Contemporary Economic Issues
Final Test Solutions
Course Introduction
Contemporary Economic Issues explores the pressing economic challenges and policy debates shaping the global and local economies today. Students will analyze topics such as globalization, income inequality, unemployment, inflation, fiscal and monetary policy, technological change, environmental sustainability, and the impacts of economic crises. The course encourages critical thinking about how these issues affect diverse populations and examines the roles of governments, markets, and international organizations in addressing them. Through case studies, current events, and empirical data, students gain a comprehensive understanding of ongoing debates and are equipped to assess the economic forces that underpin modern society.
Recommended Textbook
Economics 4th Edition by Paul Krugman
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Page 2
Chapter 1: First Principles
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Sample Questions
Q1) Specialization in production was the starting point for:
A) The Wealth of Nations, by Adam Smith.
B) The General Theory, by John Maynard Keynes.
C) Das Kapital, by Karl Marx.
D) Free to Choose, by Milton Friedman.
Answer: A
Q2) Overall, trade between China and the United States will:
A) benefit the United States more than China.
B) benefit China more than the United States.
C) benefit both countries.
D) hurt both countries.
Answer: C
Q3) When individuals act in their own self-interest:
A) efficiency is always achieved.
B) equity is always achieved.
C) society may be worse off in some cases.
D) all opportunities have been taken to make some people better off without making other people worse off.
Answer: C
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Page 3
Chapter 2: Economic Models- Trade-Offs and Trade
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Sample Questions
Q1) (Figure: Strawberries and Submarines II) Look at the figure Strawberries and Submarines II. Assume that the economy is operating at point A. The opportunity cost of moving to point C is equal to _____ million tons of strawberries:
A) 800
B) 200
C) 2
D) 50
Answer: B
Q2) Economists disagree more over normative economics than positive economics.
A)True
B)False
Answer: True
Q3) In the circular-flow diagram, an individual or a group of people (usually a family) who share their income is a(n):
A) market.
B) factor.
C) household.
D) business.
Answer: C
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) Good X and good Y are related goods. Holding everything else constant, if the price of X decreases and the demand for Y increases, X and Y are probably:
A) complements.
B) substitutes.
C) inferior.
D) normal.
Q2) (Figure: Supply, Demand, and Equilibrium) Look at the figure Supply, Demand, and Equilibrium. In the figure, there will be excess demand for the good at a price of P<sub>3</sub>.
A)True
B)False
Q3) Excess supply occurs when:
A) the price is above the equilibrium price.
B) the quantity demanded exceeds the quantity supplied.
C) the price is below the equilibrium price.
D) the quantity demanded exceeds the quantity supplied and the price is below the equilibrium price.
Q4) Why do many clothing stores have big after-Christmas sales on their merchandise?
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5
Chapter 4: Consumer and Producer Surplus
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Sample Questions
Q1) (Table: Willingness to Pay for Peanuts) Using the table Willingness to Pay for Peanuts, if the price of a bag of peanuts is $2:
A) all of the consumers would purchase a bag.
B) everyone except Dave would purchase a bag.
C) everyone except George would purchase a bag.
D) no one would purchase a bag.
Q2) (Table: Willingness to Pay for Peanuts) Using the table Willingness to Pay for Peanuts, if the price of a bag of peanuts is $4, what is the value of George's consumer surplus?
A) $4
B) $3
C) $6
D) $10
Q3) If the price of a good rises along an upward-sloping supply curve, then producer surplus:
A) will increase.
B) will decrease.
C) will remain the same.
D) may change, but we can't tell how.
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Chapter 5: Price Controls and Quotas- Meddling With Markets
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Sample Questions
Q1) Which is NOT an inefficiency caused by price floors?
A) inefficiently low quality
B) inefficient allocation of sales among sellers
C) wasted resources
D) illegal activity
Q2) (Table: Market for Butter) Look at the table Market for Butter. If the government imposes a price ceiling of $0.90 per pound of butter, the quantity of butter actually purchased will be:
A) 10.5 million pounds.
