Name: ________________________ Class: ___________________ Date: __________

ID: A

Practice Test
Short Answer 1. How does the study of economics depend upon the phenomenon of scarcity? 2. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today? 3. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run. 4. Using this outline, draw a circular-flow diagram representing the interactions between households and firms in a simple economy. Explain briefly the various parts of the diagram.

5. Draw a production possibilities frontier showing increasing opportunity cost for hammers in terms of horseshoes. a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes. b. On the graph, label a point that is efficient as point "E" and a point that is inefficient as point "I". c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy. d. On a second graph, illustrate the effect of a new computerized assembly line in the production of hammers on this economy.

Name: ________________________

ID: A

6. The prairie dog has always been considered a problem for American cattle ranchers. They dig holes that cattle and horses can step in and they eat grass necessary for cattle. Recently, ranchers have discovered that there is a demand for prairie dogs as pets. In some areas prairie dogs can sell for as high as $150. Cattlemen are now fencing off prairie dog towns on their land so these towns will not be disturbed by their cattle. Draw a production possibilities frontier showing a rancher's production option between cattle production and prairie dog production showing increasing opportunity cost and show what would happen in each of the following situations. (Use a separate graph for each situation.) a. The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and prairie dogs. b. As a protest against the government introducing the gray wolf back into the wild in their state, ranchers decide to withhold 25 percent of the available grassland for grazing. c. The price of prairie dogs increases to $200 each, so ranchers decide to allot additional land for prairie dogs. d. The government grants new leases to ranchers, giving them 10,000 new acres of grassland each for grazing. e. A drought destroys most of the available grass for grazing of cattle, but not for prairie dogs since they also eat plant roots. 7. Identify each of the following topics as being part of microeconomics or macroeconomics: a. the impact of a change in consumer income on the purchase of luxury automobiles b. the effect of a change in the price of Coke on the purchase of Pepsi c. the impact of a war in the Middle East on the rate of inflation in the United States d. factors influencing the rate of economic growth e. factors influencing the demand for tractors f. the impact of tax policy on national saving g. the effect of pollution taxes on the U.S. copper industry h. the degree of competition in the cable television industry i. the effect of a balanced-budget amendment on economic stability j. the impact of deregulation on the savings and loan industry 8. Which of the following statements are positive, and which are normative? a. The minimum wage creates unemployment among young and unskilled workers. b. The minimum wage ought to be abolished. c. If the price of a product in a market decreases, other things equal, quantity demanded will increase. d. A little bit of inflation is worse for society than a little bit of unemployment. e. There is a tradeoff between inflation and unemployment in the short run. f. If consumer income increases, other things equal, the demand for automobiles will increase. g. The U.S. income distribution is not equitable. h. U.S. workers deserve more liberal unemployment benefits. i. If interest rates increase, investment will decrease. j. If welfare benefits were reduced, the country would be better off. 9. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?

Name: ________________________

ID: A

10. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the same kind of meal in 2 hours, and his opportunity cost of one hour is $20. Will both Julia and Jacque be better off if she pays him $45 per meal to fix her meals? Explain. 11. Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides. a. How much time would it take the two to complete the project if they divide the calculations equally and the slides equally? b. How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing slides? c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or preparing slides? 12. a. What is the difference between a "change in supply" and a "change in quantity supplied"? Graph your answer. b. For each of the following changes, determine whether there will be a change in quantity supplied or a change in supply. i. a change in the resource cost ii. a change in producer expectations iii. a change in price iv. a change in technology v. the number of sellers

13. This question deals with demand and supply and refers you to the table below. a. Given the table, graph the demand and supply curves for flashlights. Make certain to label equilibrium price and equilibrium quantity. Price $5 $4 $3 $2 $1 b. c. d. Quantity Demanded/Month 6,000 8,000 10,000 12,000 14,000 Quantity Supplied/Month 10,000 8,000 6,000 4,000 2,000

What is the equilibrium price and equilibrium quantity? Suppose the price is currently at $5. What problem would exist in the economy? What would you expect to happen to price? Show this on your graph. Suppose the price is currently $2. What problem exists in the economy? What would you expect to happen to price? Show this on your graph.

Name: ________________________

ID: A

14. You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.

a. b. c. d. e. f.

What is your current total revenue for both groups? The elasticity of demand is more elastic in which market? Which market has the more inelastic demand? What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic? What is the elasticity of demand between $5 and $3 in the children's market? Is this elastic or inelastic? Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take his advice?

15. When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand using the midpoint method. Explain your answer. (Is a restaurant meal a normal or inferior good to the couple?)

