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A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.


One way that governments can improve market outcomes is to ensure that individuals are able to own and exercise control over their scarce resources.


When free markets ration goods with prices, it is both efficient and impersonal.


In the circular flow diagram, one loop represents the flow of goods and services, and the other loop represents the flow of factors of production.


Points on the production possibilities frontier represent efficient levels of production.


A price ceiling is a legal minimum on the price at which a good or service can be sold.


Historical episodes allow economists to illustrate and evaluate economic theories of the present.


All goods and services are sold in perfectly competitive markets.


If the demand for a good falls when income falls, then the good is called an inferior good.


A reduction in an input price will cause a change in quantity supplied, but not a change in supply.


The scientific method is applicable to studying

both natural sciences and social sciences.

When an economy is operating inside its production possibilities frontier, we know that

there are unused resources or inefficiencies in the economy.

Refer to Figure above. The opportunity cost of this economy moving from point D to point B is


Refer to Figure above. the shift of the production possibilities frontier from A to B illustrates

economic growth.

For the Figure Below. What is the value of the deadweight loss after the imposition of the price floor?

$600, and the value of consumer surplus after the imposition of the price floor is $1,500

Increasing opportunity cost along a bowed out production possibilities frontier occurs because

some factors of production are not equally suited to producing both goods or services.

Specializing in the production of a good or service in which one has a comparative advantage enables a country to do which of the following?

consume a combination of goods that lies outside its own production possibilities frontier.

In a market economy, supply and demand are important because they

All of the above are correct.

Laws that restrict the smoking of cigarettes in public places are examples of government ________ in the market:


Suppose that a decrease in the price of good X results in fewer units of good Y being sold. This implies that X and Y are

substitute goods.

Economics deals primarily with the concept of


The term used to describe a situation in which markets do not allocate resources efficiently is

market failure.

Published in 1776, _________ was written by Adam Smith.

An Inquiry into the Nature and Causes of the Wealth of Nations

Economic surplus is maximized in a competitive market when

marginal benefit equals marginal cost.

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

an inferior good.

If the price of a good is low,

the quantity supplied of the good could be zero.

If a surplus exists in a market, then we know that the actual price is

above the equilibrium price and quantity supplied is greater than quantity demanded.

Refer to Figure above. If the price is $25, then there would be an

excess supply of 300 and the price would fall.

Which of the following is not a rationing mechanism used by landlords in cities with rent control?


When a binding price floor is imposed on a market to benefit sellers,

some sellers benefit and some sellers are harmed.

Which of the following phrases best captures the notion of efficiency?

minimum waste.

A tax on sellers will

shift the supply curve upwards by the amount of the tax.

Refer to Figure above. The amount of tax per unit is


Refer to Figure above. When the price ceiling applies in this market and the supply curve for gasoline shifts from S1 to S2,

a shortage will occur at the new market price of P2.

Economics promotes which of the following as the way to make the best decision?

Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.

In the circular flow diagram, firms produce

Both (a) and (b) are correct

The production possibilities frontier is a graph that shows the various combinations of output that an economy

can produce.

Buyers and sellers who have no influence on market price are referred to as

price takers.

Which of these statements best represents the law of demand?

When the price of a good decreases, buyers purchase more of the good.

Government policies can change the costs and benefits that people face. Those policies have the potential to

All of the above are correct.

When we move along a given demand curve,

all nonprice determinants of demand are held constant.

When calculating the cost of college, which of the following should you probably not include?

The cost of rent for your off-campus apartment.

The basic principles of economics suggest that

government should become involved in markets when those markets fail to produce efficient or fair outcomes.

If the demand for a product decreases, then we would expect

equilibrium price and equilibrium quantity to both decrease.

Policymakers use taxes

both to raise revenue for public purposes and to influence market outcomes.

To say that a price ceiling is binding is to say that the price ceiling

causes quantity demanded to exceed quantity supplied.

For economists, statements about the world are of two types:

positive statements and normative statements.

A minimum wage that is set above a market's equilibrium wage will result in

an excess supply of labor, that is, unemployment.

Opponents of the minimum wage point out that the minimum wage

All of the above are correct

Guns and butter are used to represent the classic societal tradeoff between spending on

national defense and consumer goods.

If there is public dissaving, investment spending in the economy will decline, holding everything else constant.


Only paid workers are included in the Bureau of Labor Statistics' "employed" category.


Accumulating a greater number of inputs will ensure that an economy will experience economic growth.


If the current year CPI is 90, then the price level has decreased 10 percent since the base year.


If consumption is $1800, GDP is $4300, government purchases are $1000, imports are $700, and investment is $1200, then exports are $300.


Within the US population, women have higher rates of unemployment that men.


Eliminating frictional unemployment would be good for the economy.


If the GDP deflator is equal to 100, then for that year nominal GDP is equal to real GDP.


Human capital refers to the percentage of the working-age population in the labor force.