B) 9.0 million pounds.
C) 1.5 million pounds.
D) 10.0 million pounds.
Q3) Price ceilings will impose costs on society because they:
A) will eliminate long waiting lines.
B) may result in black market prices, which are lower than the market-determined price would be.
C) lead to a smaller quantity offered on the market.
D) help businesses instead of consumers.
Q4) How do price ceilings cause black markets?
Q5) How is a quota limit different from or similar to a price control?
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Chapter 6: Elasticity
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Sample Questions
Q1) If you wanted to make sure that your calculation of elasticity between two points was the same regardless of your initial point, you would use:
A) the absolute value of elasticity.
B) supply elasticity.
C) the midpoint formula calculation of elasticity.
D) the point formula calculation of elasticity.
Q2) The price elasticity of demand is the ratio of the percent change in quantity demanded to the percent change in price as one moves along the demand curve.
A)True
B)False
Q3) If the cross-price elasticity of demand between rice and beans is -0.25, rice and beans are complements.
A)True
B)False
Q4) Given a price increase for any good, the price effect on revenue is always larger than the quantity effect on revenue.
A)True
B)False
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8
Chapter 7: Taxes
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Sample Questions
Q1) (Figure: The Market for Lattes) Look at the figure The Market for Lattes. If the government assesses a tax of $0.75 on each latte, the price the consumer pays for a latte after the tax will:
A) increase from $2 to $2.75.
B) increase from $2 to $2.50.
C) increase from $2 to $2.25.
D) change, but we cannot determine by how much.
Q2) Determining who bears the burden of the tax is a question about:
A) tax incidence.
B) externality analysis.
C) public interest theory.
D) public choice theory.
Q3) (Table: Three Tax Structure Proposals) Look at the table Three Tax Structure Proposals. If one wished to use a proportional or flat tax structure, one should use proposal _____, in which the percentage of income taxed is _____.
A) 1; 20%
B) 2; 10%
C) 3; 20%
D) 2; 20%
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Page 9
Chapter 9: The Rational Consumer
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Sample Questions
Q1) (Figure and Table: The Budget Line) Look at the figure and table The Budget Line. An increase in income would:
A) rotate the budget line along the horizontal axis.
B) shift the budget line to the left.
C) rotate the budget line along the vertical axis.
D) shift the budget line to the right.
Q2) To say that you can't have too much of a good thing means that for any good that you enjoy (for example, pizza):
A) higher consumption will always lead to higher utility.
B) higher consumption will cause utility to decrease at an increasing rate.
C) higher consumption will increase utility, but only up to a point; after that utility will start to decrease.
D) it is valid to measure utility in utils.
Q3) (Figure and Table: The Budget Line) Look at the figure and table The Budget Line. A decrease in income would:
A) rotate the budget line along the horizontal axis.
B) shift the budget line to the left.
C) rotate the budget line along the vertical axis.
D) shift the budget line to the right.
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Page 10
Chapter 8: International Trade
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Sample Questions
Q1) (Table: Production Possibilities for the United States and Canada) Look at the table Production Possibilities for the United States and Canada. Both nations can produce cars and lumber. If these nations trade, Canada has the comparative advantage in _____ and should trade _____ to the United States in exchange for _____.
A) cars; cars; lumber.
B) lumber; lumber; cars
C) lumber; cars; lumber
D) cars; lumber; cars
Q2) Countries that engage in trade will tend to specialize in goods in which they have _____ and will _____ those goods.
A) a comparative advantage; import
B) an absolute advantage; export
C) a comparative advantage; export
D) an economic profit; import
Q3) When a country exchanges goods with another country, in the short run:
A) producers in the exporting industry may be better off.
B) consumers of the imported good may be worse off.
C) consumers of the exported good may be better off.
D) producers in the importing industry are better off.
