Public Economics Practice Exam
Course Introduction
Public Economics explores the role of government in the economy, focusing on how public policy can address market failures, redistribute income, and provide public goods. The course examines the rationale for government intervention, methods of taxation, and government expenditure, as well as the economic effects of these policies on efficiency and equity. Students will analyze theoretical frameworks alongside real-world applications to understand how governments design and implement policies aimed at improving social welfare.
Recommended Textbook
Economics Private and Public Choice 14th Edition by
David A. Macpherson
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Chapter 1: The Economic Approach
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Sample Questions
Q1) The basic difference between macroeconomics and microeconomics is that
A) microeconomics is concerned with aggregate markets and the entire economy, while macroeconomics is concerned with specific individual markets.
B) macroeconomics is concerned with policy decisions, while microeconomics applies only to theory.
C) microeconomics is concerned with individual markets and the behavior of people and firms, while macroeconomics is concerned with aggregate markets and the entire economy.
D) macroeconomics is concerned with positive economics, while microeconomics is concerned with normative economics.
Answer: C
Q2) What do economists mean when they state that a good is scarce?
A) There is a shortage or insufficient supply of the good at the existing price.
B) It is impossible to expand the availability of the good beyond the current amount.
C) People will want to buy more of the good regardless of the price of the good.
D) The amount of the good that people would like exceeds the supply freely available from nature.
Answer: D
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Chapter 2: A : Some Tools of the Economist
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Sample Questions
Q1) Which of the following will most likely cause an outward shift in the production possibilities curve?
A) a reduction in the man-made productive resources available to the economy as the result of a decline in investment
B) an increase in government payments to farmers for taking land out of production
C) an increase from 40 to 50 hours in the average number of hours worked per week
D) None of the above would cause an outward shift in the production possibilities curve.
Answer: C
Q2) Retired persons travel by bus and automobile more frequently than do business executives, who more commonly use air travel. An economic explanation for this would be that
A) business executives have more time to travel.
B) it is more important for retired persons to save time.
C) business executives value their time more highly.
D) retired persons have more money than do business executives.
Answer: C
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Chapter 2: B : Some Tools of the Economist
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Sample Questions
Q1) A popular video program used to teach economics to primary school children defines opportunity cost as "what you give up to get something." In light of your understanding of opportunity cost, how would you modify this definition?
Answer: The video program always gives the children two choices; the choice forgone, therefore, is the opportunity cost. For children of this age and reasoning ability, this is probably a good approach. We know, however, that more than one option is relinquished once a decision has been made. A choice to take a 9 a.m. economics class will mean that you cannot take English, French, math, biology, or philosophy at that time. Our understanding of opportunity cost reveals that it is only the highest valued alternative forgone.
Q2) Refer to Table 2-4. Which of the following is correct?
A) Lebos has the comparative advantage in both goods.
B) Slavia has the comparative advantage in food.
C) Lebos has the comparative advantage in food.
D) Lebos has the comparative advantage in clothing.
Answer: C
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Chapter 3: A : Supply, Demand, and the Market Process
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Q1) If people expect the price of coffee to rise next month, the demand for coffee will A) decrease now.
B) increase now.
C) stay the same now and increase next month.
D) stay the same now and decrease next month.
E) stay the same now and next month.
Q2) An increase in the price of a good normally increases the A) demand for its substitutes
B) supply of complements for the good
C) purchasing power of consumers' dollar incomes
D) money income of the consumer
Q3) If a large percentage increase in the price of a good results in a small percentage reduction in the quantity demanded of the good, demand is said to be A) horizontal.
B) relatively inelastic.
C) relatively elastic.
D) income proof.
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Chapter 3: B : Supply, Demand, and the Market Process
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Q1) Which of the following is not a function of prices in a market system?
A) Prices have the crucial job of balancing supply and demand.
B) Prices send signals to buyers and sellers to help them make rational economic decisions.
C) Prices coordinate economic activity.
D) Prices ensure an equitable distribution of goods and services among consumers.
Q2) Refer to Figure 3-19. Sellers whose costs are less than price are represented by which line segment?
A) AC
B) CE
C) BC
D) CD
Q3) Which of the following would most likely shift the supply curve to the left for Wii video games?
