A. THINKING LIKE AN ECONOMIST 1. Economists use assumptions in order to: a.

recreate real situations accurately, with all their complexity. b. avoid dealing with issues they would rather not talk about. c. simplify economic theories, so as to make it possible to answer economic questions. d. make their theories more realistic. -------------------------------------------------------------------------------2. Economic models are: a. simplified versions of economic theories. b. all of the other options are true. c. created by making assumptions. d. usually composed of diagrams and equations. -------------------------------------------------------------------------------3. Which of the following is true regarding the Production Possibilities Frontier Model of the economy? a. Any point along the PPF represents an efficient level of production. b. Any point in the area below the PPF represents a combination of production that is not feasible. c. The opportunity cost of producing one more unit of one of the goods represented in the PPF remains the same at any point along the PPF. d. Increases in the resources available for production will cause the PPF to shift towards the origin. -------------------------------------------------------------------------------4. Economic growth in the economy can be portrayed in the Production Possibilities Frontier model as a: a. movement up and to the left along the PPF. b. shift of the PPF away from the origin. c. movement down and to the right along the PPF. d. shift of the PPF towards the origin. -------------------------------------------------------------------------------5. Microeconomics is the study of: a. how governments can get the economy out of a recession. b. economy-wide phenomena, including inflation, unemployment, and economic growth. c. how households and firms make decisions and how they interact in markets. d. how governments can reduce inflation. -------------------------------------------------------------------------------6. Which of the following is an example of a normative statement? a. Higher interest rates will cause people to borrow and invest less. b. The government should increase spending during recessions, so that the economy recovers quickly. c. When the price of a good increases, consumers respond by reducing the quantity that they want to purchase of the good. d. Over the past 50 years, the number of women that participate in the labor force has increased dramatically. B. THE MARKET FORCES OF SUPPLY AND DEMAND 1. Which of the following is NOT a characteristic of a perfectly competitive market? a. The goods being offered for sale are all the same. b. Buyers and sellers are very numerous. c. Buyers and sellers are price takers. d. It is difficult for new firms to enter the market. -------------------------------------------------------------------------------2. A market with only a few firms is called: a. oligopoly.

b. monopoly. c. perfect competition. d. monopolistically competitive. -------------------------------------------------------------------------------3. An increase in demand means that: a. when the price drops consumers are willing to purchase greater quantities of the good. b. consumers are willing to purchase greater quantities of the good at any given price. c. when the price rises, consumers are willing to purchase greater quantities of the good. d. consumers make the price drop by buying greater quantities of the good. -------------------------------------------------------------------------------4. If good B is a substitute for good A, and the price of good B increases: a. the quantity demanded of good A will decrease. b. the quantity demanded of good A will increase. c. the price of good A will tend to decrease. d. the quantity demanded of good B will increase. -------------------------------------------------------------------------------5. When the price of a good increases: a. the quantity supplied of the good will increase. b. the quantity supplied of the good will decrease. c. the supply curve of the good will shift to the right. d. the supply curve of the good will shift to the left. -------------------------------------------------------------------------------6. A new technology that helps firms reduce production costs will cause a: a. movement down and to the left along the supply curve. b. movement up and to the right along the supply curve. c. shift to the right of the supply curve. d. shift to the left of the supply curve. -------------------------------------------------------------------------------7. If the price in a market happens to be below equilibrium, there will be a ________ in the market, and the price will tend to ________. a. surplus, drop b. surplus, rise c. shortage, drop d. shortage, rise -------------------------------------------------------------------------------8. If the price in a market happens to be above equilibrium, there will be a ________ in the market, and the price will tend to ________. a. surplus, drop b. surplus, rise c. shortage, drop d. shortage, rise -------------------------------------------------------------------------------9. Suppose that a scientific study just published demonstrates that eating apples makes people much healthier. How will this affect the equilibrium price and quantity in the market? a. The equilibrium price will increase and the equilibrium quantity will decrease. b. The equilibrium price will decrease and the equilibrium quantity will increase. c. Both the equilibrium quantity and price will increase. d. Both the equilibrium quantity and price will decrease. -------------------------------------------------------------------------------10. Suppose the price of corn syrup increases. Given that corn syrup is a major ingredient in the production of soft drinks, how will this affect the equilibrium price and quantity in the soda market? a. The equilibrium price will increase and the equilibrium quantity will decrease.

