ECON201/202 Test 1 Ch.

1-5 Worksheets
Name: ____________________________________________________ Date: _________________
Chapter 1 – Limits, Alternatives & Choices 1.
Economics is primarily the study of:
a. How scarcity can be eliminated.
b. How firms manipulate prices.
c. How government influences resource allocation decisions.
d. The problem of scarce resources relative to human wants.

2. Suppose you have a $20 iTunes gift card with which you can buy (download) songs or videos. Songs cost
$1.00 each and videos cost $2.00 each. The opportunity cost of one video:
a. Increases as more videos are purchased.
b. Is $1.00.
c. Is constant and equal to ½ song.
d. Is constant and equal to 2 songs.

3. You should decide to study an extra hour tonight

a. If the marginal cost of studying an extra hour exceeds its marginal benefit.
b. If the marginal benefit of studying an extra hour exceeds its marginal cost.
c. If you got a lower than expected grade on your last exam.
d. Because studying harder will improve your test scores.

4. Answer the next question on the basis of the data given in the following production possibilities table:

The data in the table indicate that increasing production of capital goods requires:
a. Increasing sacrifices of consumer goods.
b. Decreasing sacrifices of consumer goods.
c. Constant sacrifices of consumer goods.
d. No sacrifices of consumer goods.

5. Consider the problem Marsha faces of how to allocate her weekly allowance between books and videos.
An increase in Marsha’s allowance will:
a. Shift her budget line to the right.
b. Shift her budget line to the left.
c. Rotate her budget line, allowing her to buy more books but not more videos.

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ECON201/202 Test 1 Ch. 1-5 Worksheets
d. Rotate her budget line, allowing her to buy more videos but not more books.

6. The negative slope of the production possibilities curve illustrates that:

a. Some resources are always unemployed.
b. When resources are fully employed, an economy can produce more of one thing only by
producing less of something else.
c. Opportunity costs are constant.
d. Businesses can sell more goods when their prices are low.
7. A microeconomist would most likely study:
a. How consumer respond to a change in gasoline prices.
b. The effects of an income tax reduction on the size of the national budget deficit.
c. The effects of aggregate consumer debt on overall consumption spending.
d. The relationship between the size of the money supply and the rate of inflation.

8. Refer to the following production possibilities diagram:

Production of which of the points in the diagram is currently unattainable given the economy’s resources?
a. Point A.
b. Point B.
c. Point C.
d. Point D.

9. The fundamental problem of economics implies that:

a. Governments must be relied upon to supply essential goods and services.
b. Inflation and unemployment are unavoidable.
c. Growing populations will deplete natural resources.
d. Individuals and communities must make choices among competing alternatives.

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ECON201/202 Test 1 Ch. 1-5 Worksheets
10. Margaret decides to stay home and study for her exam rather than going out to a movie with her friends.
Her dilemma is an example of:
a. The economic perspective.
b. Marginal analysis.
c. Opportunity cost.
d. Allocative efficiency

Chapter 2 – The Market System & Circular Flow

1. Refer to the following diagram of a circular flow model of the economy:

In the diagram, consumer expenditures are represented by:

a. Flow 1.
b. Flow 2.
c. Flow 3.
d. Flow 4.

2. For a laissez-faire system, which of the following best answers the question, “What goods and services
will be produced?”
a. Only those goods whose long-term profits are greater than average.
b. Any good for which consumers are willing to pay a positive price.
c. Any good whose production is characterized by the least-cost technology.
d. Any good that returns its producers sufficient revenue to cover its total costs.

3. The command systems of the Soviet Union and eastern Europe failed in part because:
a. Previously abundant economic resources became scarce.
b. Central planners found it increasingly difficult to coordinate the economic decisions of
consumers, resource suppliers, and businesses.
c. Firms manufactured more output than consumers could afford to buy, resulting in a general glut.
d. Prices were set too low in all markets.

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ECON201/202 Test 1 Ch. 1-5 Worksheets
4. The competitive market system encourages innovation and technological advance, primarily through: a.
The government’s tax code.
b. The process of “dollar voting.”
c. The guiding function of consumer needs and preferences.
d. Profitable returns to innovative firms.

5. Human specialization, or the division of labor:

a. Reduces output by dehumanizing workers.
b. Reduces output by discouraging workers from learning a wide variety of tasks.
c. Increases output by enabling workers to take advantage of differences in their skills.
d. Increases output by allowing workers to each perform a wide variety of tasks.

6. Economic profits and losses:

a. Answer the question “Who will get the output?”
b. Answer the question “How will the goods and services be produced?”
c. Help determine which industries survive or fail.
d. Are the expected outcomes of a decrease in dollar votes and an increase in dollar votes,
respectively.