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Page 11
Chapter 10: Decision Making by Individuals and Firms
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Sample Questions
Q1) The amount by which an additional unit of an activity increases total benefit is:
A) net benefit.
B) marginal benefit.
C) marginal cost.
D) utility.
Q2) Accountants use only _____ costs in their computations.
A) opportunity
B) implicit
C) explicit
D) variable
Q3) Bessie wants to calculate the accounting and economic profits of her cattle farm in Nebraska. She pays $30,000 per year in overhead, $80,000 in wages, and $20,000 in insurance. She forgoes $30,000 per year that she could make as a teacher. If her total revenue equals $140,000, that means her accounting profit is _____ and her economic profit is _____.
A) $10,000; -$20,000
B) $30,000; -$30,000
C) -$10,000; -$10,000
D) $60,000; $30,000
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Page 12
Chapter 11: Perfect Competition and the Supply Curve
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Sample Questions
Q1) In a perfectly competitive market, tastes and preferences lead to an increase in the demand for the good. Holding everything else constant, this will lead to an increase in price that will result in _____, which will _____, which will _____.
A) positive economic profits; attract new firms; reduce the price
B) economic losses; attract new firms; reduce the price
C) positive economic profits; lead some firms to leave the industry; further increase the price
D) economic losses; lead some firms to leave the industry; further increase the price
Q2) (Figure: Revenues, Costs, and Profits for Tomato Producers III) Look at the figure Revenues, Costs, and Profits for Tomato Producers III. The market for tomatoes is perfectly competitive. If the market price of a bushel of tomatoes is $12, in the short run this farm will:
A) minimize its losses by shutting down.
B) minimize its losses by continuing to produce.
C) break even.
D) earn an economic profit.
Q3) Why are perfectly competitive firms described as price takers?
Q4) Explain how the long-run perfectly competitive equilibrium is efficient.
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Page 13
Chapter 12: Monopoly
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Sample Questions
Q1) Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she wants to sell six, she can only charge $20,000 each. The price effect of selling the sixth motor home is:
A) $20,000.
B) -$15,000.
C) -$5,000.
D) $25,000.
Q2) (Figure: The Monopolist) Look at the figure The Monopolist. If this monopolist attempts to profit-maximize, it will produce _____ units and sell them at _____.
A) Q<sub>1</sub>; P<sub>1</sub>
B) Q<sub>2</sub>; P<sub>4</sub>
C) Q<sub>2</sub>; P<sub>2</sub>
D) Q<sub>3</sub>; P<sub>3</sub>
Q3) To maximize profits, an airline will offer _____ prices to customers with _____ demand.
A) higher; inelastic
B) higher; elastic
C) lower; inelastic
D) the lowest; the least
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Page 14
Chapter 13: Oligopoly
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Sample Questions
Q1) (Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. If industry output is 700, each firm's profits will be _____ than they would be at the output of 500, which maximizes industry profit.
A) $150 less
B) $150 more
C) $200 more
D) $200 less
Q2) Collusive agreements are typically difficult for cartels to maintain because each firm can increase profits by:
A) producing more than the quantity that maximizes joint profits.
B) producing less than the quantity that maximizes joint profits.
C) charging more than the price that maximizes joint cartel profits.
D) advertising less than will maximize joint cartel profits.
Q3) An industry with only two firms is generally called:
A) a monopoly.
B) monopolistic competition.
C) a duopoly.
D) perfect competition.
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Chapter 14: Monopolistic Competition and Product
Differentiation
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Sample Questions
Q1) Toby operates a small deli downtown. The deli industry is monopolistically competitive. In the long run, Toby will produce where:
A) marginal revenue equals marginal cost.
B) price equals minimum average total cost.
C) price equals marginal cost.
D) price equals marginal revenue.
Q2) The model of monopolistic competition characterizes the market for plumbing services in a city. Suppose that the market is in long-run equilibrium. For a typical plumbing firm, price:
A) equals average total cost.
B) exceeds average total cost.
