Microeconomics
Test Preparation
Course Introduction
Microeconomics is the branch of economics that studies the decision-making behavior of individual consumers, firms, and industries, and how these agents interact within markets to allocate scarce resources. The course explores fundamental concepts such as supply and demand, elasticity, consumer choice, production and costs, market structures (including perfect competition, monopoly, oligopoly, and monopolistic competition), and the role of government in correcting market failures. Through analytical tools and real-world applications, students develop a thorough understanding of how prices are determined, how resources are distributed, and how economic agents respond to incentives and constraints in a variety of market settings.
Recommended Textbook
Economics Today 17th Edition by Roger LeRoy Miller
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Chapter 1: The Nature of Economics
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Sample Questions
Q1) Charitable donations to the Red Cross
A) can be explained by the rational ignorance theory.
B) can be explained by the rational self-interest theory.
C) cannot be explained by the rational self-interest theory.
D) prove that there is no scarcity in the United States.
Answer: B
Q2) Economics is the study of A) how to get rich.
B) how people allocate their limited resources to satisfy their unlimited wants.
C) how people spend their income.
D) why people want certain goods and services rather than other goods and services.
Answer: B
Q3) Is inflation a macroeconomic or a microeconomic question? Why?
Answer: Inflation is a macroeconomic question because it deals with an economy-wide phenomenon. The price increase of a specific product, such as gasoline, would be a microeconomic matter. Since inflation deals with prices in the economy as a whole, it is a macroeconomic concern.
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Chapter 2: Scarcity and the World of Trade-Offs
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Sample Questions
Q1) The production possibilities curve represents
A) the maximum amount of labor and capital available to society.
B) the combinations of goods and services among which consumers are indifferent.
C) the maximum combination of goods and services that can be produced with fixed resources and technology, given efficient use of the resources.
D) the maximum rate of growth of capital and labor in a country.
Answer: C
Q2) A production possibilities curve will shift outward or to the right for all of the following reasons EXCEPT
A) an increase in the unemployment rate.
B) an increase in the quality of the labor force.
C) an improvement in production technology.
D) a discovery of a new source of renewable energy.
Answer: A
Q3) What is production? What economic factors are involved in production?
Answer: Production involves any activity that converts resources into goods and services that can be consumed. Production requires the use of all kinds of resources-natural resources, capital, and human resources, so the owners of all these resources are involved with production.
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Page 4
Chapter 3: Demand and Supply
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Sample Questions
Q1) All of the following will cause the supply curve of good A to shift rightward EXCEPT
A) a reduction in the prices of inputs used to produce good A.
B) an increase in the number of firms in the industry producing good A.
C) a decrease in the per-unit tax on good A which producers must pay.
D) an increase in the market price of good A.
Answer: D
Q2) According to the above figure for a gasoline market, an increase in the price from $2 to $4 will result in
A) a shortage of 30 million gallons.
B) an increase in quantity demanded of 10 million gallons.
C) an increase in quantity supplied of 20 million gallons.
D) an increase in demand of 20 million gallons.
Answer: C
Q3) According to the above table, a surplus exists when
A) the price is $1 per unit.
B) the price is $2 per unit.
C) the price is $3 per unit.
D) the price is greater than $3 per unit.
Answer: D
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Chapter 4: Extensions of Demand and Supply Analysis
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Sample Questions
Q1) A newspaper headline asserts: "Rising Demand Pushes Up Housing Prices." This headline
A) incorrectly implies that the demand for housing can change, whereas in fact only the quantity of housing demanded can change.
B) incorrectly implies that the price of housing will rise when demand increases.
C) incorrectly implies that more housing will be demanded at higher prices.
D) correctly implies that an increase in demand will increase the market clearing price.
Q2) The signaling aspect of the market system refer to
A) legal requirements for contracts and exchanges.
B) the price of the good to the consumer and producer.
C) the voluntary character of the exchange.
D) transaction costs of carrying out exchanges.
Q3) Price floors are designed to
A) establish a minimum allowable price.
B) allow free market prices to be achieved.
C) create shortages where none existed before.
D) none of the above.
Q4) What are the terms of exchange and how are these terms related to the price?