ID: A

Practice Test Answer Section

SHORT ANSWER 1. ANS: Since economics is the study of how society allocates its scarce resources, if there were no scarcity, there would be no need for economics. Everyone could have all the goods and services they wanted. No one would have to make decisions based on tradeoffs, because there would be no opportunity cost associated with the decision. (It is difficult to conceive of a situation where time is not scarce, however). DIF: 2 REF: 1-1 TOP: Economics, Scarcity MSC: Applicative 2. ANS: Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time. For most students this would be the income the student gives up by not working. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.) DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive 3. ANS: To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don't adjust immediately. Lower spending, combined with prices that are too high, reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment. DIF: 2 MSC: Applicative REF: 1-3 TOP: Inflation, Unemployment, Tradeoffs

ID: A 4. ANS:

This diagram should duplicate the essential characteristics of the diagram in the text, with an explanation of the meaning of each flow and each market. It is important that the student understands that the inner loop represents the flow of real goods and services and that the outer loop represents the corresponding flow of payments. DIF: 2 MSC: Interpretive 5. ANS: REF: 2-1 TOP: Circular-flow diagram

DIF: 3 MSC: Applicative

REF: 2-1

TOP: Production possibilities frontier

ID: A 6. ANS:

DIF: 3 REF: 2-1 TOP: Production possibilities frontier MSC: Analytical 7. ANS: a, b, e, g, h, and j are microeconomic topics. c, d, f, and i are macroeconomic topics. DIF: 2 REF: 2-1 TOP: Microeconomics, Macroeconomics MSC: Applicative 8. ANS: a, c, e, f, and i are positive statements. b, d, g, h, and j are normative statements. DIF: 2 MSC: Interpretive REF: 2-1 TOP: Positive statements, Normative statements

ID: A 9. ANS: Absolute advantage refers to productivity, as in the producer who can produce a product at a lower cost in terms of the resources used in production. Comparative advantage refers to the producer who can produce a product at a lower opportunity cost. Comparative advantage is the principle upon which trade patterns are based. Comparative advantage is based on opportunity cost, and opportunity cost measures the real cost to an individual or country of producing a particular product. Opportunity cost is therefore the information necessary for an individual or nation to determine whether to produce a good or buy it from someone else. DIF: 2 REF: 3-2 TOP: Absolute advantage, Comparative advantage, Trade MSC: Applicative 10. ANS: Since Julia's opportunity cost of preparing a meal is $50, and Jacque's opportunity cost of preparing a meal is $40, each of them will be better off by $5 per meal if this arrangement is made. DIF: 2 REF: 3-2 TOP: Opportunity cost MSC: Applicative 11. ANS: a. If both tasks are divided equally, it will take 11 hours for the calculations and 15 hours for the writing, for a total of 26 hours. b. If Diane specializes in calculating and Gary specializes in preparing slides, it will take 22 hours to complete the project. c. If Diane specializes in calculating, her opportunity cost will be $60; hence, Diane would be better off if she paid Gary any amount less than $60 to do the calculating. Since Gary's opportunity cost of doing the calculations is only $50, he would be better off if Diane paid him between $50 and $60 dollars to do the calculations. In this case, the total time spent on the project would be 20 hours. DIF: 2 MSC: Applicative REF: 3-2 TOP: Opportunity cost, Comparative advantage

ID: A 12. ANS: a. A change in supply refers to a shift in the supply curve. A change in quantity supplied refers to a movement along a fixed supply curve.

In part b, all of the events except (iii) shift the supply curve. DIF: 2 MSC: Applicative 13. ANS: a. REF: 4-3 TOP: Supply, Quantity supplied

b. c. d.

Equilibrium price would be $4 and equilibrium quantity would be 8,000. A surplus of 4,000 flashlights would be the problem in the economy and we would expect the price to fall. A shortage of 8,000 flashlights would be the problem in the economy and we would expect the price to rise. REF: 4-4 TOP: Equilibrium, Shortages, Surpluses

DIF: 2 MSC: Applicative

ID: A 14. ANS: a. Total revenue from children's tickets is $100 and from adult tickets is $250. Total revenue from all sales would be $350. b. the demand for children's tickets is more elastic. c. The adult ticket market has the more inelastic demand. d. The elasticity of demand between $5 and $2 is 0.26 or inelastic. e. The elasticity of demand between $5 and $3 is 1.33 or elastic. f. If price is increased to $8 for adult tickets (maximum for the graph) and price decreased to $3 for child tickets (minimum for graph), total revenue would increase to $440 [($8)(40) + ($3)(40)] or $90 more than before. DIF: 2 REF: 5-1 TOP: Price elasticity of demand, Total revenue MSC: Applicative 15. ANS: The income elasticity of demand for the Shaffers is 1.89. Since the income elasticity of demand is positive, this would be interpreted as a normal good. DIF: 2 MSC: Applicative REF: 5-1 TOP: Income elasticity of demand