C) is less than average total cost.
D) is greater than the average for all other firms in the market.
Q3) Monopolistic competition is characterized by:
A) free entry and exit in the long run.
B) each firm producing a standardized product.
C) few producers.
D) barriers to entry.
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Chapter 15: Externalities
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Q1) Your community requires the sewage treatment plant to process raw sewage so that it is safe to return the water to the environment. This is:
A) an emissions tax.
B) the Coase theorem.
C) a tradable emissions permit.
D) an environmental standard.
Q2) Which of the following is an environmental policy based on tradable pollution permits?
A) a charge of $0.10 to automobile drivers for a given level of emitted emissions
B) paying automobile drivers $0.10 for each 10% reduction in automobile emissions
C) allowing automobile drivers to buy and sell the right to a certain level of automobile emissions
D) ignoring pollution and letting private markets operate without government interference
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Chapter 16: Public Goods and Common Resources
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Sample Questions
Q1) A public good is a good or service for which exclusion is _____ and which is _____ in consumption.
A) possible; rival
B) possible; nonrival
C) not possible; rival
D) not possible; nonrival
Q2) Which of the following activities is a public good?
A) going to school
B) voting
C) smoking
D) getting a flu shot
Q3) A good is most likely to be artificially scarce if:
A) it is nonexcludable and nonrival.
B) the seller is a monopolist.
C) it is nonexcludable but rival.
D) it is excludable but nonrival.
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Chapter 17: The Economics of the Welfare State
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Sample Questions
Q1) In the United States, the mobility between income groups is:
A) relatively high.
B) not important because less than 1% of the population lives below the poverty line.
C) difficult because of public assistance programs.
D) very rare.
Q2) In the United States, inequality has increased over the past 25 years, in part because of rapid technological change.
A)True
B)False
Q3) Which of the following countries has a health care system that directly employs health care workers and runs hospitals and clinics that are free to the public?
A) United States
B) Canada
C) France
D) Great Britain
Q4) Poverty can be defined either in absolute terms or in relative terms.
A)True
B)False
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Chapter 18: Factor Markets and the Distribution of Income
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Q1) Lakisha's labor supply curve is downward-sloping for wage rates greater than $40 per hour and upward-sloping for wage rates less than $40 per hour. If leisure is a normal good for Lakisha and if the wage is _____, the substitution effect of a wage increase is _____ than the income effect.
A) greater than $40; greater
B) equal to $18; less C) greater than $40; less
D) greater than $20; less
Q2) If the extra output that is produced by hiring one more unit of labor adds more to _____ than to _____, the firm will increase its profit by increasing the use of labor.
A) total cost; total revenue
B) total revenue; total cost
C) marginal cost; marginal revenue
D) marginal product; marginal cost
Q3) If the hourly wage increases from $8 to $10 an hour and in response Jim increases the number of hours that he works from 44 to 46, the substitution effect is dominant.
A)True
B)False
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Chapter 19: Uncertainty, Risk, and Private Information
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Q1) A fair insurance policy is one whose premium is _____ the expected value of the claims.
A) equal to B) greater than C) less than
D) unrelated to
Q2) The easiest risks to reduce by diversification are those associated with positively correlated events.
A)True
B)False
Q3) An individual finds that as his income increases, his total utility also increases but at a decreasing rate. This can be attributed to:
A) diminishing marginal utility.
B) being risk-neutral.
C) expected values.
D) efficient allocation of risk.
Q4) You have one ticket for a raffle with a grand prize of $1,000. There are two prizes worth $100 and five prizes worth $20. If only 100 tickets have been distributed, what is the expected value of your winnings?
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Chapter 20: Macroeconomics- the Big Picture
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Sample Questions
Q1) An open economy:
A) trades goods and services with other countries.
B) does not regulate its industries.
C) does not impose taxes on its citizens.
D) allows free practice of speech and religion.
Q2) The peak of the business cycle provides evidence that the recession is over.