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Page 6
Chapter 5: Public Spending and Public Choice
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Sample Questions
Q1) The market and public sector are similar in that
A) there is competition amongst the participants in both sectors.
B) the resources used in both sectors are scarce.
C) the participants in both sectors react to incentives.
D) All of the above are true.
Q2) Market failures
A) prevent the price system from attaining economic efficiency.
B) result in quantities and prices that are socially desirable.
C) strengthen economic efficiency by forcing unprofitable firms to close.
D) weaken the argument for government intervention in the economy.
Q3) Safe Bank has an outside display which has the time and temperature that is always correct. This is an example of
A) an interference in the workings of the price system.
B) a breakdown in communication between the bank and its customers.
C) a negative externality.
D) a positive externality.
Q4) Explain why an external benefit leads to an under-allocation of resources to the production of a good.
Q5) How do public goods differ from private goods?
Q6) How does a government-sponsored good differ from a public good?
Page 7
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Chapter 6: Funding the Public Sector
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Q1) The Social Security system was founded
A) during the Civil War, to pay pensions for veterans.
B) during the last years of the nineteenth century, as people who had once depended on having a family farm found themselves without a means of support.
C) as the United States began to recover from the Great Depression.
D) in response to concerns that arose during the high inflation of the 1970s.
Q2) Current concern about Social Security is that
A) the fund is growing too rapidly and would trigger inflation.
B) the fund might be depleted before long and might not be there for workers who retire later.
C) the government is planning to phase out the program.
D) none of the above
Q3) The marginal income tax rate applies to
A) all income earned by a family.
B) the income in the highest tax bracket reached.
C) the income of the highest income U.S. taxpayers.
D) the income received by people above the national average.
Q4) According to dynamic tax analysis, will continuing to push up the tax lead to steady increases in tax revenues? Why?
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Chapter 7: The Macroeconomy: Unemployment, Inflation, and Deflation
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Sample Questions
Q1) A recession may be defined as
A) a period during which the rate of growth of business activity is consistently less than its long-term trend.
B) an increase in real economic output from one period to the next.
C) no change in real economic output over a period of time.
D) no change in the dollar (money) value of economic output over a period of time.
Q2) Deflation is the situation when
A) the rate at which prices increase falls.
B) the average of all prices is declining.
C) the real rate of interest is negative.
D) some prices are increasing and some are declining.
Q3) Unemployment that is caused by business recessions is called
A) frictional unemployment.
B) cyclical unemployment.
C) seasonal unemployment.
D) structural unemployment.
Q4) What are the costs to society of inflation? Who is harmed by inflation and who benefits?
Q5) In what ways is the consumer price index flawed?
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Chapter 8: Measuring the Economys Performance
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Sample Questions
Q1) Which of the following will have the smallest dollar value?
A) Personal income.
B) Disposable personal income.
C) National income.
D) Net domestic product.
Q2) The simple circular flow of income shows that the total income in an economy equals
A) total profits earned by firms.
B) all taxes paid by households.
C) the total amount of money supplied by the government.
D) total expenditures.
Q3) Using the above table, the Gross Domestic Product (GDP) for the country is A) 662.
B) 84.
C) 746.
D) 338.
Q4) Where does profit enter in the circular flow? Why?
Q5) Why aren't financial transactions, sales of secondhand goods, and household production included in measuring GDP?
Page 10
Q6) Explain the two main methods used to measure GDP.
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Chapter 9: Global Economic Growth and Development
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Sample Questions
Q1) What are the shortcomings of using changes in per capita real GDP to measure economic growth?
Q2) Economic growth will
A) shift the production possibilities curve inward.
B) shift the production possibilities curve outward.
C) shift along the production possibilities curve toward the X-axis.
D) be a movement from inside the productions possibilities curve to the curve itself.
Q3) Refer to the above table. You have a choice among four alternatives. Choice A lets you invest $250,000 at 4 percent; B lets you invest $125,000 at 6 percent; C lets you invest $62,500 at 8 percent, and D lets you invest $31,250 at 10 percent. Which choice will get you to $1 million faster?
A) A
B) B
C) C
D) D
Q4) How does innovation differ from invention? Why is innovation required for economic growth?
Q5) Why are economic growth and saving related?