b. The equilibrium price will decrease and the equilibrium quantity will increase. c. Both the equilibrium quantity and price will increase. d. Both the equilibrium quantity and price will decrease. -------------------------------------------------------------------------------11. In a market economy, the decisions of what and how much to produce are made by: a. voters in elections. b. all producers and consumers. c. the government only. d. non governmental agencies. -------------------------------------------------------------------------------12. Even though markets do a great job in organizing economic activity, governments are needed to do all of the following EXCEPT: a. establish and enforce property rights. b. intervene when markets fail due to externalities. c. intervene when markets fail due to market power. d. decide what and how much should be produced. -------------------------------------------------------------------------------13. All of the following can be considered a student's costs of going to college, EXCEPT: a. textbooks. b. tuition and fees. c. room and board (that costs her about the same as she was paying before entering college). d. the student's time, which can no longer be devoted to earning a salary. -------------------------------------------------------------------------------14. Net benefits are maximized when a. the marginal benefits from an allocation equal the marginal costs. b. there is no waste. c. supply=demand and there is no external cost. d. all of the above. -------------------------------------------------------------------------------15. As the level of production increases, marginal costs a. decrease at an increasing rate. b. increase at an increasing rate. c. decrease at a decreasing rate. d. remain constant. -------------------------------------------------------------------------------16. The term "marginal social benefit" of an economic activity means a. benefits that are just above the margin of being zero. b. the entire benefits obtainable from the activity. c. that part of the benefits covered by the costs of carrying on the activity. d. the change in social benefits as a result of a 1 unit increase in the amount of the activity. -------------------------------------------------------------------------------17. When Marginal private cost is less than Marginal social cost a. the firm will tend to produce more than is socially optimal. b. the price for the product will be higher than the competitive price. c. the firm must be a monopolist. d. the firm will tend to produce less than is socially optimal. C. PUBLIC GOODS AND COMMON RESOURCES 1. Private goods are: a. both excludable and rival. b. neither excludable nor rival. c. excludable, but not rival. d. rival, but not excludable. -------------------------------------------------------------------------------2. Public goods are:

a. both excludable and rival. b. neither excludable nor rival. c. excludable, but not rival. d. rival, but not excludable. -------------------------------------------------------------------------------3. Common resources are: a. both excludable and rival. b. neither excludable nor rival. c. excludable, but not rival. d. rival, but not excludable. -------------------------------------------------------------------------------4. The free-rider problem refers to the: a. over exploitation that tends to occur to common resources. b. abuse of power by some firms when they increase their prices to unreasonable levels. c. excessive consumption that occurs when goods are given for free during promotion campaigns. d. fact that when public goods are provided by someone, there is no way of avoiding others from using them, even if they do not pay for them. -------------------------------------------------------------------------------5. All of the following are examples of public goods, EXCEPT: a. national defense. b. basic research. c. clean air and water. d. programs to fight poverty. -------------------------------------------------------------------------------6. The tragedy of the commons refers to: a. the grounds surrounding medieval towns, which became barren through overuse. b. ill conceived government policies that led to excessive bureaucracy. c. the free rider problem, that led communities not to provide desirable public goods. d. farmers being taxed too heavily. -------------------------------------------------------------------------------7. All of the following are solutions to the problem of common resources being overused, EXCEPT: a. converting the common resource into a private good through privatization or other means. b. having the government provide more of the common resource. c. regulation limiting the use of the common resource. d. a tax imposed on the common resource. -------------------------------------------------------------------------------5 8. Which of the following is a good example of a common resource? a. Batteries for toys. b. Empty freeways. c. A gallon of chocolate ice cream. d. The electricity utility service. -------------------------------------------------------------------------------9. Which of the following is the most effective solution to congested freeways? a. Build more freeways. b. Add more lanes to existing freeways. c. Urge people to drive less. d. Make freeways into toll ways, with the toll being steep enough to discourage some drivers from using them. -------------------------------------------------------------------------------10. Which of the following will help solve the free-rider problem of public goods? a. Taxing the good.