A) an increase in the price of Wii video games
B) a decrease in the price of computer chips used to make Wii games
C) a decrease in the demand for Wii games
D) an increase in the price of electronic components used to produce the Wii games
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Chapter 4: A : Supply and Demand: Applications and Extensions
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Q1) If a $5,000 tax is placed legally (statutorily) on the sellers of new automobiles and as a result the price of automobiles to consumers rises by $4,000, then the actual burden of the tax
A) falls completely on automobile buyers.
B) falls completely on automobile sellers.
C) is $4,000 on automobile buyers and $1,000 on sellers.
D) is $1,000 on automobile buyers and $4,000 on sellers.
Q2) Refer to Figure 4-8. Which of the following is true?
A) The tax increases the price of soft coal by $40 per ton.
B) Since the demand for soft coal is more inelastic than the supply, consumers bear most of the burden of the tax.
C) Since the demand for soft coal is more elastic than the supply, suppliers of soft coal bear most of the burden of the tax.
D) Since the supply of soft coal is highly inelastic, the primary burden of the tax is imposed on the consumers of soft coal.
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Chapter 4: B : Supply and Demand: Applications and Extensions
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Sample Questions
Q1) Refer to Figure 4-17. Suppose a price floor of $7.00 is imposed. As a result,
A) buyers' total expenditure on the good decreases by $20.00.
B) the supply curve will shift to the left so as to now pass through the point (Q = 40, P = $7.00).
C) the quantity of the good demanded decreases by 20 units.
D) the price of the good continues to serve as the rationing mechanism.
Q2) Refer to Figure 4-25. The tax causes a reduction in consumer surplus that is represented by area
A) A.
B) B + C.
C) D + E.
D) F.
Q3) If there was an increase in the excise tax on beer, what would be the effect on the equilibrium price and quantity of beer?
A) price increases, quantity decreases
B) price decreases, quantity decreases
C) price increases, quantity increases
D) price decreases, quantity increases
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Chapter 5: Difficult Cases for the Market and the Role of Government
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Q1) Which of the following would be a protective function of government?
A) legal enforcement of contracts and rules against fraud
B) undertaking income redistribution
C) providing national parks
D) providing a stable monetary system
Q2) Which one of the following would reduce the efficiency of the market process?
A) promoting competitive markets
B) protecting persons from fraud and theft
C) providing a stable monetary environment
D) protecting consumers by imposing legally mandated price ceilings
Q3) Market failure will most likely arise from poor information when the product is
A) a repeat-purchase item.
B) easily evaluated on inspection.
C) often purchased from the same seller.
D) unlikely to be purchased from the same seller in the future.
Q4) A good is considered to be a public good if it
A) is a good produced by the government sector.
B) is both nonrival-in-consumption and nonexcludable.
C) benefits only a small group of consumers but is very costly to produce.
D) is a good whose production is financed by tax revenue.
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Chapter 6: The Economics of Collective Decision-Making
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Q1) Most income transfer programs in the United States
A) are means-tested programs that transfer income to the poor.
B) allocate income to small businesses and small farmers.
C) are designed to help those with very little economic and political power.
D) allocate income to concentrated interest groups, such as the elderly, large farmers, and business interests.
Q2) When voters pay taxes in proportion to the benefits they receive from government projects,
A) efficient projects will tend to be opposed by a majority of voters.
B) inefficient projects will often be favored by a majority of voters.
C) projects that are efficient will tend to be favored by an overwhelming majority of voters.
D) democratic political decision making can be expected to work poorly.
Q3) Public choice theory indicates competitive forces provide a politician with a strong incentive to offer voters a bundle of political goods that she believes
A) is best for the economic and political situations the country faces.
B) will most likely clear the legislative process.
C) will increase the welfare of society.
D) will increase her chances of winning elections.
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Chapter 7: A : Taking the Nations Economic Pulse
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Q1) GDP is not a perfect measure of welfare because it
A) treats a dollar spent on candy bars the same as a dollar spent on education
B) treats a dollar spent on exports the same as a dollar spent on imports
C) double counts the value of leisure time
D) double counts depreciation
E) counts illegal activities in the underground economy
Q2) If waitresses and taxi drivers do not report all of their income to the government, GDP will be understated. This is because the unreported income
A) involves the introduction of new goods.