Q6) What is economic growth and why are growth rates so important?
Page 11
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Chapter 10: Real GDP and the Price Level in the Long Run
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Sample Questions
Q1) The interest rate effect shows that if the price level increases,
A) consumers and businesses will increase their spending to buy the same amount of goods as before to make up for the higher interest rates.
B) consumers and businesses will decrease their spending as the interest rate increases, thereby pushing up the cost of acquiring funds.
C) U.S. exports and imports will both decrease.
D) the real value of financial assets will increase.
Q2) Higher interest rates
A) reduce total planned real expenditures because they increase the cost of borrowing funds.
B) reduce total planned real expenditures because they reduce the income of bankers and other creditors.
C) increase total planned real expenditures because they increase the incomes of all people in the economy.
D) increase total planned real expenditures because they lower the costs of building new plants and equipment.
Q3) What are the three forces that cause the aggregate demand curve to slope down? Explain.
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Chapter 11: Classical and Keynesian Macro Analyses
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Q1) The horizontal short-run aggregate supply curve
A) assumes that wages and all other input prices are constant.
B) shows that real GDP can be increased only when prices increase.
C) assumes that there is full employment in the economy.
D) assumes that opportunity cost is constant.
Q2) According to the classical model, prices and wages
A) are flexible.
B) must be set by government.
C) move downward easily, but are "sticky" upward.
D) move upward easily, but are "sticky" downward.
Q3) Classical economists argued that
A) there would always be an excess of saving over investment.
B) workers had money illusion.
C) excess savings would create unemployment.
D) a flexible interest rate would make saving equal to investment.
Q4) A permanent reduction in international trade barriers would
A) decrease long-run aggregate supply.
B) increase long-run aggregate supply.
C) decrease aggregate demand.
D) increase aggregate demand.
Page 13
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Chapter
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Q1) Along the 45° reference line
A) consumption expenditures equal saving.
B) the relationship between consumption and income is represented.
C) the average propensity to consume is represented.
D) planned real expenditures equal real disposable income.
Q2) What happens as interest rates fall?
A) The number of profitable investment opportunities declines.
B) The opportunity cost of using retained earnings to finance investment spending declines.
C) Planned investment spending also falls.
D) Planned investment spending remains constant since it depends on profit projections not interest rates.
Q3) Suppose that the marginal propensity to consume (MPC) is .75 and there is an increase in investment spending of $100,000. As a result, equilibrium real Gross Domestic Product (GDP) would increase by
A) $75,000.
B) $100,000.
C) $400,000.
D) $750,000.
Q4) Explain how the aggregate demand curve is related to the C + I + G + X curve.
Page 14
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Chapter 13: Fiscal Policy
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Sample Questions
Q1) Automatic stabilizers have the effect of
A) increasing aggregate demand during a recessionary gap.
B) increasing aggregate demand during an inflationary gap.
C) increasing long-run aggregate supply during a recessionary gap.
D) increasing long-run aggregate supply during an inflationary gap.
Q2) To the extent that a direct expenditure offset results from an expansionary fiscal policy,
A) the stimulative effect will be less than anticipated.
B) the stimulative effect will be more than anticipated.
C) the fiscal policy will not be discretionary.
D) the time lags associated with the implementation of fiscal policy will shorten.
Q3) Which of the following represent expansionary fiscal policy?
A) a reduction in government spending
B) an increase in average individual income tax rates
C) a cut in corporate income tax rates
D) an increase in marginal individual income tax rates
Q4) Explain how indirect crowding out can offset expansionary fiscal policy.
Q5) What is discretionary fiscal policy and what is its purpose?
Q6) Explain the Ricardian equivalence theorem.
Page 15
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Chapter 14: Deficit Spending and the Public Debt
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Q1) Which of the following statements has usually held true about the relationship between the trade deficits and government budget deficits?
A) There is no relationship between trade deficits and budget deficits.
B) There is a positive relationship between trade deficits and budget deficits.
C) There is a negative relationship between trade deficits and budget deficits.
D) A relationship exists only when there is a balanced budget.
Q2) Since 1940, the U.S. government has experienced
A) about the same number of years with budget deficits as with budget surpluses.
