Chapter 3

Interdependence and the Gains from Trade

80. A rancher can produce only hamburgers, and a farmer can produce only french fries. The rancher and the farmer both like both foods. They

a. cannot gain from trade.

b. could gain from trade under certain circumstances, but not always.

c. could gain from trade because each would enjoy a greater variety of food.

d. could gain from trade only if each were indifferent between hamburgers and french fries.

ANSWER: c. could gain from trade because each would enjoy a greater variety of food.

81. Without trade

a. a country is better off.

b. a country’s production possibilities frontier is also its consumption possibilities frontier.

c. a country can still benefit from international specialization.

d. more product variety is available in a country.

ANSWER: b. a country’s production possibilities frontier is also its consumption possibilities frontier.

82. If labor in Mexico is less productive than labor in the U.S. in all areas of production,

a. neither nation can benefit from trade.

b. Mexico can benefit from trade but the U.S. cannot.

c. Mexico will not have a comparative advantage in any good.

d. both nations can benefit from trade.

ANSWER: d. both nations can benefit from trade.

For the following question(s), use the accompanying table.

Labor Hours needed to make one unit of: Amount produced in 120 hours:

Perfume Cloth Perfume Cloth

(bottles) (yards) (bottles) (yards)

Nancy 6 8 20 15

Roger 5 10 24 12

83. Refer to the tables shown. The opportunity cost of 1 bottle of perfume for Nancy is

a. 4/3 yards of cloth.

b. 3/4 yard of cloth.

c. 1 yard of cloth.

d. 1/4 yard of cloth.

ANSWER: b. 3/4 yard of cloth.

84. Refer to the tables shown. The opportunity cost of 1 bottle of perfume for Roger is

a. 3 yards of cloth.

b. 2 yards of cloth.

c. 1/3 yard of cloth.

d. 1/2 yard of cloth.

ANSWER: d. 1/2 yard of cloth.

85. Refer to the tables shown. For Nancy the opportunity cost of 1 yard of cloth is

a. 4/3 bottles of perfume.

b. 1 bottle of perfume.

c. 3/4 bottle of perfume.

d. 1/3 bottle of perfume.

ANSWER: a. 4/3 bottles of perfume.

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86. Refer to the tables shown. For Roger the opportunity cost of 1 yard of cloth is

a. 2 bottles of perfume.

b. 1 bottle of perfume.

c. 1/2 bottle of perfume.

d. 1/4 bottle of perfume.

ANSWER: a. 2 bottles of perfume.

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87. Refer to the tables shown. Nancy has a comparative advantage in __________ and Roger has an absolute advantage in __________.

a. perfume, cloth

b. perfume, both goods

c. cloth, both goods

d. cloth, perfume

ANSWER: d. cloth, perfume

88. Refer to the tables shown. Nancy has an absolute advantage in __________________ and Roger has a comparative advantage in _______________.

a. cloth, perfume

b. perfume, cloth

c. perfume, neither good

d. cloth, cloth

ANSWER: a. cloth, perfume

89. Refer to the tables shown. Nancy has an absolute advantage in _______________ and Roger has an absolute advantage in ________________.

a. perfume, perfume

b. cloth, perfume

c. perfume, cloth

d. both goods, neither good

ANSWER: b. cloth, perfume

90. Refer to the tables shown. Nancy and Roger both could benefit by Nancy specializing in __________ and Roger specializing in __________.

a. perfume, cloth

b. cloth, perfume

c. perfume, perfume

d. cloth, cloth

ANSWER: b. cloth, perfume

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91. Refer to the tables shown. Nancy has a comparative advantage in __________ and Roger has a comparative advantage in __________.

a. cloth, perfume

b. cloth, both goods

c. cloth, neither good

d. perfume, cloth

ANSWER: a. cloth, perfume

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92. Comparative advantage is based on

a. capital costs.

b. labor costs.

c. opportunity costs.

d. dollar price.

