Test 1
1. Efficiency means that society is getting the maximum benefits from its scarce resources.
2. Trade makes costs lower and increases the variety of goods and services available.
3. Suppose a gardener produces both tomatoes and squash in his garden. If he must give up
8 bushels of squash to get 5 bushels of tomatoes, then his opportunity cost of 1 bushel of
tomatoes is 1.6 bushels of squash.
→ 8 bu. squash per 5 bu. tomatoes = 8/5 = 1.6 bu. squash per 1 bu. tomatoes. You would
give up growing 1.6 bushels of squash to grow an extra bushel of tomatoes.
4. The equilibrium price of a good is $6 with no price controls. If a price floor of $8 is
imposed, there will be a surplus in the market.
→ Price will be held above equilibrium, causing suppliers to want to supply more than
buyers want to buy, i.e., quantity supplied greater than quantity demanded.
5. When the price of a good increases, there is a movement along the demand curve for that
good.
6. The market demand curve represents the sum of the quantities demanded by all the
buyers at each price of the good.
7. Suppose that a decrease in the price of good X results in fewer units of good Y being
demanded. This implies that X and Y are substitute goods
8. Kara receives a promotion at work, which increases her income. We would expect Kara's
demand for inferior goods to decrease.
→ A good is an inferior good if demand decreases when income increases.
9. Suppose the figure below shows the market demand for coffee. Suppose the price of tea,
a substitute good, increases. Which of the following changes would occur?
→ a shift from D2 to D1; If the price of tea increases, people will substitute coffee for
tea, as tea becomes relatively more expensive (than it was before). Thus, more coffee
will be demanded at every price, shifting the demand curve up and to the right (from D2
to D1).
,10. A supply curve slopes upward because an increase in price gives producers an incentive
to supply a larger quantity.
11. An improvement in production technology will decrease a firm's costs and increase its
supply.
12. Economists generally support rent controls because they believe that rent controls will
help the poorest citizens find adequate affordable housing.
→ False
13. To calculate consumer surplus, one finds the area under the demand curve and above the
price the buyer paid.
→ True
14. Daisy has the following Production Possibilities Frontier per week. Her resource is 5 lbs
of flour. Note: You will use this PPF to answer the next several questions. Given Daisy's
PPF, the following production combo, 9 pies and 8 tarts is
→ an efficient use of resources.
15. Given Daisy's PPF, the following production combo, 6 pies and 10 tarts is
→ an inefficient use of resources.
16. Given Daisy's PPF, the following production combo, 12 pies and 12 tarts is
→ Not possible with the given resources
17. Assume Daisy got a pie making machine that allowed her to make 21 pies per week with
the same 5 lbs of flour. Describe how her PPF curve would change.
→ It would pivot, staying the same along the tarts axis, and hitting the pies axis at a
higher number.
→ As this machine only affects the making of pies, the PPF would pivot, keeping the
intercept on the tarts axis the same at 20 (still can make a maximum of 20 tarts with 5 lbs
of flour) and increasing the pies intercept to 21 (can now make up to 21 pies with 5 lbs of
flour).
,18. Please refer to these PPFs for Questions 18-23.
Maxine and Daisy are both bakers that make tarts and pies. They have the same
resource: 5 lbs of flour/week. These are their weekly PPFs. Who has an absolute
advantage in tarts?
→ Daisy
19. Who has an absolute advantage in pies?
→ Daisy
20. What is Maxine's opportunity cost of pies (in terms of tarts)?
0.5
21. What is Daisy's opportunity cost of pies (in terms of tarts)? (enter in decimal form)
1.33 (4/3)
22. Who has a comparative advantage in pies?
→ Maxine
23. Which good should Daisy specialize in?
→ Tarts; Daisy has a comparative advantage in tarts, so that's what she should specialize
in.
, 24. For Questions 24-28, please refer to the following four panels:
Panel (a) shows which of the following?
→ an increase in demand and an increase in quantity supplied
25. Referring to the panels in Question 24, which of the four panels represents the market for
high-rise building construction as a result of an increase in steel prices (used in
constructing high-rise buildings)?
→ Panel d
26. Referring to the panels in Question 24, which of the four panels represents the market for
bikini bathing suits as a result of the invention of a new technology that allows for faster
sewing of such bathing suits?
→ Panel c
27. Referring to the panels in Question 24, which of the four panels represents the market for
bikini bathing suits as summer (i.e., bathing suit weather) approaches?