B) twice as many annual budget surpluses as annual budget deficits.
C) only one year with a budget surplus.
D) many more budget deficits than budget surpluses.
Q3) To compare the net public debt of various countries, the debt has to be compared to
A) the country's trade deficit.
B) the country's current budget deficit or surplus.
C) the country's real GDP.
D) the country's national defense expenditure.
Q4) What are the macroeconomic consequences of a budget deficit when the economy is operating at full employment? Be sure to discuss the effects in the short-run and in the long-run.
Page 16
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Chapter 15: Money, Banking, and Central Banking
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Q1) Open market operations are
A) the buying of existing corporate securities in secondary markets by private citizens, banks and the Fed.
B) the buying and selling of existing U.S. government securities in open private markets by the Fed.
C) the actions of the Fed that are used to finance deficit financing by the government.
D) the selling of new government securities in order to increase the money supply.
Q2) The Fed is said to be the "lender of last resort" in that
A) it stands ready to lend to any depository institution that it has decided should not fail.
B) it makes loans to individuals whom commercial banks do not believe are credit-worthy.
C) it charges a higher interest rate to borrowers than does any other bank.
D) it functions as the government's bank only when commercial banks fail to do so.
Q3) Why is money as a medium of exchange important in an economy?
Q4) Explain the role of financial intermediation.
Q5) What is money?
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Chapter 16: Domestic and International Dimensions of Monetary Policy
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Q1) If the interest rate increases, the A) quantity of money demanded will remain unchanged.
B) money demand curve will shift to the right.
C) money demand curve will shift to the left.
D) quantity of money demanded will fall.
Q2) An increase in bond prices will most likely result in A) an increase in interest rates.
B) a decrease in the quantity demanded of money.
C) an increase in the quantity demanded of money.
D) an increase in the opportunity cost of holding money.
Q3) Suppose the Fed increases the money supply. As a result of this, people go out and spend more money on consumer goods, increasing aggregate spending. This is known as a(n)
A) direct effect of monetary policy.
B) indirect effect of monetary policy.
C) direct effect of fiscal policy.
D) indirect effect of fiscal policy.
Q4) Using a graph above, show the short-run and long-run effects of an expansionary monetary policy.
Page 18
Q5) What does the demand curve for money look like? Why?
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Chapter 17: Stabilization in an Integrated World Economy
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Q1) Under the rational expectations hypothesis, if wages adjust rapidly to new information about intended policy actions, the only time that changes in government policies have real effects is when
A) the changes are unanticipated.
B) the changes involve fiscal policy.
C) the changes involve monetary policy.
D) the changes affect aggregate demand.
Q2) According to New Keynesians, which of the following is one of the two key factors that determines the inflation rate?
A) fiscal policy
B) firms' average inflation adjusted per-unit costs of production
C) oil prices
D) stock prices
Q3) Use the above figure. This graph is known as A) the Laffer curve.
B) the short-run Phillips curve.
C) the NAIRU relationship.
D) the Keynesian curve.
Q4) Explain the difference between active and passive policy making.
Q5) Describe and explain the policy irrelevance proposition.
Page 19
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Chapter 18: Policies and Prospects for Global Economic Growth
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Q1) What are some of the criticisms that have been levied on the World Bank and the International Monetary Fund concerning adverse selection and moral hazard?
Q2) Which of the following is NOT a function of the International Monetary Fund?
A) serve as lender of last resort for national governments
B) administer an international foreign exchange system
C) establish the SDR system nations utilize to settle international payment obligations
D) establish and administer each nation's fiscal and monetary policies
Q3) When an international financial crisis occurs
A) financial lenders protect their investments by pouring money into the ailing country.
B) investors sell off bonds and restrict loans as a mechanism to help the country recover.
C) financial flows can slow to a trickle, influencing economic growth.
D) there are no serious financial effects that last more than a few months.
Q4) How have government inefficiencies contributed to the creation of dead capital in the world's developing nations?
Q5) Discuss why the World Bank has been criticized for making loans to nations that can attract private funds.
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Chapter 19: Demand and Supply Elasticity
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Q1) Refer to the above table. What is the absolute price elasticity of demand if a price falls from $7 to $6.50?