Real GDP per capita is calculated by dividing the value of real GDP for a country by the country's adult population.


What is investment in a closed economy if you have the following economic data?
Y=$10 trillion ; C=$5 trillion ; Tr-$2 trillion ; G=$2 trillion

$3 trillion

During the recession phase of the business cycle,

interest rates are usually falling.

Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth in the economy.

decreases; decreases

Someone who is available for work but has not actively looked for work in the previous week would be classified as

not in the labor force.

Which of the following increases labor productivity?

inventions of new machinery, equipment, or software.

Which of the following statistic is usually regarded as the best single measure of a society's economic well-being?

gross domestic product

Oceania buys $40 of wine from Escudia and Escudia buys $100 of wool from Oceania. Supposing that this is the only trade that these countries do. What are the net exports of Oceania and Escudia, in that order?

$60 and -$60

Financial securities that represent promises to repay a fixed amount of funds are known as


Which of the following is not a cause of the changing role of women in American society over the past several decades?

scientists have shown that women are better employees than men.

An American company operates a fast food restaurant in Romania. Which of the following statements is accurate?

The value of the goods and services produced by the restaurant is included in Romanian GDP, but not US GDP.

In a closed economy, private saving is equal to which of the following? (Y=GDP ; C=Consumption ; G=Government purchases ; T=Taxes ; and Tr=Transfers)


Gross domestic product is defined as

the market value of all final goods and services produced within a country in a given period of time.

When inflation rises, people tend to go to the bank

more often, giving rise to shoeleather costs.

Actual real GDP will be above potential GDP if

firms are producing above capacity.

In an imaginary economy, consumers buy only shirts and pants. The fixed basket consists of 6 shirts and 4 pairs of pants. A shirt cost $20 in 2006 and $25 in 2007. A pair of pants cost $30 in 2006 and $40 in 2007. Using 2006 as the base year, which of the following statements is correct?

The rate of inflation is 29.17% in 2007.

Changes in nominal GDP reflect

both changes in prices and changes in the amounts being produced.

Gross domestic product understates the total production of final goods and services because of the omission of

household production.

The value of what a US owned McDonald's produces in South Korea is included in the US ______ and the South Korean ______.


One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called

substitution bias.

When economists refer to intangible items, they are referring to such things as

consulting services and dental care, and the value of such items is included in GDP.

The consumer price index is used to

monitor changes in the cost of living over time.

Refer to Figure above. At the equilibrium wage, how many workers are unemployed?

0, and if the government imposes a minimum wage of $4, then unemployment will increase by 0 workers.

According to the text, economists consider full employment to occur when

the unemployment rate consists of only frictional and structural unemployment.

The response of investment spending to an increase in the government budget deficit is called

crowding out.

Technological advances generally result in

increased life expectancy.

The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 10 bushels of peaches and 15 bushels of pecans. Refer to Table above. The cost of the basket in 2006 was

$240, and if 2005 is the base year, then the inflation rate in 2006 was 20 percent.

Suppose an economy's production consists only of corn and soybeans. In 2005, 20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2 per bushel. In 2004, the price of corn was $2 per bushel and the price of soybeans was $1 per bushel. Using 2004 as the base year, it follows that, for 2005,

nominal GDP is $100, real GDP is $50, and the GDP deflator is 200.

Which of the following causes of unemployment is associated with a wage rate above the market equilibrium level?

All of the above are correct.

Frictional unemployment is the result of

the search process of matching workers with jobs.

If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita?


Unemployment that results because the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one is called

structural unemployment.

Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been chosen as the base year. In 2002, the basket's cost was $75.00 ; in 2004, the basket's cost was $79.50 ; and in 2006, the basket's cost was $85.86. The value of the CPI was

All of the above are correct.

Long-run economic growth requires all of the following except

political instability.

The demand for loanable funds is downward sloping because the _______ the interest rate, the ______ the number of profitable investment projects a firm can undertake, and the ________ the quantity demanded of loanable funds.

lower ; greater ; greater

An economy's natural rate of unemployment is

the amount of unemployment that the economy normally experiences.

Liquidity refers to

the ease with which a financial security can be traded for cash.

In 2004, based on concepts similar to those used to estimate US employment figures, the Japanese adult non-institutionalized population was 109.684 million, the labor force was 65.760 million, and the number of people employed was 62.630 million. According to these numbers, the Japanese labor-force participation rate and unemployment rate were about

60% and 4.8%

Refer to Figure below. Which of the following is consistent with the graph depicted above?

New government regulations decrease the profitability of new investment.

If the GDP deflator is less than 100, then for that yer nominal GDP _______ real GDP.

is less than

A sharp increase in the divorce rate increases the numbers of lawyers hired to determine divorce settlements. This will

increase GDP and decrease well being in the economy.

Which of the following is a macroeconomics question?

What determines the inflation rate?

Which of the following best describes an assumption economists make about human behavior?

They assume that rational behavior is useful in explaining choices people make even though people may not behave rationally all the time.