ANSWER: c. opportunity costs.

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93. Trade is based on

a. absolute advantage.

b. comparative advantage.

c. production costs.

d. relative dollar prices.

ANSWER: b. comparative advantage.

94. Absolute advantage is found by

a. comparing opportunity costs.

b. calculating the dollar cost of production.

c. comparing the productivity of one nation to that of another.

d. first determining which country has a comparative advantage.

ANSWER: c. comparing the productivity of one nation to that of another.

95. Trade can benefit society as a whole because it allows

a. for a more efficient use of resources.

b. for goods to be obtained at a lower opportunity cost.

c. people to specialize in activities in which they have a comparative advantage.

d. All of the above are correct.

ANSWER: d. All of the above are correct.

96. Imports are

a. people who work in foreign countries.

b. an example of an economic model.

c. whatever is given up to obtain some item.

d. goods produced abroad and sold domestically.

ANSWER: d. goods produced abroad and sold domestically.

97. Exports are

a. a limit placed on the quantity of goods brought into a country.

b. goods produced domestically and sold abroad.

c. a country's ability to produce a good.

d. goods produced abroad and sold domestically.

ANSWER: b. goods produced domestically and sold abroad.

98. The principle of comparative advantage was developed by

a. Harry Truman.

b. David Ricardo.

c. John Maynard Keynes.

d. Adam Smith.

ANSWER: b. David Ricardo.

Chapter 4

The Market Forces of Supply and Demand

99. Which of the following are the words most commonly used by economists?

a. supply and demand

b. entrepreneurial ability

c. scarcity and human wants

d. prices and exchange

ANSWER: a. supply and demand

100. In a free market, who determines how much of a good will be sold and the price at which it is sold?

a. suppliers

b. demanders

c. the government

d. both suppliers and demanders

ANSWER: d. both suppliers and demanders

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101. A market is

a. a place where only buyers come together.

b. a place where only sellers meet.

c. a group of demanders and suppliers of a particular good or service.

d. a group of people with common desires.

ANSWER: c. a group of demanders and suppliers of a particular good or service.

102. A competitive market is

a. a market in which there are many buyers and many sellers so that each has a negligible impact on price.

b. a market where consumers cannot freely interact with sellers.

c. a market where suppliers are under no government restrictions.

d. a market with many buyers but few sellers.

ANSWER: a. a market in which there are many buyers and many sellers so that each has a negligible impact on price.

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103. Generally, the market for ice cream would be considered

a. a monopolistic market.

b. a competitive market.

c. more organized than an auction.

d. a market where individual sellers have significant pricing power.

ANSWER: b. a competitive market.

104. If buyers and/or sellers are price takers, then individually

a. they can somewhat influence the market price.

b. they have ultimate control over market price.

c. buyers will be able to find prices lower than those determined in the market.

d. they have no influence on market price because there are so many in the market.

ANSWER: d. they have no influence on market price because there are so many in the market.

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105. There are thousands of wheat farmers who produce and sell wheat and there are millions of consumers who use wheat and wheat products. The market for wheat would be considered

a. perfectly competitive.

b. monopolistic.

c. oligopolistic.

d. monopolistically competitive.

ANSWER: a. perfectly competitive.

106. A monopoly is

a. a market with few sellers.

b. a market with one seller.

c. a market with one buyer.

d. a market where the government sets the price.

ANSWER: b. a market with one seller.

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107. Which of the following would be an example of a monopoly?

a. a local cable television company

b. local cement companies

c. a bakery in a large city

d. a potato farmer

ANSWER: a. a local cable television company

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108. A market with only a few sellers would be

a. a monopoly.

b. a competitive market.

c. an oligopoly.

d. a monopolistically competitive market.

ANSWER: c. an oligopoly.