A) 0.85
B) 1.08
C) 1.17
D) 0.92
Q2) The longer any price change lasts over time, the A) more difficult it is to alter quantity demanded.
B) the more quickly quantity demanded will return to its original level.
C) the longer the short-run equilibrium will continue to be the short-run equilibrium. D) more quantity demanded will change.
Q3) When demand is unit elastic, a 10 percent change in the price of the good
A) will cause a change in quantity demanded of less than 10 percent.
B) will cause a change in quantity demanded equal to 10 percent.
C) will cause a change in quantity demanded greater than 10 percent.
D) will not cause any change in quantity demanded.
Q4) Which has a more elastic demand: hamburger or beef?
Q5) What is the price elasticity of demand? How is the price elasticity of demand calculated?
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Chapter 20: Consumer Choice
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Q1) Refer to the above table. If a consumer's optimum consists of 3 magazines and 6 books, then
A) the price of a magazine is six times more than the price of a book.
B) the price of a magazine is three times more than the price of a book.
C) the price of a book is more than five times more than the price of a magazine.
D) the price of a book is six times more than the price of a magazine.
Q2) Marginal utility is defined as
A) the increase in utility divided by the total number of units consumed.
B) the total utility divided by the total number of units consumed.
C) the change in total utility divided by the change in number of units consumed.
D) the number of units consumed divided by the total utility.
Q3) Refer to the above table. Suppose the price of a hamburger is $2, the price of a movie is $5, and the income of the consumer is $29. How many hamburgers and movies will this consumer buy to be at an optimum?
A) 1 hamburger and 5 movies.
B) 6 hamburgers and 3 movies.
C) 4 hamburgers and 4 movies.
D) 2 hamburgers and 5 movies.
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Chapter 21: Rents, Profits, and the Financial Environment of Business
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Q1) The more profits are reinvested into the firm, the
A) less there is available to distribute to bondholders.
B) less there is available to distribute to stockholders.
C) more the firm will be able to raise in sales of new issues to stock.
D) more bonds the firm will sell in order to pay their required dividends to preferred stockholders.
Q2) If the death of an owner causes the firm to dissolve, the firm must have been
A) a partnership only.
B) a proprietorship only.
C) a corporation only.
D) either a proprietorship or a partnership.
Q3) What is the present value of $100 three years from now at an interest rate of 6%?
A) $83.96
B) $82
C) $94.34
D) $119.10
Q4) Which of the following is not an advantage of a partnership?
A) Limited liability
B)
23
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Chapter 22: The Firm: Cost and Output Determination
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Q1) The relationship Q = f(K, L) is an example of a A) cost function.
B) production function.
C) demand equation.
D) profit equation.
Q2) Marginal cost begins to rise when
A) diminishing marginal product begins.
B) diminishing marginal product ends.
C) average total cost falls.
D) fixed cost falls.
Q3) In the short run, the additional output that results from hiring an additional unit of a variable input is the
A) marginal physical product.
B) average product.
C) average variable cost.
D) marginal cost.
Q4) "If an industry's minimum efficient scale is between 2,000 and 4,000 units of output, then a firm producing 2,000 units of output in that industry has a cost-saving advantage over another firm producing 4,000 units of output in the same industry." Do you agree or disagree? Explain.
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Chapter 23: Perfect Competition
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Q1) Refer to the above table. If the price is $3, the perfectly competitive firm should produce
A) 102 units.
B) 105 units.
C) 103 units.
D) 104 units.
Q2) If a firm is producing an output rate at which marginal cost is greater than price, the firm
A) is sustaining economic loss.
B) should increase its output level.
C) should reduce its output level.
D) will not be covering its fixed cost.
Q3) The opportunity cost to society of producing one more unit of the good is
A) average cost.
B) marginal cost.
C) efficiency costing.
D) the optimal cost.
Q4) "An industry's short-run supply curve is constructed by adding horizontally all the average variable cost curves of firms in that industry." Do you agree or disagree? Why?
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Chapter 24: Monopoly
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Q1) "Unlike a monopoly, consumer surplus in a perfectly competitive market is zero." Do you agree or disagree? Why?
Q2) In principle, can a monopolist hold its monopoly power in the long run? Explain.
