for a good or service.

3. When economists say that people act rationally, this means that
a. they gather all relevant information before making their purchases.
b. once a pattern of behavior has been established, people tend to become set in their ways.
c. they respond in predictable ways to changes in costs and benefits.
d. they rarely make errors when they are permitted to exchange or trade for themselves.
e. once made, decisions change slowly over time.

4. John takes 10 minutes to iron a shirt and 20 minutes to type a paper. Harry takes 10 minutes to iron a shirt and 30 minutes to type a paper. Which of the following statements is correct?
a. Harry has a comparative advantage in ironing.
b. Harry has a comparative advantage in typing.
c. Harry has an absolute advantage in typing.
d. Harry has an absolute advantage in ironing.
e. Neither can gain from specialization and exchange.

5. An increase in demand for a good could mean that
a. consumers are willing to pay a higher price for each quantity of the good.
b. consumers are willing to buy larger quantities of the good at each price.
c. the demand curve has made a parallel shift to the right.
d. the demand curve has made a nonparallel shift to the right.
e. All of the above.

6. Which of the following is most likely to be an inferior good?
a. Airline travel
b. Restaurant meals
c. A subscription to the Wall Street Journal
d. Soft drinks
e. Used clothing

7. Which of the following events is likely to reduce the demand for on-campus student housing?
a. A rise in rents for off-campus housing
b. More students enrolling at the university
c. More students desiring separate rooms for privacy
d. A rise in dorm fees
e. A rise in the incomes of students

8. A decrease in demand will result in
a. an increase in supply.
b. a decrease in supply.
c. an increase in quantity supplied.
d. an increase in equilibrium price.
e. a decrease in equilibrium price.

9. A new hormone has been developed that will increase the amount of milk each cow produces. If this hormone is adopted by many dairies, what will be the effect on the milk market?
a. An increase in supply, higher equilibrium price, and lower equilibrium quantity
b. A decrease in supply, lower equilibrium price, and lower equilibrium quantity
c. An increase in supply, lower equilibrium price, and higher equilibrium quantity
d. An increase in supply, higher equilibrium price, and higher equilibrium quantity
e. A decrease in supply, lower equilibrium price, and higher equilibrium quantity

10. Another word for elasticity is
a. responsiveness.
b. happiness.
c. bonus.
d. profit.
e. surplus.

11. If the city of London expects that an increase in bus fares will raise mass transit revenues, it must think that the demand for bus travel is
a. elastic.
b. unit elastic.
c. inelastic.
d. perfectly inelastic.
e. 10.

12. A government-imposed price floor above the market price of milk would increase consumers' expenditures on milk only if
a. demand is elastic.
b. supply is inelastic.
c. demand falls.
d. demand is inelastic.
e. supply is unit elastic.

13. If Emelda claims that when it comes to buying shoes, "price is no object," her demand curve for shoes is likely to be
a. horizontal.
b. vertical.
c. upward sloping.
d. highly inelastic.
e. unit elastic.

14. As the economy recovers from a recession, we should expect that
a. demand for inferior goods will fall and demand for normal goods will rise.
b. demand for both inferior and normal goods will rise.
c. demand for inferior goods will rise and demand for normal goods will fall.
d. demand for both inferior and normal goods will fall.
e. demand for complements will fall.

15. The reason that you drink two cups of tea at breakfast instead of five is that
a. the marginal utility of cups of tea eventually diminishes.
b. most people can't afford five cups.
c. the total utility of tea rises as you consume more.
d. the price of tea rises as you buy more.
e. the marginal satisfaction derived from cups of tea remains constant.

16. If you buy a good, we know that its marginal value to you
a. is equal to its price.
b. is greater than its price.
c. is less than its price.
d. is less than or equal to but not greater than its price.
e. is greater than or equal to but not less than its price.

17. The difference between the maximum amount a person is willing to pay for a given quantity of a good and the amount actually paid for that quantity is called
a. producer surplus.
b. the substitution effect.
c. price discrimination.
d. the income effect.
e. consumer surplus.

18. Who is more likely to take the Concorde from London to New York, business executives or retired people?
a. Retired people, because they have a lower opportunity cost of time
b. Retired people, because they have a higher opportunity cost of time
c. Executives, because they have a lower opportunity cost of time
d. Executives, because they have a higher opportunity cost of time
e. It depends on whether the trip is for business or pleasure.

19. If the government imposes a ceiling price on rental apartments, we would expect to observe all of the following except
a. new apartment complexes being built.
b. long waiting lists for apartment seekers.
c. lower maintenance levels in existing apartments.
d. conversion of some apartment complexes to condos.
e. rents stabilizing in rent-controlled apartments.

20. Suppose a market is in equilibrium and then a price ceiling is established below the equilibrium price. Which of the following will happen?
a. Quantity demanded will increase
b. A surplus will develop
c. A shortage will develop
d. The quantity sold will rise
e. The market will remain in equilibrium

II. Answer True, False, or Uncertain. Explain.

1. Opportunity cost is defined as the difference between the benefits and the costs of your choice.

2. If demand is elastic, a fall in price leads to a fall in total revenue.

3. If demand shifts but supply does not and price remains the same, supply must be perfectly inelastic.

4. The marginal utility of a second copy of today's International Herald Tribune is equal to the marginal utility of the first one.

5. The slope of the demand curve for a normal good must be positive.

III. Short Answer

1. Describe the basic difference between a positive and a normative statement. Provide an example of each. If people disagree on the validity of a positive statement, what is the best way to resolve the disagreement?

2. Using the diagrams provided, show the consequences of the following events. What happens to equilibrium price and quantity?

a. The Southern Baptist Convention places a boycott on everything produced by Disney Studios (in the market for the next Disney movie).

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b. A severe drought in the Midwest raises the price of feed grain (in the market for beef).

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c. It's "Cap Night" at the Ball Park in Arlington and the first 35,000 fans receive a free Rangers baseball cap (in the market for Texas Rangers baseball tickets).

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Bonus

Explain how the change in the price of a baseball ticket will manifest itself. (Remember ticket prices are determined months in advance).