What is Economics

3. Social security programs are aimed at making the distribution of

resources in an economy more

a. efficient.

b. inequitable.

c. inefficient.

d. equitable

15. The branch of economics that is concerned with the overall

performance of the economy is called

a. resource economics.

b. microeconomics.

c. contemporary economics.

d. macroeconomics.

12. If there is a way to change a situation so that at least some

people gain while no one in the economy loses, the situation is

a. neither equitable nor efficient.

b. providing an inequitable distribution of resources to the

community.

c. economically inefficient.

d. economically efficient.

5. Governments may intervene in a market economy in order to

a. protect property rights (I).

b. All (I), (II), (III) are correct.

c. achieve a more equal distribution of income (III).

d.correct a market failure due to externalities (II).

4. Which of the following activities would occur in a market for

factors of production?
a. Reesa buys a new computer to help balance her personal
checkbook.

b. General Motors hires additional workers to run a third-shift at a

factory.

c. Randy pays a speeding ticket.

d. Ian mows his grass.

12. If the economy shown in the diagram moves from position A

inside the PPF curve to position B on the PPF curve, we would know
that

a. it has achieved full employment of its resources.

b. its unemployment decreased, but at the expense of either capital

or consumption good production.

c. the rate of unemployment increased.

d. consumption goods production increased, but capital goods

production decreased.

7. Households play what role(s) in the circular flow diagram?

a. purchasers of factors of production and sellers of goods

b. purchasers of goods and services only

c. purchasers of factors of production and sellers of services

d. purchasers of goods and services and sellers of factors of

production

24. A student’s course grade and amount of time spent studying for
the course are generally

a. negatively correlated.

b. positively correlated.

c. quasi-correlated.

d. uncorrelated.

24. Policymakers can make effective short-term policy actions

because
a. central banks always accommodate changes in the economy by
increasing or decreasing the money supply.

b. the Phillips curve is downward sloping.

c. prices are sticky so that changes in the economy occur relatively

slowly.

d. prices will immediately respond to changes in the macroeconomy.

2. The cost to an airline of letting its employees fly at no charge

a. is greater during the Christmas holidays than at most other

times.

b. will depend on the value employees place upon travel.

c. is zero.

d. depends on the alternatives open to the employees.

17. The poor in the United States are disproportionately people who

a. have incomes that are essentially nonwage incomes.

b. have less than a high school education.

c. have families with over five children.

d. live in cities.

15. The market power that your school’s bookstore has is now
limited by

a. university policies against monopoly power.

b. increased access to other booksellers provided by the internet.

c. public goods provided by the government.

d. new federal antitrust laws.

23. When we say that prices are “sticky” in the short run, we mean
that

a. labor unions will not make concessions in the short run.

b. prices change slowly in response to changes in the economy.

c. prices will never change unless resource costs fall.

d. prices will not change without government intervention.

17. The television network newscaster reports that the national

inflation rate in the past year equaled 4 percent. This report is most

likely prepared from work done by a

a. social scientist rather than an economist.

b. microeconomist.

c. macroeconomist.

d. normative economist.

12. Which of the following is a positive, rather than a normative,

statement?

a. Law X is a good piece of legislation.

b. The president should veto law X.

c. Law X will reduce national income.

d. Congress ought to pass law X.

19. “An increase in interest rates will lower economic growth.” This
statement is

a. a normative economic statement.

b. untrue in every case.

c. a positive economic statement.

d. controversial, and so not a valid economic issue.

3. An economic model

a. cannot be proven wrong.

b. often omits crucial elements.

c. simplifies reality in order to focus on crucial elements.

d. uses equations to understand normative economic phenomena.

18. According to economists who emphasize the connection

between productive contribution and economic reward, a more
equal income distribution
a. generates greater productivity.

b. creates inefficiency.

c. always helps the poor in the long run.

d. is fundamental to economic growth.