7. If a change in consumer preferences results in many more consumers registering their “dollar votes” in
favor of peaches, which of the following will most likely follow?
a. Profits of peach growers will rise and peach production will rise.
b. Profits of peach growers will rise and peach production will fall.
c. Profits of peach growers will fall and peach production will rise.
d. Profits of peach growers will fall and peach production will fall.
8. The laissez-faire system is characterized by:
a. Widespread use of government price controls.
b. Centralized decision-making.
c. Limited use of capital goods.
d. Private property rights.

9. A firm will earn a positive economic profit if:

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ECON201/202 Test 1 Ch. 1-5 Worksheets
a. Its total sales revenue equals the total cost of labor, capital, raw materials, and
entrepreneurship.
b. It produces its output utilizing the least-cost production method.
c. It is regulated by government.
d. Its total sales revenue exceeds the sum of all its costs.

10. A firm can produce a single unit of output by combining labor and capital in any of the combinations
shown in the following table. Labor costs $2 per unit and capital costs $4 per unit.

Refer to the table. Which is the most efficient technique for producing the output? a.
A.
b. B.
c. C.
d. D.

Chapter 3 – Demand, Supply & Market Equilibrium

1. When an economist says that the demand for a product has increased, this means that:
a. Quantity demanded is greater at each possible price.
b. Firms make less of the product available for sale.
c. Consumers respond to a lower price by buying more.
d. The demand curve becomes steeper.

2. When movie ticket prices increase, families tend to spend less time watching movies and more time at
home watching videos instead. This best reflects:
a. Diminishing marginal utility.
b. The income effect.
c. The rationing function of markets.
d. The substitution effect.

3. If consumer incomes increase, the demand for product Y:

a. Will necessarily remain unchanged.
b. Will shift to the right if Y is a complementary good.

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ECON201/202 Test 1 Ch. 1-5 Worksheets
c. Will shift to the right if Y is a normal good.
d. Will shift to the right if Y is an inferior good.
4. When drawing demand and supply curves, economists are assuming that the primary influence on
production and purchasing decisions is:
a. Price
b. The cost of production.
c. The overall state of the economy.
d. Consumer incomes.

5. Refer to the following diagrams:

Which one of the above diagrams best illustrates the effect of an increase in crude oil prices on the
market for gasoline?
a. A.
b. B.
c. C.
d. D.

6. A decrease in the price of a product will increase the amount of quantity demanded because:
a. Supply curves are upsloping.
b. The lower price will decrease real incomes.
c. The lower price induces consumers to use this product instead of other products.
d. Firms produce more at lower prices.

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7. “Because of unusually good growing conditions, the supply of strawberries has substantially increased.”
This statement indicates that:
a. The demand for strawberries will necessarily rise.
b. The equilibrium quantity of strawberries will fall.
c. The amount of strawberries that will be available at various prices has increased.
d. The price of strawberries will rise.

8. Goods X and Y are complements while goods X and Z are substitutes. If the supply of good X increases:
a. The demand for both Y and Z will increase.
b. The demand for Y will increase while the demand for Z will decrease.
c. The demand for Y will decrease while the demand for Z will increase.
d. The demand for both Y and Z will decrease.

9. The following data show the supply and demand schedule for a competitively produced good.

Refer to the above data. At the equilibrium price, the quantity exchanged in this market will be: a.

190.

b. 220.
c. 245.
d. 250.

10. An improvement in production technology for a specific good will cause a(n):
a. Increase in demand and an increase in price.
b. Increase in demand and a drop in price.
c. Drop in price and increase in quantity demanded.
d. Increase in supply and an increase in price.

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ECON201/202 Test 1 Ch. 1-5 Worksheets
Chapter 4 – Market Failures: Public Goods & Externalities
1. Use the following diagram to answer the next question; assume the demand and supply curves capture all
relevant benefits and costs.

Refer to the diagram. In this competitive market, total surplus (combined consumer and producer
surplus) is maximized at:
a. Price M
b. Price B
c. Output G
d. Output H
2. Suppose two goods, X and Y, are economically desirable in that there is some positive output at which
total benefits exceed total costs. If good X is characterized by nonrivalry and non-excludability but good Y
is characterized by both rivalry and excludability, then:
a. Both can be efficiently provided by private firms
b. X can be efficiently provided by private firms but Y must be financed through taxes
c. Y can be efficiently provided by private firms but X must be financed through taxes
d. Both goods must be financed through taxes

3. Answer the next question on the basis of the following diagram:

Refer to the diagram. At the equilibrium price and quantity, consumer surplus in this market is:

a. $3

b. $7

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ECON201/202 Test 1 Ch. 1-5 Worksheets
c. $150
d. $350

4. Positive externalities are most likely found in the production of:

a. Illegal drugs
b. DVD recording devices
c. Milk and dairy products
d. Secondary education

5. Bees from a keeper’s hive can pollinate fruit trees for many surrounding orchards. Therefore, the
production of honey:
a. Generates a positive externality and should be encouraged through subsidies
b. Generates a positive externality, however resources are correctly allocated in this market
c. Generates a negative externality and should be discouraged through taxes
d. Needs no government intervention. Beekeepers reap all private benefits.