→ Panel a
1. Efficiency means that society is getting the maximum benefits from its scarce resources.
2. Trade makes costs lower and increases the variety of goods and services available.
3. Suppose a gardener produces both tomatoes and squash in his garden. If he must give up
8 bushels of squash to get 5 bushels of tomatoes, then his opportunity cost of 1 bushel of
tomatoes is 1.6 bushels of squash.
→ 8 bu. squash per 5 bu. tomatoes = 8/5 = 1.6 bu. squash per 1 bu. tomatoes. You would
give up growing 1.6 bushels of squash to grow an extra bushel of tomatoes.
4. The equilibrium price of a good is $6 with no price controls. If a price floor of $8 is
imposed, there will be a surplus in the market.
→ Price will be held above equilibrium, causing suppliers to want to supply more than
buyers want to buy, i.e., quantity supplied greater than quantity demanded.
5. When the price of a good increases, there is a movement along the demand curve for that
good.
6. The market demand curve represents the sum of the quantities demanded by all the
buyers at each price of the good.
7. Suppose that a decrease in the price of good X results in fewer units of good Y being
demanded. This implies that X and Y are substitute goods
8. Kara receives a promotion at work, which increases her income. We would expect Kara's
demand for inferior goods to decrease.
→ A good is an inferior good if demand decreases when income increases.
9. Suppose the figure below shows the market demand for coffee. Suppose the price of tea,
a substitute good, increases. Which of the following changes would occur?
→ a shift from D2 to D1; If the price of tea increases, people will substitute coffee for
tea, as tea becomes relatively more expensive (than it was before). Thus, more coffee
will be demanded at every price, shifting the demand curve up and to the right (from D2
to D1).
,10. A supply curve slopes upward because an increase in price gives producers an incentive
to supply a larger quantity.
11. An improvement in production technology will decrease a firm's costs and increase its
supply.
12. Economists generally support rent controls because they believe that rent controls will
help the poorest citizens find adequate affordable housing.
→ False
13. To calculate consumer surplus, one finds the area under the demand curve and above the
price the buyer paid.
→ True
14. Daisy has the following Production Possibilities Frontier per week. Her resource is 5 lbs
of flour. Note: You will use this PPF to answer the next several questions. Given Daisy's
PPF, the following production combo, 9 pies and 8 tarts is
→ an efficient use of resources.
15. Given Daisy's PPF, the following production combo, 6 pies and 10 tarts is
→ an inefficient use of resources.
16. Given Daisy's PPF, the following production combo, 12 pies and 12 tarts is
→ Not possible with the given resources
17. Assume Daisy got a pie making machine that allowed her to make 21 pies per week with
the same 5 lbs of flour. Describe how her PPF curve would change.
→ It would pivot, staying the same along the tarts axis, and hitting the pies axis at a
higher number.
→ As this machine only affects the making of pies, the PPF would pivot, keeping the
intercept on the tarts axis the same at 20 (still can make a maximum of 20 tarts with 5 lbs
of flour) and increasing the pies intercept to 21 (can now make up to 21 pies with 5 lbs of
flour).
,18. Please refer to these PPFs for Questions 18-23.
Maxine and Daisy are both bakers that make tarts and pies. They have the same
resource: 5 lbs of flour/week. These are their weekly PPFs. Who has an absolute
advantage in tarts?
→ Daisy
19. Who has an absolute advantage in pies?
→ Daisy
20. What is Maxine's opportunity cost of pies (in terms of tarts)?
0.5
21. What is Daisy's opportunity cost of pies (in terms of tarts)? (enter in decimal form)
1.33 (4/3)
22. Who has a comparative advantage in pies?
→ Maxine
23. Which good should Daisy specialize in?
→ Tarts; Daisy has a comparative advantage in tarts, so that's what she should specialize
in.
, 24. For Questions 24-28, please refer to the following four panels:
Panel (a) shows which of the following?
→ an increase in demand and an increase in quantity supplied
25. Referring to the panels in Question 24, which of the four panels represents the market for
high-rise building construction as a result of an increase in steel prices (used in
constructing high-rise buildings)?
→ Panel d
26. Referring to the panels in Question 24, which of the four panels represents the market for
bikini bathing suits as a result of the invention of a new technology that allows for faster
sewing of such bathing suits?
→ Panel c
27. Referring to the panels in Question 24, which of the four panels represents the market for
bikini bathing suits as summer (i.e., bathing suit weather) approaches?
→ Panel a