A)True
B)False
Q3) The point on a business cycle when real GDP stops falling and begins rising is a(n): A) peak.
B) expansion.
C) trough.
D) recession.
Q4) Changing government spending and taxes to affect overall spending is use of _____ policy.
A) tax-and-spend
B) monetary
C) fiscal
D) free-trade
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Chapter 21: Gdp and the Consumer Price Index
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Sample Questions
Q1) Real GDP per capita is:
A) a perfect measure of a country's standard of living.
B) the only way to measure living standards among different countries.
C) an incomplete measure of a country's standard of living.
D) used by the United Nations to compare nations based on measures of welfare.
Q2) (Table: Lemonade and Cookies) Look at the table Lemonade and Cookies. Assume that an economy produces only lemonade and cookies. Assuming 2013 was the base year, the growth rate of real GDP from 2013 to 2014 was:
A) 5%.
B) 10%.
C) 11.25%.
D) 20%.
Q3) In the circular-flow diagram, the places where resources, especially capital and labor, are bought and sold are the:
A) product markets.
B) factor markets.
C) households.
D) firms.
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23
Chapter 22: Unemployment and Inflation
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Q1) The natural rate of unemployment:
A) equals zero.
B) equals the actual rate of unemployment when cyclical unemployment equals zero.
C) equals the cyclical plus the actual rate of unemployment.
D) fluctuates around the actual rate of unemployment.
Q2) (Table: Labor Force Distribution) Look at the table Labor Force Distribution. The total population is:
A) 486 million.
B) 253 million.
C) 278 million.
D) 283 million.
Q3) Deflation is:
A) a decrease in unemployment.
B) a decreasing aggregate price level.
C) a decline in wages.
D) a recession.
Q4) Frictional unemployment is a special type of structural unemployment.
A)True
B)False
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Chapter 23: Long-Run Economic Growth
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Q1) Sweden has real GDP per capita of $50,000, while Chile has real GDP per capita of $25,000. If real GDP per capita in Sweden grows at 2% and Chile's real GDP per capita grows at 4%, how long will it take for real GDP per capita in the two nations to converge?
A) 10 years
B) 20 years
C) 25 years
D) 35 years
Q2) The term human capital describes improvement:
A) made possible by better machines and equipment.
B) in the technology available to the work force.
C) in a worker's skills made possible by education, training, and knowledge.
D) in the robotics technology that can substitute for a human worker.
Q3) When a country utilizes more physical capital per worker over time, there will be:
A) lower and eventually zero growth rate of productivity.
B) higher growth rates of productivity.
C) no change in the growth rate of productivity.
D) lower but always positive growth rates of productivity.
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Chapter 24: Savings, Investment Spending
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Q1) Income to the owners of commercial real estate is in the form of:
A) interest.
B) dividends
C) transfer payments.
D) rent and profit from selling the property at a price higher than its purchase price.
Q2) If the interest rate in the market for loanable funds is above the equilibrium rate:
A) there is a shortage of loanable funds.
B) savings exceed investment spending.
C) the quantity demanded of loanable funds exceeds the quantity supplied.
D) consumption is smaller than savings.
Q3) If a country's capital inflow exceeds outflow, then foreigners are contributing to the domestic country's investment spending.
A)True
B)False
Q4) Explain how fluctuations in asset prices contributed to the financial crisis of 2008.
Q5) Compare stocks and bonds with respect to risk and return.
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Chapter 25: Fiscal Policy
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Q1) The cyclically balanced budget is an estimate of what the budget balance would be if real GDP were exactly equal to potential output.
A)True
B)False
Q2) The government has a budget surplus if _____ expenditures.
A) its revenues are equal to
B) its revenues are less than C) its revenues are greater than
D) the money supply is less than
Q3) Which of the following is NOT a tool of fiscal policy?
A) changing tax rates
B) government transfers
C) government purchases of goods and services
D) changes in the money supply
Q4) Contractionary fiscal policy includes:
A) increasing government purchases.