20. The distinction between positive and normative economics

a. helps us to understand why economists sometimes disagree with

one another.

b. is that normative economics applies only to microeconomic

problems.

c. explains why economics is not a social science but a natural

science.

d. is that positive economics applies only to microeconomic

problems.

4. The opportunity cost of building an additional parking lot at your

school is

a. the cost of concrete, labor, etc. used to build the lot.

b. the value of the property and resources used at their next-best

alternative use.

c. the value of the property and resources used at all of their

alternative uses.

d. infinite; we cannot estimate it.

5. Which of the following activities would occur in a market for

goods and services?

a. General Motors hires additional workers to run a third shift at a

factory.

b. Harry mows his grass.

c. Dolly buys a ticket to a ball game.

d. Jane bakes pies for Thanksgiving dinner.

8. A nation’s standard of living can be increased by

a. neither international trade nor improvements in technology.

b. improvements in technology but not international trade.

c. international trade but not improvements in technology.

d. improvements in technology and international trade.

13. Assume that there are spillover benefits associated with keeping
cars in good mechanical conditions. Without government
intervention (i.e., with a free market), we would expect people to

a. subsidize each other’s car maintenance bills.

b. give their cars too much maintenance.

c. not maintain their cars as much as they should.

d. stop driving and start walking.

2. The ultimate purpose of an economic model is to

a. explain reality as completely as possible.

b. establish assumptions that closely resemble reality.

c. guide government policy decisions.

d. help us to understand economic behavior.

9. Which of the following would not result in an outward shift of a

nation’s production possibilities frontier?

a. advances in technology

b. an expanding resource base

c. a reduction in the unemployment rate

d. a rise in labor productivity

18. The Secretary of Labor states that wage rates in the country
have risen by 2 percent this past year. The head of a local labor
union states that wage gains should have been higher. The
Secretary’s statement is a __________ economic statement, and the
labor head’s statement is a __________economic statement.

a. positive; positive

b. normative; normative

c. normative; positive
d. positive; normative

14. All points on a production possibilities frontier show the

a. minimum output that society can produce with given resources

and technology.

b. maximum satisfaction that households receive from their

purchases of goods.

c. maximum output that society can produce with given resources

and technology.

d. minimum quantities of resources that must be used to produce a

given quantity of output.

23. The number of rainy days in the year and annual sales of suntan
lotion are probably

a. negatively correlated.

b. positively correlated.

c. uncorrelated.

d. quasi-correlated.

3. A marginal change is one that

a. is not important for public policy.

b. makes an outcome inefficient.

c. does not influence incentives.

d. incrementally alters an existing plan.

19. Inflation reduces

a. the money supply.

b. the purchasing power of money.

c. employment.

d. the price level.

Supply & Demand & Elasticity

9. If the same dairy can produce either whole milk or skim milk, an

increase in the profitability of whole milk results in a

a. decrease in the supply of skim milk.

b. increase in the supply of whole milk.

c. decrease in the quantity supplied of whole milk.

d. increase in the supply of skim milk.

11. Suppose that the elasticity of supply of lawn mowers is 1.5. If

the price of lawn mowers rises 5 percent, the quantity supplied of
lawn mowers would

a. rise 0.3 percent.

b. rise 7.5 percent.

c. decline 7.5 percent.

d. rise 1.5 percent.

11. An increase in the supply of a good will decrease the total

revenue producers receive if

a. the demand curve is inelastic.

b. the demand curve is elastic.

c. the supply curve is elastic.

d. the supply curve is inelastic.

5. Demand for which of the following goods is the most likely to be

(nearly) perfectly elastic?

a. diamonds

b. Farmer Ben’s wheat

c. Ford automobiles

d. emergency surgery

12. Suppose that the demand for apples increased more than the
supply of apples increased. The net effect of these two changes
would be a
a. decrease in the equilibrium price and a decrease in the
equilibrium quantity.

b. increase in the equilibrium price and an increase in the

equilibrium quantity.

c. decrease in the equilibrium price and an increase in the

equilibrium quantity.

d. increase in the equilibrium price and a decrease in the

equilibrium quantity.

