Economics 104
Spring 2003, Exam I
Professor Lang  


Multiple Choice Questions (1.6 points each) (Please choose the best response to each of the following):

1.    Economics is concerned with:
    a.    earning as much money as possible.
    b.    using scarce resources to satisfy virtually limitless material wants and needs.
    c.    limiting individuals’ wants so that our scarce resources will not be used up.
    d.    using the maximum amount of resources to produce any given level of output.

2.    Because resources are scarce, individuals must:
    a.    make value judgments.
    b.    learn to do without.
    c.    learn to be more efficient.
    d.    all of the above.

3.    The opportunity cost to a student of preparing for an examination is:
    a.    impossible to measure.
    b.    the alternative use of the time required to prepare for the exam.
    c.    high for a student with a high GPA and low for a student with a low GPA.
    d.    zero since the tuition has already been paid for the course and there is not an
           extra fee to take the exam.

4.    An engineer employed by the city is an example of:
    a.    land.
    b.    labor.
    c.    capital.
    d.    entrepreneurship.

5.    A woman who owns and operates her own employment agency is an example of:
    a.    land.
    b.    labor.
    c.    capital.
    d.    entrepreneurship.

6.    Resources are scarce:
    a.    when compared to the wants and needs people wish to satisfy.
    b.    in less developed countries, but not in advanced economies, such as that of the
            United States.
    c.    in the sense that there is almost no oil, coal, clean air, or water left, and the
            labor force is shrinking.
    d.    because people do not demand enough goods and services to ensure that
            resources will be made available in large enough quantities.

7.    Which of the following is an example of an economic theory?
    a.    The actual behavior of the economy over a one-year period.
    b.    A tax cut to increase spending by businesses and households.
    c.    Statistics showing the change in the unemployment rate over the 1990s.
    d.    An explanation as to why lowering taxes might lead to increased spending by
            businesses and households.
 
8.    Which of the following is an economic policy?
    a.    Assuming that you will earn more as you grow older.
    b.    Explaining what happens to the supply of a product as its price falls.
    c.    Understanding that the scarcity problem is at the foundation of economics.
    d.    Giving families a tax break on college tuition in order to encourage more
            degrees.

9.    Two variables are inversely related when:
    a.    neither variable increases nor decreases.
    b.    one variable increases as the other increases.
    c.    one variable decreases as the other increases.
    d.    one variable does not change as the other increases.

10.    A direct relationship occurs when two variables move in:
    a.    the same direction, and graphs as an upward-sloping line.
    b.    opposite directions, and graphs as an upward-sloping line.
    c.    the same direction, and graphs as a downward-sloping line.
    d.    opposite directions, and graphs as a downward-sloping line.

11.    A production possibilities table or graph shows:
    a.    different ways in which a particular good can be produced.
    b.    different combinations of goods that a particular resource can produce.
    c.    different amounts of two goods that an economy can produce at full
            employment with resources and technology held constant.
    d.    the amount of time it takes to produce two goods when the economy is at full
            employment and resources and technology are held constant.

12.    A production possibilities model illustrates which of the following concepts?
    a.    Scarcity.
    b.    Opportunity cost.
    c.    Tradeoffs.
    d.    All of the above.

The following production possibilities figure applies to questions 13 and 14.




















 
13.    It would be impossible for the economy in the production possibilities figure to
produce the output shown by:
a.    point V.
b.    point Z.
c.    point W, X, or Y.
d.    point W, X, Y, or Z.

14.    The economy represented in the production possibilities figure would gain more of
            good A and give up some of good B by moving from:
    a.    point V to point Y.
    b.    point W to point X.
    c.    point Y to point X.
    d.    point Z to point V.

15.    The three basic economic decisions are:
    a.    what to produce, how to produce, and what prices to charge.
    b.    what to produce, how to produce, and who receives what has been produced.
    c.    how to produce, who should produce, and what they should be paid.
    d.    what goods and services should be consumed, what these goods and services
            should cost, and how much people should earn.

16.    The basic economic decisions are faced:
    a.    in every economy because of scarcity.
    b.    in every economy because every economy has a formal government.
    c.    only in market economies since no decision making is allowed in planned
            economies.
    d.    only in advanced economies where enough goods and services are produced to
            force people to make choices.

17.    Which of the following statements about a pure market economy is FALSE?
    a.    Goods and services are produced by businesses in the most efficient manner.
    b.    Goods and services are produced using the least-cost method of production.
    c.    All goods and services must meet government standards.
    d.    The goods and services that are produced are those which businesses can sell at
            a profit.

18.    In a market system:
    a.    profit and income incentives result in the inefficient use of resources.
    b.    production and distribution decisions reflect the value judgments of sellers but
            not buyers.
    c.    prices reflect the values of buyers and sellers rather than government planners.
    d.    all of the above.

19.    If a country allows no market activity in making the basic economic choices, that
            country has:
a.    a mixed economy.
b.    a capitalistic economy.
c.    a purely planned economy.
d.    an economy based on free enterprise.

 
20.    The economic system in which the basic economic questions are answered through
            markets with some government intervention is a:
a.    mixed economy.
b.    market economy.
c.    planned economy.
d.    centralized economy.

21.    In a capitalistic system:
    a.    businesses have the right to earn a profit.
    b.    households are buyers and businesses are sellers in input markets.
    c.    collective decision making is preferred to individual decision making.
    d.    all of the above.

22.    The invisible hand doctrine is most closely associated with:
    a.    socialism.
    b.    mercantilism.
    c.    managed capitalism.
    d.    laissez-faire capitalism.