6. Government has imposed a tax on the producers of good X and has subsidized the consumers of good Y. If
these polices result in the production of the efficient amounts of both goods, it is likely the government is
correcting for:
a. External costs in producing X and external benefits in consuming Y
b. External benefits in producing X and external costs in consuming Y
c. External benefits in producing X and consuming Y
d. External costs in producing X and consuming Y

7. Answer the next question on the basis of the following information for a public good. P R and PS are the
prices that Rachael and Suzie, respectively, are willing to pay for the marginal unit of a public good, rather
than do without it. Rachael and Suzie are the only members of society.

Refer to the table. Suppose the public good can be provided by the government at a constant marginal
cost of $7. The optimal quantity of the public good is:
a. 1 unit
b. 2 units
c. 3 units

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d. 4 units

8. Compared to the efficient amount, suppose too many resources are allocated to the production of some
good. The most likely explanation is that:
a. Production of this good creates external costs
b. Production of this good creates external benefits
c. This good is characterized by non-rivalry and non-excludability
d. This is a “public good”

9. Answer the next question on the basis of the following information for four city beautification programs
of increasing scope. All figures are in millions of dollars.

Refer to the table. On economic grounds, the most efficient program is:

a. A
b. B
c. C
d. D

10. After his car broke down on a hot day, Jack walked more than a mile to the nearest convenience store
and paid $1 for a bottle of water. Considering his thirst, he would willingly have paid $3. Jack’s consumer
surplus is:
a. $1
b. $2
c. $3
d. $4
Chapter 5 - Government’s Role & Government Failure
1. Government’s right to coerce economic activity can be beneficial to society in which of the following
circumstances?
a. The competitive market is too efficient.
b. The competitive market under-provides or over-provides the good.

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c. The competitive market is too competitive.
d. The competitive market relies on the pricing mechanism.

2. Democratic governments face a number of challenges in directing and supervising government actions.
Which of the following is NOT a primary challenge?
a. The government’s massive size and scope.
b. Information aggregation issues from bottom to top.
c. Determining the appropriate prices for a majority of private goods and services.
d. The need for bureaucracy to manage a large number of employees.

3. The alleged inefficiency of public bureaucracies arises primarily because:

a. The private market provides too much output as a result of bureaucratic regulation.
b. Special interest groups work to assure the passage of projects whose benefits exceed their costs.
c. Public sector workers have less training than their private sector counterparts.
d. Competitive pressures of the market are largely absent.

4. Your job as a government employee is to assess the efficiency of a current government program. Which of
the following criteria should you use in guiding your decision?
a. If the program is a large percentage of government spending then it should be eliminated.
b. If the program is a small percentage of government spending then it should be expanded.
c. If marginal benefit of the current program is less than the marginal cost, then the program
should be reduced.
d. If the marginal benefit of the current program is less than its marginal cost, then the program
should be expanded.

5. In a corporation, one primary principal-agent relationship is exemplified by:

a. Owner-stockholder
b. Stockholder-manager
c. Hourly worker-salaried employee
d. Bond holder-stockholder

6. According to public choice theorists, which of the following circumstances will most likely lead to approval
of a given public project?
a. Immediate costs and benefits

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b. Delayed costs and benefits
c. Immediate benefits and delayed costs
d. Delayed benefits and immediate costs

7. Political office holders must typically take stands on and make decisions regarding hundreds of different
issues, but voters typically vote for one of only two candidates. This problem reflects:
a. The market paradox
b. Adverse selection
c. Limited and bundles choices
d. Pork-barrel politics

8. The U.S. social security system’s projected cost (payouts to future and current retirees) exceeds the
amount of projected tax revenue required to fund the system (the current and future payroll tax
revenue). This is known as:
a. The special interest effect
b. An earmark
c. Logrolling
d. An unfunded liability

9. Smaller groups can achieve political victories against larger groups because larger groups are more
difficult and more expensive to organize. This is known as:
a. The collective action problem
b. The irrational democracy problem
c. The political earmarking problem
d. The government contamination problem

10. Assume a government agency is subject to regulatory capture. Which of the following problems below is
most likely to arise in this industry?
a. Regulation results in less tax revenue
b. Regulation is in the best interest of the industry rather than the consumer
c. Regulation is in the best interest of the consumer rather than the industry
d. Regulation results in excessive government control

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