18. The supply of food

a. is characterized by a large price elasticity of demand.

b. has been decreasing over the long run.

c. is subject to significant technological advance in the long run.

d. can be represented by a horizontal supply curve.

2. In a perfectly competitive market,

a. advertising is widely used to influence demand and price.

b. firms are price takers rather than price makers.

c. a small number of firms produce an identical product.

d. firms produce a small number of differentiated products.

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?

a. an increase in the price of grapes, an input into jelly

b. an increase in consumers’ incomes, as long as jelly is a normal

good

c. an increase in the price of Marshmallow Fluff, a substitute for

jelly

d. an increase in the price of peanut better, a complement to jelly

5. If the economy goes into a recession and incomes fall, what

happens in the markets for inferior goods?

a. Prices fall and quantities rise.

b. Prices and quantities both rise.

c. Prices rise and quantities fall.

d. Prices and quantities both fall.

15. In which of the markets listed below would you expect the least
elastic response from suppliers?

a. Picasso paintings

b. fast food

c. road building

d. soft drink

8. Which of the following sets of goods are most likely to be

complementary goods?

a. baseballs and baseball gloves

b. automobiles and computers

c. shoes and pizza

d. football tickets and baseball tickets

20. A government seeking to raise revenue would be most likely to

tax a good with a

a. high income elasticity of demand.

b. low cross-price demand elasticity.

c. high price elasticity of demand.

d. low price elasticity of demand.

5. The amount of a good or service that buyers would be willing and

able to purchase at a specific price is known as

a. supply.

b. quantity supplied.

c. demand.

d. quantity demanded.
5. Demand for which of the following goods is the most likely to be
(nearly) perfectly inelastic?

a. Ford automobiles

b. Farmer Ben’s wheat

c. emergency surgery

d. diamonds

17. Higher wages in the U.S. auto industry would __________ the
prices of autos and __________ the quantity exchanged.

a. raise; raise

b. lower; raise

c. raise; lower

d. lower; lower

8. The price of a good rises from $8 to $12, and the quantity

demanded falls from 110 to 90 units. Calculated with the midpoint
method, the price elasticity of demand is

a. 5.

b. 1/5.

c. 1/2.

d. 2.

6. The slope of the demand curve is not the same as the price
elasticity of demand because the slope of a demand curve

a. is not constant when the demand curve is linear.

b. obeys the law of demand.

c. compares percentage changes in quantity demanded and price.

d. compares absolute changes in quantity demanded and price.

9. A linear, downward-sloping demand curve is

a. inelastic

b. elastic.
c. inelastic at some points, and elastic at others.

d. unit elastic.

15. In which of the markets listed below would you expect the least
elastic response from suppliers?

a. fast food

b. Picasso paintings

c. road building

d. soft drink

4. If Weiskamp T-Shirt Co. lowers its price from $6 to $5 and finds

that students increase their quantity demanded from 400 to 600 T-
shirts, then the demand for Weiskamp T-shirts within this price
range is

a. unit elastic.

b. price inelastic.

c. cross elastic.

d. price elastic.

13. Temporary shortages in a market are eliminated by

a. decreases in the price, which cause quantity supplied to fall and

quantity demanded to rise.

b. increases in the price, which cause quantity supplied to rise and

quantity demanded to fall.

c. increases in the price, which cause quantity supplied to fall and

quantity demanded to rise.

d. decreases in the price, which cause quantity supplied to rise and

quantity demanded to fall.

8. A 5 percent increase in the price of sugar reduces sugar

consumption by about 10 percent. The increase causes households
to

a. consume more goods like coffee and tea that are complements of
sugar.
b. spend the same amount on sugar.

c. spend less on sugar.

d. spend more on sugar.

