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Test B and D

The correct answers are in bold. For those of you who have exam A or C, you’ll have to correlate these questions with the different numbering system on your exam.

Put your name on the bottom of the answer key and the letter D where it says PERIOD. Fill in the letter corresponding to the choice that best completes the statement or answers the question. Each question has only one correct answer.


1. The tragedy of the commons

a.

occurs when average, or common, people try to control an economic resource.

c.

occurs when the extensive use of the market leads to impoverishment of a minority of the average, or common, people

b.

is a shorthand way of using William Shakespeare’s tragedy plays to explain economic phenomenon.

d.

occurs when property rights over a resource are not well defined. As in the fish exercise we did in class.

2. If you buy a burger and fries at your favorite fast food restaurant,



a.

then neither GDP nor consumption will be affected because you would have eaten at home had you not bought the meal at the restaurant.

b.

then GDP will be higher, but consumption spending will be unchanged.

c.

then GDP will be unchanged, but consumption spending will be higher.

d.

then both GDP and consumption spending will be higher. Your purchase is a consumption good and therefore C and GDP both rise.

3. In computing GDP, market prices are used to value final goods and services because



a.

market prices do not change much over time, so it is easy to make comparisons between years.

b.

market prices reflect the values of goods and services.

c.

if market prices are out of line with how people value goods, the government sets price ceilings and price floors.

d.

None of the above is correct; market prices are not used in computing GDP.

4. Which of the following products would be considered scarce?



a.

golf clubs

b.

Picasso paintings

c.

apples

d.

All of the above are correct. The fact that they all have a price means they all are scarce.

5. Ben bakes bread and Shawna knits sweaters. Ben and Shawna both like to eat bread and wear sweaters. In which of the following cases is it impossible for both Ben and Shawna to benefit from trade?



a.

Ben cannot knit sweaters and Shawna cannot bake bread.

b.

Ben is better than Shawna at baking bread and Shawna is better than Ben at knitting sweaters.

c.

Ben is better than Shawna at baking bread and at knitting sweaters.

d.

Both Ben and Shawna can benefit from trade in all of the above cases.

6. Which of these statements best represents the law of supply?



a.

When input prices increase, sellers produce less of the good. This is a shift in supply, not the law of supply

b.

When production technology improves, sellers produce less of the good.

c.

When the price of a good decreases, sellers produce less of the good.

d.

When sellers’ supplies of a good increase, the price of the good increases.

7. International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with



a.

longer life expectancy and a lower percentage of the population that is literate.

b.

longer life expectancy and a higher percentage of the population that is literate.

c.

very nearly the same life expectancy and a lower percentage of the population that is literate.

d.

very nearly the same life expectancy and a higher percentage of the population that is literate.

8. Which of the following items is included in GDP?



a.

the sale of stocks and bonds

b.

the sale of used goods

c.

the sale of services such as those performed by a doctor

d.

All of the above are included in GDP.

9. There is no shortage of scarce resources in a market economy because



a.

the government makes shortages illegal.

b.

resources are abundant in market economies.

c.

Prices adjust to eliminate shortages. Note that this does not mean that goods are not scarce, just that there is not a shortage. Be sure you understand the difference.

d.

quantity supplied is always greater than quantity demanded in market economies.

10. A country reported nominal GDP of $100 billion in 2008 and $75 billion in 2007. It also reported a GDP deflator of 125 in 2008 and 120 in 2007. Between 2007 and 2008,



a.

real output and the price level both rose.

b.

real output rose and the price level fell.

c.

real output fell and the price level rose.

d.

real output and the price level both fell.

So nominal GDP rose by 33% and prices rose by less than 5%. Real output (GDP) must have increased because current dollar GDP (nominal GDP) rose by a lot more than prices.

11. An increase in the price of a good would



a.

increase the supply of the good.

b.

increase the amount purchased by buyers.

c.

give producers an incentive to produce more. This is an increase in quantity supplied, caused by the price increase. It is a movement along the supply curve.

d.

decrease both the quantity demanded of the good and the quantity supplied of the good.



Table 3-7
Assume that Japan and Korea can switch between producing cars and producing airplanes at a constant rate. (which means the production possibility curve is a straight line)





Hours Needed

to Make 1



Quantity Produced

in 2400 Hours



Car

Airplane

Cars

Airplanes

Japan

30

150

80

16

Korea

50

150

48

16

12. Refer to Table 3-7. Assume that Japan and Korea each has 2400 hours available. Originally, each country divided its time equally between the production of cars and airplanes. (which means Japan spends 1200 hours producing 40 cars and 1200 hours producing 8 airplanes. Korean spends 1200 hours producing 24 cars and 1200 hours producing 8 airplanes) Now, each country spends all its time producing the good in which it has a comparative advantage. (Japan has a comparative advantage in cars since it can produce 5 times as many cars as airplanes and Korea can produce only 3 times as many cars as airplanes so Japan produces 80 cars and Korea 0 cars). As a result, the total output of cars increased by (80 – 64= 16)



a.