Lydia runs a small nail salon in the town of New Hope. She is debating whether she should extend her hours of operation. Lydia figures that her sales revenue will depend on the number of hours the nail salon is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $10 per hour. Refer to Table 1. Using marginal analysis, determine how many hours should Lydia extend her nail salon's hours of operations?

5 hours

Every society faces economic trade-offs. This means

producing more of one good means less of another good can be produced.

In a market economy, ________ interact in markets to decide the answers to the fundamental economic questions.

households and firms

Competition forces firms to produce and sell products as long as the ______ to consumers exceeds the _____ of production.

marginal benefit ; marginal cost

Which of the following is a positive economic statement?

The minimum wage law causes unemployment.

In economics, the term "equity" means

economic benefits are distributed fairly.

The slope of a production possibilities frontier

measures the opportunity cost of producing one more unit of a good.

Refer to Figure above. _______ is (are) inefficient in that not all resources are being used.

Point A, and point C is (are) unattainable with current resources.

Increasing marginal opportunity cost implies that

the more resources already devoted to any activity, the payoff from allocating yet more resources to that activity increases by progressively smaller amounts.

Refer to Figure above. If the economy is currently producing at point Y, what is the opportunity cost of moving to point W?

0 million tons of paper.

Suppose your expenses for this term are as follows: tuition: $5,000 ; room and board: $3,000 ; books and other educational supplies: $500. Further, during the term, you can only work part-time and earn $4,000 instead of your full-time salary of $10,000. What is the opportunity cost of going to college this term, assuming that your room and board expenses would be the same even if you did not go to college?


If you can produce more of something than others with the same resources, you have

an absolute advantage.

Refer to Figure above. Which country has a comparative advantage in the production of coconuts?


The ability to exercise control over one's own resources within the confines of the law refers to

one's property rights.

Optimal decisions are made at the point where marginal cost equals zero.


It is possible to have a comparative advantage in producing a good or service without having an absolute advantage.


An increase in population shifts the production possibility frontier inwards over time.


The idea underlying Adam Smith's invisible hand is that people tend to behave in ways that go unnoticed in society.


What is the difference between an "increase in demand" and an "increase in quantity demanded"?

An "increase in demand" is represented by a rightward shift of the demand curve while an "increase in quantity demanded" is represented by a movement along a given demand curve.

Holding everything else constant, an increase in the price of MP3 players will result in

a decrease in the quantity of MP3 players demanded.

The income effect of a price change refers to the impact of a change in

the price of a good on a consumer's purchasing power.

If an increase in income leads to a decrease in the demand for popcorn, then popcorn is

an inferior good.

If, in the market for oranges, the supply has increased then

the supply curve for oranges has shifted right.

Refer to Figure above. An increase in the number of firms in the market would be represented by a movement from

S1 to S2.

Refer to Figure above. If the price is $10,

there would be a shortage of 600 units.

Refer to Figure above. Assume that the graphs in this figure represent the demand and supply curves for Fruitopia, a soft drink. Which panel describes what happens in the market for Fruitopia when the price of Snapple, a substitute product, decreases?

Panel (d)

The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called

consumer surplus.

Marginal benefit is equal to the ______ benefit to a consumer receives from consuming one more unit of a good or service.


The total amount of producer surplus in a market is equal to

the area above the market supply curve and below the market price.

A _______ curve shows the marginal cost of producing one more unit of a good or service.


The Figure above shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. What is the value of consumer surplus at a price of $18? And what is the value of the deadweight loss at a price of $18?

$60 , $100

_________ is maximized in a competitive market when marginal benefit equals marginal cost.

Economic surplus

To affect the market outcome, a price ceiling

must be set below the equilibrium price.

Refer to Figure above. How much of the tax is paid by buyers?


If consumers believe the price of iPhones will decrease in the future, this will cause the demand for iPhones to decrease now.


An increase in the number of firms in a market will cause the quantity of a good supplied to increase.


In response to a surplus the market price of a good will fall; as the price falls ,the quantity demanded will increase and quantity supplies will decrease until equilibrium is reached.


Shortage means the same thing as scarcity.


If real GDP in a small country in 2005 is $8 billion and real GDP in the same country in 2006 is $8.3 billion, the growth rate of real GDP between 2005 and 2006

is 3.75%.

If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from

23.3 years to 17.5 years.

Potential GDP refers to

the level of GDP attained when all firms are producing at capacity.

Financial securities that represent promises to repay a fixed amount of funds are known as


In a closed economy, which of the following equations reflects investment?

Y - C - G

When the government runs a budget deficit, we would expect to see that

investment will fall.

Refer to Figure above. Which of the following is consistent with the graph depicted above?

Technological change increases the profitability of a new investment.

Refer to Figure above. Crowding out of firm investment as a result of a budget deficit is illustrated by the movement from ______ in the graph above.

A to B

The best measure of the standard of living is

real GDP per capita.

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