Q3) If marginal cost is constant, what happens to a market if it alters from perfect competition to monopoly without any change in the position of the market demand curve or any variation in costs?
A) Consumer surplus decreases, producer surplus increases and a deadweight loss is created.
B) Consumer surplus decreases, producer surplus decreases and a deadweight loss is created.
C) Consumer surplus increases, producer surplus decreases and a deadweight loss is created.
D) Consumer surplus increases, producer surplus increases and a deadweight loss is created..
Q4) Explain how a monopolist can increase profits by price discriminating. What are the conditions necessary for price discrimination?
Q5) What does the demand curve facing a monopoly look like? Why?
Q6) "A monopolist can charge whatever price it wants." Do you agree or disagree? Why?
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Chapter 25: Monopolistic Competition
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Q1) Explain how information products are "special."
Q2) An experience good is a product
A) with qualities that consumers lack the expertise to assess without assistance.
B) that emphasizes the features of its product.
C) with characteristics that enable an individual to evaluate the product's quality in advance of a purchase.
D) that an individual must consume before the quality can be established.
Q3) Suppose a sushi restaurant is making significant economic profit in the short run. In the long run
A) more people will open sushi restaurants, reducing the economic profit for each restaurant.
B) high barriers to entry keep people from opening sushi restaurants.
C) the government will require the sushi restaurant to sell part of its interests in the city.
D) more people will open steak restaurants, increasing the economic profit for the sushi restaurant.
Q4) For an information product, why a profit-maximizing firm unable to practice marginal cost pricing? How is its price determined in the long run?
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Chapter 26: Oligopoly and Strategic Behavior
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Q1) The market structure of monopoly exists when
A) there are a small number of interdependent firms that constitute the entire market.
B) there is a single producer of a product.
C) there are many producers of differentiated products.
D) there are many producers of a homogeneous product.
Q2) Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. If Bob does not confess, what is the best strategy for Harry?
A) Confess.
B) Don't confess.
C) Flip a coin to decide what to do.
D) There is no best strategy.
Q3) The Herfindahl-Hirschman index is a measure of
A) the profit margin of an industry.
B) market size.
C) the degree of collusion among firms in a market.
D) the degree of concentration among firms in a market.
Q4) Explain the basic operations of an economic game.
Q5) Why would a member of a cartel cheat?
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Chapter 27: Regulation and Antitrust Policy in a Globalized Economy
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Q1) Which of the following federal agencies is engaged in economic regulation?
A) Occupational Safety and Health Administration
B) Federal Motor Carrier Safety Administration
C) Food and Drug Administration
D) Consumer Product Safety Commission
Q2) In marginal cost pricing, the natural monopoly would have to set price equal to
A) AFC.
B) AVC.
C) ATC.
D) MC.
Q3) In the above figure, if this natural monopolist were unregulated, the profit maximizing firm would sell the product at the price ________.
A) A
B) B
C) C
D) F
Q4) Why do government regulators not enforce marginal cost pricing for natural monopolies? What are the common regulatory solutions?
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Q5) What is the main difference between economic regulation and social regulation?
Chapter 28: The Labor Market: Demand, Supply and Outsourcing
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Q1) The monopolist's input demand curve is equal to its
A) variable cost curve.
B) marginal cost curve.
C) average cost curve.
D) marginal revenue product curve.
Q2) According to the above table, if the wage rate is $400 a week and the price of the good produced is $5, the perfectly competitive firm should hire
A) 3 workers.
B) 4 workers.
C) 5 workers.
D) 6 workers.
Q3) A profit maximizing firm will hire additional workers until
A) the additional cost associated with hiring the last worker equals the average wage rate of the workers.
B) the additional cost associated with hiring the last worker equals the additional revenue generated by that worker.
C) the extra revenue generated by the last worker hired equals zero.
D) the extra cost associated with hiring the last worker equals the price of the good produced.
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Chapter 29: Unions and Labor Market Monopoly Power
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Q1) When unions exist in markets,
A) firms must have market power in their output markets.
B) there no longer is a perfectly competitive labor supply.
C) individual workers no longer make labor-leisure trade-off decisions.
D) employers have market power in labor markets.