b. Regulating the good, to limit its over use. c. Have the government itself provide the good. d. Educating consumers, so they buy the optimal quantity of the good. -------------------------------------------------------------------------------11. A good is classified as a collective good if a. one person's consumption excludes others from consuming the good. b. one person's consumption does not exclude someone else from consuming the good. c. a majority of citizens wants the good d. the market can provide the good efficiently. -------------------------------------------------------------------------------12. Which of the following has characteristics of a collective good? a. a video player b. life insurance c. crime prevention d. medical care D. EXTERNALITIES 1. Which of the following statements is true regarding externalities? a. Both negative and positive externalities lead to inefficient outcomes in markets. b. Negative externalities lead to inefficiencies in markets, but positive externalities do not. c. Negative externalities occur when the good harms those who consume it. d. Positive externalities occur when the good benefits those who consume it. -------------------------------------------------------------------------------2. Positive externalities cause the market to trade a quantity: a. greater than the optimal quantity. b. smaller than the optimal quantity. c. that is exactly the optimal. d. that can be greater, or smaller than the optimal quantity. -------------------------------------------------------------------------------3. Negative externalities cause the market to trade a quantity: a. greater than the optimal quantity. b. smaller than the optimal quantity. c. that is exactly the optimal. d. that can be greater, or smaller than the optimal quantity. -------------------------------------------------------------------------------4. Markets with positive externalities do not trade the optimal quantity because: a. the government fails to provide markets with all the information needed for an efficient outcome. b. producers fail to consider the external cost in their decision making process. c. consumers fail to consider the external benefit in their decision making process. d. bystanders are not important members of society. -------------------------------------------------------------------------------5. Markets with negative externalities do not trade the optimal quantity because: a. the government fails to provide markets with all the information needed for an efficient outcome. b. producers fail to consider the external cost in their decision making process. c. consumers fail to consider the external benefit in their decision making process. d. bystanders are not important members of society. -------------------------------------------------------------------------------6. The Coase Theorem states that: a. it is impossible to solve externality problems without the aid of government. b. efficient outcomes can be accomplished by private parties, even when externalities are present, as long as there are no bargaining costs. c. there is a cost to negotiating externalities. d. the government cannot solve externality problems without the intervention of private parties --------------------------------------------------------------------------------

7. Private solutions to externalities are not always possible because: a. the government has a vested interest in the outcome and will always intervene. b. private parties are simple not good at negotiating problems related to externalities. c. sometimes there are simply too many people involved for them to be able to reach a negotiated solution. d. externalities affect other people who are not participating in the market. -------------------------------------------------------------------------------8. Which of the following statements is true about regulating externalities? a. Regulation only works if the government does not get involved. b. Regulation only works in dealing with positive externalities. c. Regulation is a method used by the government to let the market reach on its own an efficient outcome. d. Regulation is a command and control policy that can be used to deal with externalities. -------------------------------------------------------------------------------9. Which of the following is false regarding Pigovian subsidies? a. Pigovian subsidies can only be applied effectively in situations with negative externalities. b. Applying Pigovian subsidies can lead a market with positive externalities to trade an optimal quantity. c. A Pigovian subsidy has to be exactly equal to a positive externality. d. A Pigovian subsidy can be given to either the sellers or the buyers of the good with the externality. -------------------------------------------------------------------------------10. Which of the following is false regarding Pigovian tax? a. Applying Pigovian tax can lead a market with negative externalities to trade an optimal quantity. b. A Pigovian tax has to be exactly equal to a negative externality. c. A Pigovian tax can be given to either the sellers or the buyers of the good with the externality. d. Pigovian tax can only be applied effectively in situations with positive externalities.