1. If price elasticity of demand is 2.0, this implies that consumers

would

a. buy twice as much of the good if price falls by 10 percent.

b. require at least a $2 increase in price before showing any

response to the price increase.

c. require a 2 percent cut in price to raise quantity demanded of the

good by 1 percent.

d. buy 2 percent more of the good in response to a 1 percent cut in

price.

16. The discovery of new gold in South America will __________ the
price of gold and __________ the quantity of gold traded.

a. lower; lower

b. lower; raise

c. raise; raise

d. raise; lower

7. The cross elasticity of demand for substitute goods must be

a. less than one.

b. greater than zero.

c. greater than one.

d. zero.

4. A group of buyers and sellers with the potential to trade is known

as a

a. sector.

b. cartel.

c. industry.
d. market.

3. Suppose that a large dairy farmer is able to raise the market

price of milk by withholding milk supply from the market. In this
instance,

a. the milk market is perfectly competitive.

b. buyers will increase their demand for milk.

c. buyers will decrease their demand for milk.

d. the milk market is imperfectly competitive.

12. A decrease in supply will raise the equilibrium price most when
demand is

a. relatively inelastic.

b. relatively elastic.

c. perfectly elastic.

d. unit elastic.

6. The demand curve for Beanie Baby dolls shows the quantity of
dolls demanded

a. at the equilibrium price for Beanie Baby dolls.

b. at each level of income.

c. by suppliers of those dolls.

d. at each possible price of Beanie Baby dolls.

10. The U.S. Post Office finds that it now has extra costs associated
with decontaminating first class mail for anthrax. It is considering a
rate hike, but it will only be successful in raising more revenue to
pay for these additional costs if

a. no anthrax is found on the mail.

b. the demand for first class mail service is inelastic.

c. the rate increase is a very large one.

d. there are many substitutes for first class mail service.

Markets & G. Interventions

6. A per-unit tax on a good creates deadweight loss because

a. by increasing the price consumers pay, and reducing the price

sellers receive, it prevents some mutually beneficial trades.

b. it makes supply more elastic.

c. the government wastes the tax revenues it receives.

d. it makes demand more inelastic.

5. The Laffer curve illustrates that, in some circumstances, the

government can reduce a tax on a good and increase the

a. deadweight loss.

b. government’s tax revenue.

c. price paid by consumers.

d. equilibrium quantity.

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

a. increases by more than 50 percent.

b. increases by exactly 50 percent.

c. The answer depends on whether supply or demand is more

elastic.

d. increases by less than 50 percent and may even decline.

2. If you had been willing to pay $2.19 for the gallon of milk
purchased at the supermarket but were required to pay only $1.89,
you have gained

a. excess marginal benefit of $2.19.

b. producer surplus of $.30.

c. a consumer surplus amounting to $.30.

d. a refund of $.30 from the clerk.

1. A tax on a good has a deadweight loss if

a. the reduction in consumer surplus is greater than the reduction in
producer surplus.

b. the tax revenue is greater than the reduction in consumer and

producer surplus.

c. the reduction in consumer and producer surplus is greater than

the tax revenue.

d. the reduction in producer surplus is greater than the reduction in

consumer surplus.

7. In a market where the government imposes a price control, the

excess demand or excess supply created will be determined by the

a. imposed price and the slope of the supply curve.

b. imposed price and the slope of the demand curve.

c. difference between the imposed price and the equilibrium price.

d. difference between quantity demanded and quantity supplied at

the imposed price.

21. Market failure in the form of externalities arises when

a. all production costs are included in the prices of goods.

b. the market fails to achieve equilibrium.

c. the total surplus is maximized but some consumers cannot buy

because prices are too high.

d. not all costs and benefits are included in the prices of goods.