23.    A buyer’s demand for a product refers to the amounts of the product the buyer:
    a.    has in his or her possession.
    b.    wishes he or she could purchase.
    c.    would purchase at different prices.
    d.    would purchase at different income levels.

24.    A demand curve for a good is shown on a graph that has:
    a.    price on the vertical axis, quantity on the horizontal axis, and the curve is
            upward sloping.
    b.    price on the vertical axis, quantity on the horizontal axis, and the curve is
            downward sloping.
    c.    quantity on the vertical axis, price on the horizontal axis, and the curve is
            upward sloping.
    d.    quantity on the vertical axis, price on the horizontal axis, and the curve is
            downward sloping.

25.    Because of the Law of Demand, demand curves:
    a.    slope upward.
    b.    slope downward.
    c.    are perfectly vertical.
    d.    are perfectly horizontal.

26.    A supply curve is shown in a graph that has:
    a.    price on the vertical axis, quantity on the horizontal axis, and the curve is
            upward sloping.
    b.    price on the vertical axis, quantity on the horizontal axis, and the curve is
            downward sloping.
    c.    quantity on the vertical axis, price on the horizontal axis, and the curve is
            upward sloping.
    d.    quantity on the vertical axis, price on the horizontal axis, and the curve is
            downward sloping.

27.    A shortage occurs when quantity demanded:
    a.    is less than quantity supplied.
    b.    is more than quantity supplied.
    c.    equals quantity supplied.
    d.    none of the above.

28.    The expected reaction to a shortage is:
    a.    an increase in price.
    b.    a reduction in quantity demanded.
    c.    an increase in quantity supplied.
    d.    all of the above.

29.    Given the following supply and demand schedules, equilibrium will be reached when:

    Price        Quantity Supplied        Quantity Demanded
    $7            10                4
    $6            9                5
    $5            8                6
    $4            7                7
    $3            6                8
    $2            5                9

    a.    price = $2.
    b.    price = $4.
    c.    price = $6.
    d.    this market can not reach equilibrium.

30.    A change in the quantity demanded of a product is:
    a.    caused by a change in buyers’ incomes.
    b.    caused by a change in the number of buyers in the market.
    c.    represented by a movement along the product demand curve.
    d.    represented by a shift of the product demand curve to the right or left.

31.    A decrease in the demand for a product would NOT be caused by a decrease in the:
    a.    price of the product.
    b.    popularity of the product.
    c.    number of buyers in the market.
    d.    expected future price of the product.

32.    If the price of a product were to increase, a seller’s supply curve for that product
            would:
    a.    remain unchanged.
    b.    shift to the left.
    c.    shift to the right.
    d.    become perfectly vertical.

33.    If there were a decrease in the market demand for a product with no change in market
            supply, the equilibrium price would:
a.    decrease and the equilibrium quantity decrease.
b.    decrease and the equilibrium quantity increase.
c.    increase and the equilibrium quantity increase.
d.    increase and the equilibrium quantity decrease.
 
34.    If there were an increase in the market supply for a product with no change in market
demand, the equilibrium price would:
a.    decrease and the equilibrium quantity decrease.
b.    decrease and the equilibrium quantity increase.
c.    increase and the equilibrium quantity increase.
d.    increase and the equilibrium quantity decrease.

35.    If there were an increase in both demand and supply in a market:
    a.    there would be an increase in both equilibrium price and quantity.
    b.    it would not be certain how equilibrium price or quantity would change.
    c.    there would be an increase in equilibrium quantity, but it would not be certain
            how equilibrium price would change.
    d.    there would be an increase in equilibrium price, but it would not be certain
            how equilibrium quantity would change.

 
Terms (Please give a brief definition/explanation of 3 of the following.  You must include 1 from Group A, 1 from Group B, and 1 from Group C) (5 points each):

Group A (Choose 1)        Group B (Choose 1)        Group C (Choose 1)
Scarcity                            Economic System            Demand
Opportunity Cost              Planned Economy            Law of Supply
Capital                             Capitalism                        Surplus
Land                                 Free Enterprise                Price Ceiling
Entrepreneur                     Laissez-faire Capitalism        
Economic Theory             Comparative Advantage
Economic Policy        

Free Response Questions (10 points each) Please answer the following as completely as possible.  For all questions, use a graph or figure where appropriate.  Be sure to label everything.  Partial credit will be awarded for partially correct answers.  You must show all work.

1.    Suppose a production possibilities frontier includes the following data points:
    Computers    Wheat
A    0    760
B    100    570
C    200    380
D    300    190
E    400    0

Draw the PPF for this economy.  What can be said about the opportunity cost of computers and wheat in this economy?  Which point will the economy produce at?  Can both 229 Computers and 172 units of Wheat be produced in this economy?  How about 104 Computers and 602 units of Wheat?


 
2.    Consider the chart describing the market for economics textbooks.

Price    Quantity Supplied    Quantity Demanded
0                    0                              600
20                200                            600
40                400                            600
60                600                            600
80                800                            600
100            1000                            600
 
Draw the Supply Curve, Demand Curve, and Equilibrium in this Market.  What is the equilibrium price and quantity in this market?  Suppose the government places a permanent price ceiling at $40.  What will happen in this market?  Suppose that, due to the lousy reputation of the instructor, 400 fewer students enroll in the course (and need textbooks), next year.  What will happen in this market?

 
3.    Consider the market for Marijuana.  Suppose the government passes a law that legalizes both buying and selling Marijuana.  Use Supply and Demand analysis to determine the effect on the equilibrium price and quantity.  How would this analysis change if the government only legalizes the buying of Marijuana?