B) increasing government transfers.
C) raising tax rates.
D) decreasing money growth.
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Chapter 26: Money, Banking, and the Federal Reserve System
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Q1) Checkable deposits are bank accounts on which people can write checks.
A)True
B)False
Q2) Which of the following is NOT one of the main features designed to protect depositors and the economy against bank runs?
A) deposit insurance
B) capital requirements
C) reserve requirements
D) interest rate ceilings on checkable deposits.
Q3) In 1989 Congress increased oversight of S&Ls and allowed two government agencies, Fannie Mae and Freddie Mac, to take over much of the home mortgage lending previously done by the thrifts.
A)True
B)False
Q4) The reduction in a firm's net worth from falling asset prices is called:
A) the balance sheet effect.
B) the income statement effect.
C) leverage.
D) securitization.
Q5) Explain the role of the housing market in the 2008 financial crisis.
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Chapter 27: Monetary Policy
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Q1) (Scenario: Taylor Rule) Look at the scenario Taylor Rule. The economy has:
A) an inflationary gap, since the inflation rate is high.
B) a recessionary gap, since the economy is not producing potential GDP.
C) an inflationary gap, since actual real GDP exceeds potential real GDP.
D) a recessionary gap, since potential real GDP exceeds actual real GDP.
Q2) People pay a cost for holding money instead of nonmonetary assets such as Treasury bills.
A)True
B)False
Q3) International data for 1970-2010 show that monetary neutrality occurs only in wealthy countries.
A)True
B)False
Q4) Short-term interest rates apply to financial assets due within:
A) 24 hours.
B) three months.
C) six months.
D) one year.
Q5) Why does a recession, all else equal, decrease the demand for money?
Q6) What is the opportunity cost of holding money?
Page 29
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Chapter 28: Inflation, Disinflation, and Deflation
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Sample Questions
Q1) During a liquidity trap:
A) monetary policy is ineffective, since nominal interest rates cannot fall below zero.
B) the money market is in disequilibrium.
C) the only tool that the Federal Reserve finds effective is expansionary monetary policy.
D) nominal interest rates will rise regardless of what policy the Federal Reserve pursues.
Q2) The long-run Phillips curve is:
A) the same as the short-run Phillips curve.
B) negatively sloped, showing an inverse relationship between unemployment and inflation.
C) vertical at the nonaccelerating inflation rate of unemployment (NAIRU).
D) unrelated to the NAIRU.
Q3) A high inflation rate leads people to increase their money holdings, leading to more money printing and higher inflation.
A)True
B)False
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Chapter 29: Crises and Consequences
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Sample Questions
Q1) The repo market:
A) is where the Federal Reserve makes loans to banks.
B) refers to transactions between lenders and borrowers with bad credit.
C) is the market for houses in foreclosure.
D) is the overnight credit market.
Q2) As a consequence of the 2008 financial crisis, the economies of the United States and the European Union shrank by more than 25%.
A)True
B)False
Q3) Shadow banks differ from commercial banks because shadow banks:
A) accept deposits only from businesses and state and local governments, not from individuals.
B) are not subject to as many regulations as commercial banks.
C) are not allowed to pay interest on deposits.
D) can operate branches in more than one state.
Q4) Fiscal stimulus is expansionary fiscal measures, such as increases in government spending and decreases in taxes, designed to reduce unemployment.
A)True
B)False
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Chapter 30: Macroeconomics- Events and Ideas
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Sample Questions
Q1) A very low rate of inflation during a recession can lead to:
A) a liquidity trap, which makes monetary policy ineffective.
B) a liquidity trap, which makes monetary policy effective.
C) government budget deficits.
D) government budget surpluses.
Q2) The Great Moderation consensus is that:
A) fiscal policy should play the main role in stabilization policy.
B) monetary policy should play the main role in stabilization policy.
C) automatic stabilizers should be the only type of policy used.