15. A 5 percent tax is levied on products A and B, both of which

have the same demand elasticity. Unit sales of A are nearly the
same after the tax, while unit sales of B fall dramatically. Which of
the following can we conclude?

a. Product B has a smaller elasticity of supply than product A.

b. Tax revenue is greater from product B.

c. Tax revenue is greater from product A.

d. Producers of A bear a greater share (relative to consumers) of

their market’s tax burden than the producers of B.
18. The government is thinking about increasing the gasoline tax to
promote conservation. The tax will discourage the consumption of
gasoline by the greatest extent when the price elasticity of demand
equals

a. 2.0.

b. 0.7.

c. 1.3.

d. 0.1.

11. The market for swordfish in equilibrium at $20 per pound. If the
government imposes a price ceiling of $10.00 in order to protect
buyers in this market,

a. total surplus will decrease and efficiency will decrease.

b. total surplus and efficiency in the market will increase.

c. total surplus will decrease but efficiency will increase.

d. consumer surplus will increase but producer surplus will decrease

by the same amount.

16. According to supply-side economists, a policy that __________ will

cause productivity to increase, which increases the supply of goods
and services in the marketplace.

a. reduces marginal tax rates

b. decreases inflation

c. increases interest rates

d. funds capital investment in the economy

3. Eggs have a supply curve that is linear and upward-sloping and a

demand curve that is linear and downward-sloping. If a 2 cent per
egg tax is increased to 3 cents, the deadweight loss of the tax

a. increases by more than 50 percent.

b. The answer depends on whether supply or demand is more

elastic.

c. increases by less than 50 percent and may even decline.

d. increases by exactly 50 percent.

9. Suppose the government imposed a minimum price in a market

and a reporter for a local newspaper wrote a story on it. The
headline on the story would read:

a. “Price Floor Protects Sellers from Low Incomes”

b. “Government Action Calls for Ration Coupons”

c. “Rationing Price Replaces Market Price”

d. “Price Ceiling Replaces Equilibrium Price”

14. In a market with a binding price ceiling, an increase in the

ceiling will ________ the quantity supplied, ________ the quantity
demanded, and reduce the ________.

a. increase, decrease, surplus

b.decrease, increase, shortage

c. decrease, increase, surplus

d. increase, decrease, shortage

3. The demand curve shows the

a. highest price buyers would be willing and able to pay for each
unit of the good or the amount purchased at each price.

b. enjoyment consumers get from each unit of the good if they were
to purchase it.

c. highest price buyers actually pay for each unit of a good and the
amount they would buy.

d. consumer surplus buyers gain from each unit of the good if they
were to purchase it.

15. A per-unit tax on a good will

a. generally hurt only producer surplus.

b. result in an increase in total surplus.

c. result in a decrease in total surplus.

d. generally hurt only consumer surplus.

4. Deadweight loss measures the

a. the loss from economic inefficiency.

b. the amount required to compensate producers for lost surplus

due to the imposition of a sales tax.

c. the difference between two efficient situations.

d. the amount people would pay to gain an additional unit of a good.

13. An equilibrium when there is perfect competition

a. is economically efficient.

b. leads to high consumer surplus at the expense of producer

surplus.

c. can be economically efficient only if the government steps in with

price floors to protect sellers.

d. is undesirable.

7. Jen values her time at $60 an hour. She spends 2 hours giving
Colleen a massage. Colleen was willing to pay as much at $300 for
the massage, but they negotiate a price of $200. In this transaction,

a. producer surplus is $20 larger than consumer surplus.

b. producer surplus is $40 larger than consumer surplus.

c. consumer surplus is $40 larger than producer surplus.

d. consumer surplus is $20 larger than producer surplus.

20. A tax on fur coats will most likely

a. fall mostly on the fur coat buyers rather than the producers.

b. cause a large decline in the sales of fur coats because demand is

elastic.

c. be an effective way to tax the rich.

d. raise large amounts of tax revenue for the government.