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109. Which of the following would be an example of an oligopolistic market?

a. a domestic wheat market

b. air travel

c. the software industry

d. electrical power for residential consumers

ANSWER: b. air travel

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110. A market with many sellers offering similar but slightly different products is called

a. a monopoly.

b. oligopolistic.

c. monopolistically competitive.

d. perfectly competitive.

ANSWER: c. monopolistically competitive.

111. If a good is “normal,” then an increase in income will result in

a. no change in the demand for the good.

b. a decrease in the demand for the good.

c. an increase in the demand for the good.

d. a lower market price.

ANSWER: c. an increase in the demand for the good.

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112. If the price of a substitute to good X increases, then

a. the demand for good X will increase.

b. the market price of good X will decrease.

c. the demand for good X will decrease.

d. the demand for good X will not change.

ANSWER: a. the demand for good X will increase.

113. Suppose you like banana cream pie made with vanilla pudding. Assuming all other things are constant, you notice that the price of bananas is higher. How would your demand for vanilla pudding be affected by this?

a. It would decrease.

b. It would increase.

c. It would be unaffected.

d. There is insufficient information given to answer the question.

ANSWER: a. It would decrease.

114. If a decrease in income increases the demand for a good, then

a. the good is a substitute good.

b. the good is a complement good.

c. the good is a normal good.

d. the good is an inferior good.

ANSWER: d. the good is an inferior good.

115. Which of the following is a determinant of demand?

a. the price of a substitute good

b. the price of a complement good

c. the price of the good next month

d. all of the above

ANSWER: d. all of the above

116. Ceteris paribus is a Latin phrase that literally means

a. “other things being equal.”

b. “after this therefore because of this.”

c. “to respond slowly to a change in price.”

d. “There’s no such thing as a free lunch.”

ANSWER: a. “other things being equal.”

117. Suppose that John receives a pay increase. We would expect

a. John’s demand for normal goods to remain unchanged.

b. John’s demand for inferior goods to decrease.

c. John’s demand for luxury goods to decrease.

d. John’s demand for normal goods to decrease.

ANSWER: b. John’s demand for inferior goods to decrease.

118. What is the law of demand?

a. When the price of a good or service rises, buyers respond by purchasing more.

b. When income levels increase, buyers respond by purchasing more.

c. When buyers tastes for the good increase, they purchase more of the good.

d. When the price of a good falls, buyers respond by purchasing more.

ANSWER: d. When the price of a good falls, buyers respond by purchasing more.

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119. The side of the market that deals with the willingness and ability to produce and sell is

a. demand.

b. competition.

c. supply.

d. a monopoly.

ANSWER: c. supply.

120. The relationship between price and quantity supplied is

a. positive, or direct.

b. negative, or inverse.

c. nonexistent.

d. the same as the relationship between price and quantity demanded.

ANSWER: a. positive, or direct.

121. Suppose you make jewelry. If the price of gold falls, we would expect

a. you to be willing and able to produce more jewelry than before at each possible price.

b. you to be willing and able to produce less jewelry than before at each possible price.

c. you will face a greater demand for your jewelry.

d. you will face a weaker demand for your jewelry.

ANSWER: a. you to be willing and able to produce more jewelry than before at each possible price.

122. A technological advancement

a. will shift the demand curve to the right.

b. will shift the demand curve to the left.

c. will shift the supply curve to the right.

d. will shift the supply curve to the left.

ANSWER: c. will shift the supply curve to the right.

123. The unique point at which the supply and demand curves intersect is called

a. market unity.

b. equilibrium.

c. cohesion.

d. an agreement.

ANSWER: b. equilibrium.

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124. The price where quantity supplied equals quantity demanded is called

a. the equilibrium price.

b. the monopoly price.

c. the coordinating price.

d. All of the above are correct.

ANSWER: a. the equilibrium price.

PRICE QUANTITY DEMANDED QUANTITY SUPPLIED

$10 10 100

$8 20 80

$6 30 60

$4 40 40

$2 50 20

125. In the table shown, the equilibrium price and quantity would be

a. $2, 50.

b. $4, 40.

c. $8, 80.

d. $10, 100.

