Chapter 1: 10 principles of Economic

1. Economics is best defined as the study of

=> How society manages its scarce resources
2. Your opportunity cost of going to a move is
=> the total cash expenditure needed to go to the movie plus the value of your time.
3. A marginal change is one that
=> incrementally alters an existing plan
4. Because people respond to incentives,
 Policymakers can alter outcomes by changing punishments or rewards
 Policies can have unintended consequences
 Society faces a trade-off between efficiency and equality
=> All of the above
5. International trade benefits a nation when
=> All nations are specializing in producing what they do best
6. Adam Smith's "invisible hand" refers to
=> the ability of free markets to reach desirable outcomes, despite the self-interest of
market participants.
7. Government may intervene in
 Correct a market failure due to externalities
 Market economy in order to protect property rights
 Achieve a more equal distribution of income
=> All of the above
8. The main reason that some nations have higher average living standards than
others is that
=> some nations have higher levels of productivity
9. If a nation has high and persistent inflation, the most likely explanation is
=> the central bank creating excessive amounts of money.
10. If a central bank uses the tools of monetary policy to reduce the demand for
goods and services, the likely result is _____ inflation and _____ unemployment in
the short run
=> lower; higher

CHAPTER 2: THINKING LIKE AN ECONOMIST

1. A economic model is
=> a simplified representation of some aspect of the economy
2. The circular-flow diagram illustrates that, in markets for the factors of
production
=> households are sellers, and firms are buyers
In the Market for goods and services => Households are Buyers, and Firms are Sellers
In the Market for the factors of production => Households are Sellers, and Firms are
Buyers.
3. A point inside the production possibility frontier is
=> Feasible, but not efficient
4. An economy produces hot dogs and hamburgers. If a discovery of the remarkable
health benefits of hot dogs were to change consumers' preference, it would
=> move the economy along the production possibility frontier.
5. All of the following topics fall within the study of microeconomics EXCEPT
=> the influence of the government budget deficit on economic growth
6. Which of the following is a positive, rather than a normative, statement?
=> Law X will reduce national income.

CHAPTER 3: INTERDEPENDENCE AND THE GAINS FROM TRADE

1. In an hour, David can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or
mow 1 lawn. Who has the absolute advantage in car washing, and who has the
absolute advantage in lawn mowing?
=> Ron in Washing, neither in mowing
2. In an hour, David can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or
mow 1 lawn. Who has the comparative advantage in car washing, and who has the
absolute advantage in lawn mowing?
=> Ron in washing, David in mowing.
3. When two individuals produce efficiently and then make a mutual beneficial
trade based on comparative advantage,
=> they both obtain consumption outside their PPF
4. Which good will a nation typically import?
=> those goods in which other nations have a comparative advantage.
5. Suppose that in the United States, producing an aircraft takes 10,000 hours of
labor and producing a shirt takes 2 hours of labor. In China, producing aircraft
takes 40,000 hours of labor and producing a shirt takes 4 hours of labor. What will
these nation trade?
=> China will export shirts, and the United States will export aircraft.
6. Mark can cook dinner in 30 minutes and wash the laundry in 20 minutes. His
roommate takes half as long to do each task. How should the roommates allocate the
work?
=> There are no gains from trade in this situation.

CHAPTER 4: DEMAND AND SUPPLY

1. A change in which of the following will NOT shift the demand curve for
hamburgers?
=> the price of hamburgers
2. An increase in ________ will cause a movement along a given demand curve,
which is called a change in ________.
=> supply, quantity demanded
3. Movie tickets and DVDs are substitutes. If the price of DVDs increases, what
happens in the market for movie tickets?
=> The demand curve shifts to the right
4. The discovery of a large new reserve of crude oil will shift the ________ curve for
gasoline, leading to a ________ equilibrium price.
=> supply, lower
5. If the economy goes into a recession and income fall, what happens in the markets
for inferior goods?
=> Prices and quantities both rise.
6. Which of the following might lead to an increase in the equilibrium price of jelly
and a decrease in the equilibrium quantity of jelly sold?
=> an increase in the price of grapes, an input into jelly

CHAPTER 5: ELASTICITY
1. A good tends to have a small price elasticity of demand if
=> the good is a necessity.
2. An increase in a good's price reduces the total amount consumers spend on the
good if the ________ elasticity of demand is ________ than one.
=> price; greater
3. A linear, downward-sloping demand curve is
=> inelastic at some points, and elastic at others
4. The citizens of Liliput spend a higher fraction of their income on food than do the
citizens of Brobdingnag. The reason could be that
=> Liliput has lower income, and the income elasticity of demand is 0.5
5. The price of a good rises from $16 to $24, and the quantity supplied rises from 90
to 110 units. Calculated with the midpoint method, the price elasticity of demand is
=> ½
6. If the price elasticity of supply is zero, the supply curve is
=> Vertical

7. The ability of firms to enter and exit market over time means that , in the long
run,
=> the supply curve is more elastic.
8. An increase in the supply of grain will reduce the total revenue of grain producers
receive if
=> the demand curve is inelastic.
9. In competitive markets, farmers adopt new technologies that will eventually
reduce their revenue because
=> each farmer is a price taker
10. Because the demand curve for oil is ________ elastic in the long run, OPEC's
reduction in the supply had a ________ impact on the price in the long run than it
did in the short run.
=> more ; smaller
11. Over time, technological advances increase consumers' incomes and reduce the
price of smartphones. Each of these forces increases the amount consumers spend
on smartphones if the income elasticity of demand is greater than ________ and the
price elasticity of demand is greater than ________.
=> zero ; one