13. Taxes levied directly on consumers

a. always hurt consumers rather than producers.

b. generate more revenue than taxes levied on producers.

c. always hurt producers rather than consumers.

d. have the same effect as taxes directly levied on producers.

5. Consumer surplus tends to be small when

a. supply is elastic.

b. supply is inelastic.

c. demand is inelastic.

d. demand is elastic.

16. Suppose the government wants to raise additional tax revenues

with the least disruption to prevailing demand patterns. For which
product should an excise tax be levied?

a. hot tubs

b. Cheerios

c. Coca Cola

d. liquor

2. If the equilibrium price of bread is $2 and the government

imposes a $1.50 price ceiling on the price of bread,

a. more bread will be produced to meet the increased demand.

b. the demand for bread will decrease because suppliers will reduce
their supply.

c. there will be a shortage of bread.

d. a surplus of bread will emerge.

9. Sellers’ costs of producing various units of the good are shown by

the

a. width of the supply curve.

b. width of the demand curve.

c. height of the demand curve.

d. height of the supply curve.

12. Producing a quantity larger than the equilibrium of supply and

demand is inefficient because the marginal buyer’s willingness to
pay is

a. zero.

b. negative.

c. positive but less than the marginal seller’s cost.

d. positive and greater than the marginal seller’s cost.

6. Assume that the government sets a ceiling on the interest rate

that banks charge on loans. If the ceiling is set below the market
equilibrium interest rate, the result will be

a. a surplus of credit.

b. a shortage of credit.

c. a perfectly inelastic supply of credit in the market place.

d. greater profits for banks issuing credit.

14. One way of measuring the economic inefficiency in a specific

situation is to calculate the

a. change in revenue reported by firms.

b. loss in consumer and producer surplus relative to an efficient

solution.

c. change in economic profits relative to an efficient solution.

d. difference between the price of the good in the inefficient

situation and the price if the situation was efficient.

8. The benefit to a producer of selling a good at the equilibrium

price is called

a. efficiency gain.

b. producer surplus.
c. consumer surplus.

d. welfare economies.

11. When a market is in equilibrium, the buyers are those with the
________ willingness to pay and the sellers are those with the ________
costs.

a. highest, lowest

b. lowest, highest

c. highest, highest

d. lowest, lowest

International Trade
22. Jill can sew a child’s dress in 3 hours and can knit a baby’s
blanket in 2 hours. Sarah can sew a child’s dress in 6 hours and can
knit a baby’s blanket in 3 hours. Given the above information, Sarah
would trade her blankets for Jill’s dresses if the price of a blanket in
terms of dresses was

a. more than 1/2 dress for one blanket.

b. Sarah would never trade with Jill.

c. more than 2/3 dress for 1 blanket.

d. less than 1/2 dress for one blanket.

16. Many U.S. producers complain about limited access to the

Japanese market. They say that they cannot export to Japan because
Japanese import restrictions are so severe. Who gains? Who loses?

a. Japanese producers and consumers gain, U.S. producers and

consumers lose.

b. Japanese consumers and U.S. consumers gain, Japanese

producers lose.

c. Everyone loses.

d. Japanese producers gain, U.S. producers and Japanese consumers

lose.
10. If the United States imports shoes in a free-trade situation, we
can infer that

a. the domestic price of shoes in a no-trade situation is lower than

the free-trade world price.

b. the domestic production of shoes in a no-trade situation is lower

than if there is free trade.

c. domestic consumption of shoes is higher in a no-trade situation

than if there is free trade.

d. the domestic price of shoes in a no-trade situation is higher than

the free-trade world price.

10. If a nation does not have an absolute advantage in producing

anything, it

a. will export raw materials and import finished products.

b. could have a comparative advantage in something.

c. will try to get along without trade.

d. has no comparative advantage either.