ANSWER: b. $4, 40.

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126. In the table shown, if the price were $8,

a. a surplus of 30 units would exist and price would tend to fall.

b. a surplus of 60 units would exist and price would tend to rise.

c. a surplus of 60 units would exist and price would tend to fall.

d. a shortage of 30 units would exist and price would tend to rise.

ANSWER: c. a surplus of 60 units would exist and price would tend to fall.

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127. In the table shown, if the price were $2,

a. a shortage of 30 units would exist and price would tend to fall.

b. a surplus of 60 units would exist and price would tend to rise.

c. a surplus of 60 units would exist and price would tend to fall.

d. a shortage of 30 units would exist and price would tend to rise.

ANSWER: d. a shortage of 30 units would exist and price would tend to rise.

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128. A shift in the supply curve is called

a. a “change in supply.”

b. a “movement along the supply curve.”

c. a “change in the quantity supplied.”

d. All of the above are correct.

ANSWER: a. a “change in supply.”

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129. A shift in the demand curve is called

a. a “change in demand.”

b. a “movement along the demand curve.”

c. a “change in the quantity demanded.”

d. All of the above are correct.

ANSWER: a. a “change in demand.”

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130. If there is a shortage of farm laborers, we would expect

a. the wages of farm laborers to decrease.

b. the wages of farm laborers to increase.

c. the prices of farm commodities to decrease.

d. a decrease in the demand for substitutes of farm labor.

ANSWER: b. the wages of farm laborers to increase.

Chapter 5

Elasticity and Its Applications

131. In general, elasticity is

a. the friction that develops between buyer and seller in a market.

b. a measure of how much government intervention is prevalent in a market.

c. a measure of how much buyers and sellers respond to changes in market conditions.

d. a measure of the competitive nature of a market.

ANSWER: c. a measure of how much buyers and sellers respond to changes in market conditions.

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132. The price elasticity of demand measures

a. how responsive buyers are to a change in income.

b. how responsive sellers are to a change in price.

c. how responsive buyers are to a change in price.

d. how responsive sellers are to a change in buyers' income.

ANSWER: c. how responsive buyers are to a change in price.

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133. Demand is said to be inelastic

a. if the price of the good responds only slightly to changes in demand.

b. if demand shifts only slightly when the price of the good changes.

c. if buyers respond substantially to changes in the price of the good.

d. if the quantity demanded changes only slightly when the price of the good changes.

ANSWER: d. if the quantity demanded changes only slightly when the price of the good changes.

134. If a good is a necessity, demand for the good would tend to be

a. elastic.

b. inelastic.

c. unit elastic.

d. horizontal.

ANSWER: b. inelastic.

135. If a good is a luxury, demand for the good would tend to be

a. elastic.

b. inelastic.

c. unit elastic.

d. horizontal.

ANSWER: a. elastic.

136. Demand for a good would tend to be more elastic,

a. the greater the availability of complements.

b. the longer the period of time considered.

c. the broader the definition of the market.

d. the fewer substitutes there are.

ANSWER: b. the longer the period of time considered.

137. The demand for a good tends to be more elastic

a. the greater the availability of close substitutes.

b. the narrower the definition of the market.

c. the longer the period of time.

d. All of the above are correct.

ANSWER: d. All of the above are correct.

138. Suppose the price of product X is reduced from $1.45 to $1.25 and, as a result, the quantity of X demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for X in the given price range is

a. 2.00.

b. 1.55.

c. 1.00.

d. .64.

ANSWER: d. .64.

139. Demand is elastic if

a. elasticity is less than 1.

b. elasticity is equal to 1.

c. elasticity is greater than 1.

d. elasticity is equal to 0.

ANSWER: c. elasticity is greater than 1.

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140. Demand is inelastic if

a. elasticity is less than 1.

b. elasticity is equal to 1.

c. elasticity is greater than 1.

d. elasticity is equal to 0.