D) government budgets should always be balanced.
Q3) Why did the adoption of Keynesian economics come out of the Great Depression?
Q4) The money velocity equation is stated as:
A) M × V = P × Y.
B) M × P = V × Y.
C) M × Y = V × P.
D) M × Y × P = V.
Q5) The Keynesian school of thought is that expansionary monetary policy has very little or no effect on output.
A)True
B)False
Page 32
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Chapter 31: Open-Economy Macroeconomics
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Sample Questions
Q1) All other things equal, a contractionary monetary policy in Canada will decrease Canadian interest rates and increase the demand for and decrease the supply of the Canadian dollar.
A)True
B)False
Q2) An argument in favor of Britain's adopting the euro was that using the same currency as many other European countries would expand trade and increase productivity.
A)True
B)False
Q3) If the government wants to increase the value of its currency in foreign exchange markets, it can limit the ability of foreigners to buy its currency.
A)True
B)False
Q4) If a fixed currency is below its target exchange rate, the government will sell its own currency in foreign exchange markets.
A)True
B)False
Q5) What are the advantages and disadvantages of fixed and floating exchange rates?
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Chapter 32: Graphs in Economics
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Sample Questions
Q1) A pie chart is used to depict information about:
A) the relative shares of categories of data.
B) the changes of a particular variable over time.
C) positive, not negative, relationships among variables.
D) the changes of a particular variable over time and positive relationships.
Q2) (Figure: Seasonally Adjusted Unemployment Rate) Look at the figure Seasonally Adjusted Unemployment Rate. The distance between each labeled point on the horizontal axis is one year. What is the approximate slope of the graph between 1/2004 and 1/2006?
A) 1/2
B) 1
C) -1/2
D) -2
Q3) The relation between two variables that move in opposite directions is said to be:
A) independent.
B) positive.
C) direct.
D) negative.
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34
Chapter 33: Toward a Fuller Understanding
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Sample Questions
Q1) You have recently graduated from high school and are debating whether to attend college or get a job. Assume that you can spend $50,000 today for tuition and receive your college degree in only one year. When you graduate, you will receive a job that pays you $100,000 immediately and $100,000 the following year. If you begin working immediately, you can earn $35,000 today and each of the next two years. If the annual interest rate is 10%, should you go to college?
Q2) If a firm finds that the net present value of a project is _____ for a given interest rate, it will _____ the project.
A) positive; undertake
B) positive; not undertake
C) negative; undertake
D) positive or negative; undertake
Answer Key
Q3) The present value of a painting that you expect to sell for $500 in three years is $405.22 if the annual interest rate is 5%.
A)True
B)False
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35
Chapter 34: Consumer Preferences and Consumer Choice
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Sample Questions
Q1) If Coke and Pepsi are perfect substitutes for Lynn, her indifference curves are:
A) right angles.
B) concave from the origin.
C) downward-sloping straight lines.
D) vertical lines.
Q2) (Figure: Consumer Equilibrium I) Look at the figure Consumer Equilibrium I. What is Owen's marginal rate of substitution of pizza for soda when he is consuming his optimal consumption bundle?
A) 0.75
B) 1.5
C) 13.3
D) 20
Q3) The slope of a(n) _____ curve shows the rate at which two goods can be exchanged _____.
A) indifference; without changing the total budget
B) utility; without changing the total budget
C) indifference; without changing total utility
D) marginal utility; to increase the consumer's marginal utility
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Chapter 35: Indifference Curve Analysis of Labor Supply
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Sample Questions
Q1) (Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. What is Joanna's wage rate?
A) $10.00
B) $12.50
C) $40.00
D) $15.00
Q2) (Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. What is the opportunity cost of an hour of leisure?
A) $10.00
B) $12.50
C) $40.00
D) $15.00
Q3) To maximize utility, an individual should allocate time so that the marginal utility of the earnings from an hour spent working is equal to the marginal utility of an additional hour of leisure.
A)True
B)False
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