7. When customers are free to buy at the lowest prices, they will

a. prefer to purchase only well-made, foreign-produced goods.

b. purchase only goods produced in their own country.

c. purchase goods from the country that has a comparative

advantage in producing it.

d. purchase only goods produced in their own local area.

3. In voluntary exchange between two countries, if one country

gains then

a. the other country must lose under any circumstances.

b. there is no reason to expect that the other country must lose.

c. the other must lose, unless the exchange generates external

costs.

d. the other country must lose an equal amount.

9. The United States is the world’s leading grain producing nation.
Exporting U.S. grain causes the

a. price of grain to domestic consumers to rise because of the added

foreign demand.

b. U.S. standard of living to improve but reduces the standard of

living of foreigners.

c. domestic consumption of grain to rise because of the added

foreign demand.

d. price of grain in the domestic market to fall because foreigners

are now taking some of the domestic demand.

3. If two countries specialize

a. everyone in both countries benefits.

b. the other countries trading with them cannot specialize.

c. the total of goods produced increases.

d. all goods will be produced in both countries.

20. Jill can sew a child’s dress in 3 hours and can knit a baby’s
blanket in 2 hours. Sarah can sew a child’s dress in 6 hours and can
knit a baby’s blanket in 3 hours. Which of the following describes
the production possibilities frontier for Jill and Sarah together if
each works for 12 hours? The intercept on the dress axis is __________
units and the intercept on the blanket axis is __________ units.

a. 10; 6

b. 4;4

c. 9;5

d. 6;10

5. If at the world equilibrium price the U.S. quantity demanded is

greater than the U.S. quantity supplied, then the

a. world price will fall.

b. United States will export the good.

c. United States will import the good.

d. world price will rise.

4. Which goods will a nation typically import?

a. those goods in which other nations have a comparative

advantage

b. those goods in which other nations have an absolute advantage

c. those goods in which the nation has an absolute advantage

d. those goods in which the nation has a comparative advantage

15. A less-developed country would probably use __________ to argue

for trade restrictions.

a. national security

b. increased efficiency

c. unfair competition

d. infant industry

9. When a nation opens itself to trade in a good and becomes an

importer,

a. producer surplus and total surplus increase, but consumer

surplus decreases.

b. producer surplus decreases, consumer surplus increases, and so

the impact on total surplus is ambiguous.

c. producer surplus, consumer surplus, and total surplus all

increase.

d. producer surplus decreases, but consumer surplus and total

surplus both increase.

21. Jill can sew a child’s dress in 3 hours and can knit a baby’s
blanket in 2 hours. Sarah can sew a child’s dress in 6 hours and can
knit a baby’s blanket in 3 hours. Given the above information, Jill
would trade her dresses for Sarah’s blankets if the price of a dress
in terms of blankets was

a. Jill would never trade with Sarah.

b. at least 3/2 blankets for 1 dress.

c. less than 2/3 blankets for 1 dress.

d. more than 2 blankets for 1 dress.

2. If Canada has a comparative advantage over Denmark in the

production of wood, this implies that

a. it requires fewer resources in Canada than in Denmark to produce

wood.

b. the opportunity cost of producing wood in Canada is lower than in

Denmark.

c. Denmark does not benefit by trading with Canada.

d. Canada should buy wood from Denmark.

6. Which of the following statements is true?

a. A nation should specialize in producing a good only when it has

both an absolute and a comparative advantage.

b. A nation should specialize in producing a good in which it has a

comparative advantage.

c. Exports tend to decrease economic efficiency.

d. A nation should specialize in producing a good in which it has an

absolute advantage.

6. If the opportunity cost of a television set equals 20 cameras in

China, but 10 cameras in Japan, then we know

a. All (I), (II) and (III) are correct.

b. Japan has a comparative advantage in producing TV sets (II).

c. market exchange of 1 TV set for 15 cameras would produce not

only mutually beneficial trade, but would also split the gains from
trade equally between the two countries (III).

d. China has a comparative advantage in producing cameras (I).