ANSWER: a. elasticity is less than 1.

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141. Demand is unit elastic if

a. elasticity is less than 1.

b. elasticity is equal to 1.

c. elasticity is greater than 1.

d. elasticity is equal to 0.

ANSWER: b. elasticity is equal to 1.

142. A perfectly elastic demand curve will be

a. vertical.

b. horizontal.

c. downward sloping to the right.

d. upward sloping to the right.

ANSWER: b. horizontal.

143. In any market, total revenue is

a. the price divided by the price elasticity of demand.

b. the price multiplied by the quantity.

c. the price plus the quantity.

d. the price multiplied by the quantity minus the costs of production.

ANSWER: b. the price multiplied by the quantity.

144. When demand is inelastic, a decrease in price will cause

a. an increase in total revenue.

b. a decrease in total revenue.

c. no change in total revenue.

d. There is insufficient information to answer this question.

ANSWER: b. a decrease in total revenue.

145. Last year, Sheila bought 10 DVD movies when her income was $40,000. This year, her income is $50,000 and she purchased 20 DVD movies. All else constant, it is obvious that

a. Sheila prefers DVD movies to VHS videos.

b. Sheila considers DVD movies to be a normal good.

c. Sheila considers DVD movies to be an inferior good.

d. Sheila has a price elastic demand for DVD movies.

ANSWER: b. Sheila considers DVD movies to be a normal good.

146. Income elasticity of demand measures

a. how the quantity demanded changes as consumer income changes.

b. how consumer purchasing power is affected by a change in the price of a good.

c. how the price of a good is affected when there is a change in consumer income.

d. how many units of a good a consumer can buy given a certain income level.

ANSWER: a. how the quantity demanded changes as consumer income changes.

147. If an increase in income results in a decrease in the quantity demanded of a good, then the good is

a. a normal good.

b. a necessity.

c. an inferior good.

d. a luxury.

ANSWER: c. an inferior good.

148. Cross-price elasticity of demand measures

a. how the quantity demanded of a good changes as price changes.

b. how the quantity demanded of one good changes as the price of another good changes.

c. how the quantity demanded of a good changes as income changes.

d. how the price of a good is affected when income changes.

ANSWER: b. how the quantity demanded of one good changes as the price of another good changes.

149. Suppose that an increase in the price of carrots from $1.20 to $1.40 per pound raises the amount of carrots that carrot farmers produce from 1.2 million pounds to 1.6 million pounds. Using the midpoint method, what would be the elasticity of supply?

a. 0.54

b. 0.50

c. 2.00

d. 1.86

ANSWER: d. 1.86

150. Supply tends to be

a. less price elastic in the long run.

b. more price elastic in the long run.

c. perfectly price inelastic in the long run.

d. perfectly price inelastic in the short run.

ANSWER: b. more price elastic in the long run.

Suppose there is a baseball park with 10,000 seats and a demand for seats in the park as follow:.

Price per Ticket Quantity Demanded

$20 2,000

16 4,000

12 6,000

8 8,000

6 10,000

4 12,000

2 14,000

151. Referring to the given information, if the management of the baseball park charges $8 per ticket

a. there will be a shortage of tickets.

b. there will be 2,000 empty seats.

c. there will be 4,000 empty seats.

d. revenue will be maximized.

ANSWER: b. there will be 2,000 empty seats.

152. Referring to the given information, the supply of seats

a. is perfectly inelastic.

b. is perfectly elastic.

c. increases as price increases.

d. decreases as price increases.

ANSWER: a. is perfectly inelastic.

153. Refer to the given information. Notice that lowering the price from $8 to $6 per ticket decreases revenue by $4,000. In the $6 to $8 price range, demand for baseball tickets must be

a. price elastic

b. price inelastic

c. price unit elastic

d. income elastic

ANSWER: b. price inelastic