B) is part of the underground economy.
C) is an example of nonmarket production.
D) represents an increase in leisure time.
Q3) Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 215 for 2008. Ruth's 1931 salary was equivalent to a 2008 salary of about
A) $536,000.
B) $828,000.
C) $1,131,000.
D) $1,216,000.
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Chapter 7: B : Taking the Nations Economic Pulse
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Q1) National income is
A) personal income of individuals minus the taxes they pay.
B) gross national product minus depreciation.
C) employee compensation, self-employment income, interest, rents, plus corporate profits.
D) consumption, investment, government expenditures, and net exports.
Q2) You buy one hundred shares of IBM stock at $100 per share and pay $250 commission. How much will this transaction add to GDP?
A) zero
B) $250
C) $10,000
D) $10,250
Q3) Answer the following questions:
a.
What does GDP measure, and why is it a useful tool for economists, business decision makers, and government policy makers?
b.
Explain at least two important things GDP does not measure.
Q4) Explain the two approaches to calculating GDP.
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Chapter 8: Economic Fluctuations, Unemployment, and Inflation
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Q1) Which of the following is true?
A) When a dynamic labor market is operating efficiently, mostly cyclical unemployment will be present.
B) Some unemployment will be present even when a dynamic labor market is operating efficiently.
C) When full employment is present, the rate of unemployment will be zero.
D) When full employment is present, there will not be any frictional unemployment.
E) When full employment is present, it will be impossible to sustain the current rate of output in the future.
Q2) The stages of a business cycle, in order, are
A) expansion, contraction, recession, and boom.
B) contraction, recession, expansion, and boom.
C) boom, expansion, contraction, and recession.
D) recession, contraction, expansion, and boom.
Q3) The value of money
A) remains constant during periods of inflation.
B) varies inversely with the general price level.
C) varies directly with the general price level.
D) varies indirectly with output.
Page 14
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Chapter 9: A : an Introduction to Basic Macroeconomic Markets
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Q1) Which of the following is most likely to increase the net inflow of foreign capital?
A) an increase in the rate of inflation
B) a decline in real GDP as the economy falls into a recession
C) a reduction in domestic investment
D) an increase in the real interest rate in the loanable funds market
Q2) What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
A) the supply of loanable funds would shift right and investment would increase.
B) the supply of loanable funds would shift left and investment would decrease.
C) the demand for loanable funds would shift right and investment would increase.
D) the demand for loanable funds would shift left and investment would decrease.
Q3) Which of the following is true regarding an unanticipated increase in inflation?
A) Both borrowers and lenders will be better off.
B) Both borrowers and lenders will be worse off.
C) Borrowers will be better off and lenders will be worse off.
D) Borrowers will be worse off and lenders will be better off.
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Chapter 9: B : an Introduction to Basic Macroeconomic Markets
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Q1) Monetary policy can be most accurately described as
A) the use of government taxation and expenditures to achieve macroeconomic goals.
B) the use of the government's regulatory powers to improve economic efficiency.
C) the government provision of goods to improve economic efficiency.
D) the deliberate control of the money supply to achieve macroeconomic goals.
Q2) In 2000, a major U.S. oil company began exploration off the southeastern coast of the United States. Suppose the company discovers huge reserves of natural gas. Using the aggregate demand/ aggregate supply model, predict what shifts will occur and what will happen to output and prices in both the long and short runs.
Q3) In the short run, if prices were above equilibrium,
A) excess aggregate demand for goods and services would place downward pressure on prices.
B) excess aggregate supply of goods and services would place upward pressure on prices.
C) excess aggregate demand for goods and services would place upward pressure on prices.
D) excess aggregate supply of goods and services would place downward pressure on prices.
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Chapter 10: Dynamic Change, Economic Fluctuations, and the Ad-As Model
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Q1) With regard to the business cycle, most modern economists believe that
A) once a recession starts, market forces are incapable of preventing the economy from plunging deeper and deeper into a depression.
B) market economies will experience lengthy periods of recession pretty much regardless of what policy makers do.
C) the economy's self-corrective mechanism will quickly restore full employment regardless of the choices made by policy makers.