CHAPTER 6: Supply, Demand and Government Policies

1. When the government imposes a binding price floor, it causes

=> a surplus of the good to develop.
2. In a market with a binding price ceiling, increasing the ceiling price will
=> decrease the shortage
3. Rent control causes larger shortages in the ________ run because over that time
horizon, supply and demand are ________ elastic.
=> long ; more
4. An increase in the minimum wage reduces the total amount paid to the affected
workers if the price elasticity of ________ is ________ than one.
=> demand ; greater
5. A $1 per unit tax levied on consumers of a good is equivalent to
=> a $1 per unit tax levied on producers of the good
6. When a good is taxed, the burden of the tax falls mainly on consumers if
=> supply is elastic and demand is inelastic
7. When a good is taxed, the burden of the tax falls mainly on consumers if
=> supply is elastic and demand is inelastic
8. Which of the following increases quantity supplied, decreases quantity demanded,
and increases the price that consumers pay?
=> the imposition of a binding price floor
9. Which of the following increases quantity supplied, increase quantity demanded,
and decrease the price that consumers pay?
=> the repeal of a tax on good

CHAPTER 7: Consumers, Producers, and the Efficiency of Markets

1. Alexis, Bruno, and Camila each want an ice-cream cone. Alexis is willing to pay
$12, Bruno is willing to pay $8, and Camila is willing to pay $4. The market price is
$6. Consumer surplus equals
=> 8
2. "Alexis, Bruno, and Camila each want an ice-cream cone. Alexis is willing to pay
$12, Bruno is willing to pay $8, and Camila is willing to pay $4. The market price is
$3. Consumer surplus equals
=> 15
3. The demand curve of cookies is downward sloping. When the price of cookies is
$3, the quantity demanded is 100. If the price falls to $2, what happens to consumer
surplus?
=> It rises by more than $100
4. Diego, Emi, and Finn are available to work as tutors for the semester. The
opportunity cost of tutoring is $100 for Diego, $200 for Emi, and $400 for Finn. The
university is hiring tutors at a price of $300. Producer surplus equals
=> 300
5. Gavin has been working full-time as a gardener for $300 a week. When the
market price of gardeners rises to $400, Hector becomes a gardeners as well. How
much does producer surplus rise as a result of this price increase?
=> between $100 and $200
6. The supply curve for a product is Q^s=2P, and the market price is $10. What is
producer surplus? (Hint: Graph the supply curve and recall the formula for the
area of a triangle.)
=> 100
7. Isabelle values her time at $60 an hour. She spends 2 hours giving Jayla a
massage. Jayla was willing to pay as much as $300 for the massage, but they
negotiated a price of $200. In this transaction,
=> consumer surplus is $20 larger than producer surplus.
8. An efficient allocation of resource maximizes
=> consumer surplus plus producer surplus
9. When a market is in equilibrium, the buyers are those with the _____ willingness
to pay and the sellers are those with the _____ costs.
=> highest ; lowest
10. Producing a quantity larger than equilibrium of supply and demand is
inefficient because the marginal buyer's willingness to pay is
=> positive but less than the marginal seller’s cost

CHAPTER 8: The cost of Taxation

1. A tax on a good has a deadweight loss if
=> the reduction in consumer and producer surplus is greater than tax revenue.
2. Jane pays Chuck $50 to mow her lawn every week. When the government levies a
mowing tax of $10 on Chuck, he raises his price to $60. Jane continues to hire him at
the higher price. What is the change in producer surplus, change in consumer
surplus, and deadweight loss?
=> $0, -$10, $0
3. Eggs have a supply curve that is linear and upward-sloping and demand curve
that is linear and downward sloping. If a 2 cent per egg tax is increased to 3 cents,
the dead weightloss of the tax
=> increase by more than 50 percent
4. Peanut butter has an upward-sloping supply curve and a downward-sloping
demand curve. If a 10 cent per pound tax is increased to 15 cents, the government's
tax revenue
=>
5. The Laffer curve illustrates that, in some circumstances, the government can
reduce a tax on a good and increase the
=> government’s tax revenue
6. If a policymaker wants to raise revenue by taxing goods while minimizing the
deadweight losses, he should look for goods with ________ elasticities of demand
and ________ elasticities of supply.
=> small ; small

CHAPTER 9. International Trade

1. If a nation that does not allow international trade in steel has a domestic price of
steel lower than the world price, then
=> the nation has a comparative advantage in producing steel.
2. When the nation of Ectenia opens itself to world trade in coffee beans, the
domestic price of coffee beans falls. Which of the following describes the situation?
=> Domestic production of coffee falls, and Ecternia becomes a coffee importer.
3. When a nation opens itself to trade in a good and becomes an importer,
=> producer surplus decreases, but consumer surplus and total surplus both increase.
4. If a nation that imports a good imposes a tariff, it will increase
=> the domestic quantity supplied
5. Which of the following trade policies would benefit producers, hurt consumers,
and increase the amount of trade?
=> Starting to allow trade when the world price is greater than the domestic price.
6. The main difference between imposing a tariff and handing out licenses under an
import quota is that tariff increases
=> government revenue.