Q2) Which of the following is NOT considered to be a benefit of unionism?
A) increased featherbedding
B) greater workplace safety
C) higher workforce stability
D) provision of arbitration and grievance procedures
Q3) A labor union composed of workers in the same industry is called
A) a craft union.
B) an industrial union.
C) a company shop.
D) a guild.
Q4) Using a graph, compare the labor-market equilibrium under perfect competition and monopsony. Explain.
Q5) "Unions in the United States have helped raise the incomes of union workers as compared to nonunion workers." Do you agree or disagree? Why?
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Chapter 30: Income, Poverty, and Health Care
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Q1) The purpose of the Earned Income Tax Credit Program (EITC) is to
A) provide rebates of Social Security taxes to low-income workers.
B) encourage low- and moderate-income workers to take second jobs to increase their income.
C) provide in-kind services such as food stamps and public housing to those individuals who have poor credit.
D) give tax credits to low-income individuals who do volunteer work in their communities.
Q2) Other things being equal, a national health insurance program would
A) generate higher life expectancies and lower infant mortality rates.
B) generate lower life expectancies and higher infant mortality rates.
C) increase total health care expenditures.
D) increase the quality of life.
Q3) Economic discrimination against minorities exists when
A) minorities have less education and training than whites.
B) minorities are paid less than whites on average.
C) minorities are paid less than whites with the same education, experience, and training.
D) minorities are in different occupations than whites.
Q4) Why doesn't the age-earning cycle continuously increase until retirement age?
Page 32
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Chapter 31: Environmental Economics
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Q1) The Black Ash Steel Company's plant belches large quantities of noxious fumes and black ash into the air. Residents in the surrounding area have higher medical bills because of Black Ash's pollution. As long as Black Ash is allowed to emit pollution and ignore any externalities, the firm will
A) overproduce.
B) under produce.
C) charge too high a price for its output.
D) be absorbing the full value of its social costs.
Q2) Use the above table. What will the tax be when external costs are internalized?
A) $14
B) $13
C) $12.20
D) $1.80
Q3) If pollutants from smoke stacks in a city such as Newark causes people to paint their homes and cars more frequently, this implies
A) external benefits to the home and car owners.
B) external costs on home and car owners.
C) internal cost to home and car owners.
D) none of the above
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Chapter 32: Comparative Advantage and the Open Economy
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Q1) Which of the following is consistent with international trade theory?
A) The United States needs trade restrictions to stay competitive.
B) The United States has been falling behind Europe and Japan because its economy is too open.
C) The standard of living within a country is a function of the economic strength of the economy and not of its relative position.
D) A country should strive for comparative advantage in manufacturing.
Q2) Consider a world of two countries producing only wheat and cloth. In one hour, residents of Country A can produce 1 unit of wheat and 0.5 unit of cloth, whereas residents of Country B can produce 0.3 unit of wheat and 0.4 unit of cloth. Country A should export
A) wheat and cloth; country B should not export anything.
B) wheat and country B should export cloth.
C) nothing and country B should export both wheat and cloth.
D) cloth and country B should export wheat.
Q3) "The United States has fallen behind Japan and most of Europe in terms of competitiveness." Do you agree or disagree? Why?
Q4) How can comparative advantage yield gains from trade?
Q5) What is the relationship between imports and employment?
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Chapter 33: Exchange Rates and the Balance of Payments
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Q1) Changes in which of the following will cause a change in exchange rates?
A) real interest rates
B) consumer preferences
C) perceptions of economic and political stability
D) All of the above
Q2) In the above table, the fact that there is a minus sign before the number for unilateral transfers means that
A) Country X has significant inflation.
B) Country X imported more goods than it exported.
C) Country X received more in foreign aid than it gave in foreign aid.
D) Country X gave more to foreign residents than foreign residents gave to Country X.
Q3) Suppose that the current exchange rate between the dollar and peso is $1 equals 10 pesos. If a firm in Mexico wanted to purchase $100,000 worth of U.S. televisions, how many pesos must they exchange?
A) 10,000 pesos
B) 100,000 pesos
C) 1,000,000 pesos
D) 11,000,000 pesos
Q4) Explain the three categories of balance of payments transactions.
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