16.

b.

40.

c.

64.

d.

80.

13. Refer to Table 3-7. Suppose Japan decides to increase its production of cars by 45. What is the opportunity cost of this decision? (one way to look at this is that to produce 80 cars Japan gives up 16 airplanes (80 cars/16 airplanes) so to produce 5 cars it gives up 1 airplane. So to produce 45 cars it gives up 9 airplanes.



a.

9 airplanes

b.

15 airplanes

c.

135 airplanes

d.

225 airplanes

14. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, (each table costs 5 chairs) where Sandy can make 6 tables or 18 chairs (each table costs 3 chairs). Given this, we know that the opportunity cost of 1 chair is



a.

1/5 table for Mike and 1/3 table for Sandy.

b.

1/5 table for Mike and 3 tables for Sandy.

c.

5 tables for Mike and 1/3 table for Sandy.

d.

5 tables for Mike and 3 tables for Sandy.

15. The idea that only the government can organize economic activity in a way that promotes economic well-being for a country as a whole



a.

is a basic principle regarding individual decisionmaking.

b.

amounts to a denial of one of the basic principles regarding interactions among people.

c.

supports the idea that the "invisible hand" should guide economic activity.

d.

was promoted by the economist Adam Smith in a well-known 1776 book.

16. During the last few decades in the United States, health officials have argued that eating too much beef might be harmful to human health. As a result, there has been a significant decrease in the amount of beef produced. Which of the following best explains the decrease in production?



a.

Beef producers, concerned about the health of their customers, decided to produce relatively less beef.

b.

Government officials, concerned about consumer health, ordered beef producers to produce relatively less beef.

c.

Individual consumers, concerned about their own health, decreased their demand for beef, which lowered the equilibrium price of beef, making it less attractive to produce. The demand shifted left, lowering price and equilibrium quantity.

d.

Anti-beef protesters have made it difficult for both buyers and sellers of beef to meet in the marketplace.

17. Which of the following events would cause GDP for 2007 to increase?



a.

In February 2007, Amanda sells a 1996 Honda Accord to Isabella.

b.

In February 2007, Amanda buys a ticket to visit a zoo in Florida. She visits the zoo in April 2007. (This is the purchase of a service.)

c.

In December 2007, Isabella eats onions that she harvested from her backyard garden in October 2007.

d.

All of the above are correct.

18. Changes in real GDP reflect



a.

only changes in prices.

b.

only changes in the amounts being produced.

c.

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

d.

neither changes in prices nor changes in the amounts being produced.

19. When the price of a gallon of gasoline rose to over $4.00 per gallon in the summer of 2008



a.

the price got so high that a shortage would have developed had the government not instituted a price ceiling that prevented it from reaching $5.00 per gallon.

c.

The higher equilibrium price caused the quantity demanded of gasoline to fall.

b.

The demand for gasoline shifted left as a result of the high price. (there was no change in the demand curve)

d.

Suppliers were discouraged from looking for new sources of crude oil.

20. If the price of visiting a doctor were fixed below the current price, then we would expect



a.

an increase in the number of visits people want to make and an increase in the number of visits health care providers want to provide.

b.

an increase in the number of visits people want to make and a decrease in the number of visits health care providers want to provide.

c.

a decrease in the number of visits people want to make and an increase in the number of visits health care providers want to provide.

d.

a decrease in the number of visits people want to make and a decrease in the number of visits health care providers want to provide.

21. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?



a.

There is no such thing as a free lunch.

b.

People buy more when prices are low than when prices are high.

c.

No matter how much people earn, they tend to spend more than they earn.

d.

Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.

22. Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the production of linen. If these two countries decide to trade,



a.

Belarus should export linen to Russia.

b.

Russia should export linen to Belarus.

c.

trading linen would provide no net advantage to either country.

d.

Without additional information about opportunity costs, this question cannot be answered.

23. When the price of a good is higher than the equilibrium price,



a.

a shortage will exist.

b.

buyers desire to purchase more than is produced.

c.

sellers desire to produce and sell more than buyers wish to purchase.

d.

quantity demanded exceeds quantity supplied.

24. Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has



a.

reduced measured GDP.

b.

not affected measured GDP.

c.

increased measured GDP only to the extent that the value of the restaurant meals exceeded the value of meals previously cooked at home.

d.

increased measured GDP by the full value of the restaurant meals.

25. For markets to work well, there must be



a.

externalities present.

b.

a central planner.

c.

property rights.

d.

abundant, not scarce, resources.

26. Suppose buyers of computers and printers regard those two goods as complements. Then an increase in the price of computers will cause



a.

a decrease in the demand for printers and a decrease in the quantity supplied of printers.

b.

a decrease in the supply of printers and a decrease in the quantity demanded of printers.

c.

a decrease in the equilibrium price of printers and an increase in the equilibrium quantity of printers.

d.

an increase in the equilibrium price of printers and a decrease in the equilibrium quantity of printers.