1. The slope of the production possibilities frontier is determined by

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

the horizontal axis.
b. whether production is performed using efficient or inefficient
methods.

c. the distribution of incomes in the economy.

d. the market prices of the goods that the economy can produce.

6. Kayla can cook dinner in 30 minutes and wash the laundry in 20

minutes. Her roommate takes half as long to do each task. How
should the roommates allocate the work?

a. There are no gains from trade in this situation.

b. Kayla should do more of the cooking based on her comparative

advantage.

c. Kayla should do more of the washing based on her comparative

advantage.

d. Kayla should do more of the washing based on her absolute

advantage.

17. Jill can sew a child’s dress in 3 hours and can knit a baby’s
blanket in 2 hours. Sarah can sew a child’s dress in 6 hours and can
knit a baby’s blanket in 3 hours. We know that Sarah has the
comparative advantage in

a. knitting.

b. both activities.

c. neither activities.

d. sewing.

14. A good produced in Japan and sold to Korea

a. implies that Korea has a comparative advantage in the production

of the good.

b. is a Korean export and Japanese import.

c. implies that Japan has an absolute advantage in the production of

the good.

d. is a Korean import and Japanese export.

10. If a nation that imports a good imposes a tariff, it will increase

a. all (I), (II), (II) are correct.

b. the domestic quantity demanded (I).

c. the domestic quantity supplied (II).

d. the quantity imported from abroad (III).

5. If Japan can produce each unit of steel using fewer resources than
Canada does,

a. Canada has an absolute advantage in steel production.

b. Canada has a comparative advantage in steel production.

c. Japan has an absolute advantage in steel production.

d. Japan has a comparative advantage in steel production.

13. If Armenia can produce two rugs or 100 spy novels in an hour,
and Turkey can produce one rug or 50 spy novels in an hour

a. Turkey should produce both rugs and spy novels.

b. Turkey should produce only rugs.

c. Armenia should produce only rugs.

d. there are no gains from trade between these two countries with
these two goods.

3. When two individuals produce efficiently and then make a

mutually beneficial trade based on comparative advantage,

a. one individual consumes inside her production possibilities

frontier, while the other consumes outside hers.

b. each individual consumes a point on her own production

possibilities frontier.

c. they both obtain consumption inside their production possibilities

frontier.

d. they both obtain consumption outside their production

possibilities frontier.

2. In an hour, Mateo can wash 2 cars or mow 1 lawn, and Tyler can
wash 3 cars or mow 1 lawn. Who has the comparative advantage in
car washing, and who has the comparative advantage in lawn
mowing?

a. Mateo in washing, neither in mowing.

b. Tyler in washing, neither in mowing.

c. Mateo in washing, Tyler in mowing.

d. Tyler in washing, Mateo in mowing.

15. A nation should only import those goods for which it has

a. zero transactions costs.

b. higher opportunity costs than its trading partner.

c. lower opportunity costs than its trading partner.

d. lower costs of production than its trading partner.

8. 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?

a. Domestic production of coffee rises, and Ectenia becomes a coffee

importer.

b. Domestic production of coffee rises, and Ectenia becomes a coffee

exporter.

c. Domestic production of coffee falls, and Ectenia becomes a coffee

importer.

d. Domestic production of coffee falls, and Ectenia becomes a coffee

exporter.

12. One big difference between tariffs and quotas is that tariffs

a. hurt domestic producers while quotas help them.

b. generate tax revenues while quotas do not.

c. stimulate international trade while quotas inhibit it.

d. raise the price of a good while quotas lower it.

16. Jill can sew a child’s dress in 3 hours and can knit a baby’s
blanket in 2 hours. Sarah can sew a child’s dress in 6 hours and can
knit a baby’s blanket in 3 hours. We can infer that Jill has the
comparative advantage in

a. both activities.

b. sewing.

c. knitting.

d. neither activities.