27. The reason a nation’s production possibility frontier has a “bowed out” shape, as opposed to being a straight line, is that



a.

free trade makes the nation better off.

c.

most nations restrict trade; if they did not, the frontier shape would be a straight line.

b.

since resources are specialized, opportunity costs will change as more resources are devoted to producing a given product.

d.

energy is used to produce just about everything, and energy has become more scarce and expensive over the last fifty years.

28. Which of these consumption activities will most likely impose an external cost on others?



a.

An athlete works out at a gym.

b.

A secretary smokes a cigarette in a crowded break room.

c.

A young mother pushes her baby in a stroller.

d.

A construction worker eats a hotdog during his lunch break.

29. Canada and the U.S. both produce wheat and computer software. Canada is said to have the comparative advantage in producing wheat if



a.

Canada requires fewer resources than the U.S. to produce a bushel of wheat.

b.

the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S.

c.

the opportunity cost of producing a bushel of wheat is lower for the U.S. than it is for Canada.

d.

the U.S. has an absolute advantage over Canada in producing computer software.

30. An Iowan receives a Social Security check for $500, which he uses to purchase a $480 television made in Japan by a Japanese firm and a $20 dinner at a local restaurant. As a result, U.S. GDP



a.

does not change.

b.

increases by $20.

c.

increases by $520.

d.

increases by $1000.

31. According to the “I Pencil” reading, pencils



a.

can easily be produced in any country, so it is surprising that they are only produced in a few places in the world.

c.

seem to be a harmless product, but if you trace the requirements for their production, there is a great deal of pollution generated from the production of pencils.

b.

seem to be a simple product, but actually use products and services from all over the world.

d.

are an example of a good that could be traded internationally, but to due tariffs and other protectionist measures, the gains from trading them are not realized by many countries.

32. The willingness of citizens to pay for a vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as



a.

productivity.

b.

an externality.

c.

market power.

d.

property rights.

33. Which of the following events would cause a movement upward and to the right along the supply curve for tomatoes?



a.

The number of sellers of tomatoes increases.

b.

There is an advance in technology that reduces the cost of producing tomatoes.

c.

The price of fertilizer decreases, and fertilizer is an input in the production of tomatoes.

d.

The price of tomatoes rises.

34. According to Steven Levitt's analysis, the reason crack cocaine dealers live with their moms is that



a.

the salary they earn by dealing crack is so low that they can't afford their own apartment.

c.

they save money on rent and can use that money they save to buy their own crack-dealing franchise from the crack bosses.

b.

by living with their moms it's easier to avoid the police.

d.

they are familiar with the area around their mom's houses so they know what the demand is.

35. You have been asked by your economics professor to graph the market for lumber and then to analyze the change that would occur in equilibrium price as a result of recent forest fires in the west. Your first step would be to



a.

decide which direction to shift the curve.

b.

decide whether the fires affected demand or supply.

c.

graph the shift to see the effect on equilibrium.

d.

None of the above are correct.

36. If the price of a gallon of milk were fixed above the current price, then we would expect



a.

an increase in the number of gallons of milk people want to buy and an increase in the number of gallons of milk dairy farmers want to sell.

b.

an increase in the number of gallons of milk people want to buy and a decrease in the number of gallons of milk dairy farmers want to sell.

c.

a decrease in the number of gallons of milk people want to buy and an increase in the number of gallons of milk dairy farmers want to sell.

d.

a decrease in the number of gallons of milk people want to buy and a decrease in the number of gallons of milk dairy farmers want to sell.

37. If Japan chooses to engage in trade, it



a.

will only benefit if it trades with countries that produce goods Japan cannot produce.

b.

cannot benefit if it trades with less developed countries.

c.

should first attempt to produce the good itself.

d.

can benefit by trading with any other country.

38. The basic principles of economics suggest that



a.

markets are seldom, if ever, a good way to organize economic activity.

b.

government should become involved in markets when trade between countries is involved.

c.

government should become involved in markets when those markets fail to produce prices that most people desire.

d.

All of the above are correct.

Oops. None of these are correct.

39. If a nation wanted to be self sufficient and not trade with any other nations



a.

it would probably do this if it had no comparative advantage.

c.

it would do this if its production possibility frontier had a different slope and shape than other countries’ production possibility frontiers.

b.

it would make sense if it had an absolute advantage in all goods it produced.

d.

it would be poorer than it would be if it traded.

40. Your parents’ spending on your UVM tuition is included in



a.

consumption, although it might be argued that it would fit better in investment.

b.

investment, although it might be argued that it would fit better in consumption.

c.

government spending, based on the fact that most higher-education students attend publicly-supported colleges and universities.

d.

None of the above is correct; in general, household spending on services is not included in any component of GDP.


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