D) lower real interest rates and reductions in real resource prices will help direct an economy out of recession.
Q2) Which of the following will most likely be an unanticipated economic change?
A) higher oil prices resulting from a revolution in an oil-exporting country
B) this year's increase in the labor force
C) a constant increase in the general level of prices over a lengthy period of time
D) an increase in prime-age workers as a proportion of the labor force
Q3) Which will cause a larger short-run increase in prices: an anticipated or unanticipated increase in aggregate demand? Will they cause the same increase in prices in the long run?
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Chapter 11: Fiscal Policy: the Keynesian View and Historical Perspective
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Q1) Refer to Figure 11-3. If the economy is currently operating at point a, which of the following would a Keynesian economist be most likely to favor?
A) a tax cut
B) an increase in government expenditures
C) a shift to a more expansionary monetary policy
D) a reduction in the budget deficit
Q2) When the federal government is running a budget surplus,
A) government revenues exceed government expenditures.
B) government expenditures exceed government revenues.
C) the economy must be in a recession.
D) additional government borrowing will decrease the size of the national debt.
Q3) If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
A) be expansionary.
B) be restrictive.
C) be timed correctly.
D) keep the federal budget in balance.
Q4) How does Keynesian economic theory recommend that fiscal policy be conducted?
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Chapter 12: Fiscal Policy, Incentives, and Secondary Effects
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Q1) Keynesians and non-Keynesians would largely agree on which one of the following statements?
A) Expansionary fiscal policy will tend to substantially increase current real output.
B) Proper timing of discretionary fiscal policy is difficult to achieve.
C) The use of discretionary fiscal policy is an important stabilization tool.
D) Market forces will automatically direct the economy toward full employment.
Q2) As measured by the budget deficit as a share of GDP, fiscal policy was
A) more expansionary during the 1980s than the 1990s.
B) more restrictive during the 1980s than the 1990s.
C) virtually the same in the 1990s as the 1980s.
D) highly expansionary during both the 1980s and the 1990s.
Q3) Measured as a share of GDP, federal spending during 2001-2010
A) increased more rapidly than during the 1990s.
B) increased less rapidly than during the 1990s.
C) declined after increasing rapidly during the 1990s.
D) was virtually unchanged during the decade.
Q4) What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?
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Chapter 13: A : Money and the Banking System
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Q1) Ordinary commercial banks can expand the supply of money by
A) printing up currency when they need it.
B) buying and selling government bonds to the general public.
C) using a portion of their deposits to extend additional loans.
D) reducing their vault cash and increasing their deposits with the Fed.
Q2) In order for barter to occur, traders must have a
A) unit of account.
B) coincidence of wants.
C) medium of exchange.
D) central banking facility.
Q3) A decrease in the interest rate, other things being equal, causes
A) an upward movement along the demand curve for money.
B) a downward movement along the demand curve for money.
C) a rightward shift of the demand curve for money.
D) a leftward shift of the demand curve for money.
Q4) Open market operations is the
A) tool most often used by the Fed to alter the money supply.
B) least effective tool the Fed has to alter the money supply.
C) tool used by the Treasury to raise tax revenues.
D) tool used by the Fed to regulate stock market activities.
Page 20
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Chapter 13: B : Money and the Banking System
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Q1) How do changes in open market operations alter the monetary base, and how do changes in the monetary base translate to changes in the money supply?
Q2) Briefly explain the three functions of money.
Q3) What are the advantages of a fractional reserve banking system compared to a system that requires 100 percent of deposits to be kept on reserve?
Q4) You deposit a $1,000 scholarship check in the bank. If the required reserve ratio is 10 percent, explain how the banking system will create new money and how much money can potentially be created.
Q5) What is the difference between the Treasury and the Federal Reserve? Is there any difference in the effect on the money supply between the sale of bonds by the Treasury and the sale of bonds by the Fed?
Q6) Discuss the changes that have and will in the future affect the usefulness of the M1 and M2 money supply figures as indicators of monetary policy.
Q7) Explain how the Fed would use its four tools to decrease and to increase the money supply.
Q8) Why is there more than one definition of the money supply? What is the difference between them?
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Chapter 14: Modern Macroeconomics and Monetary Policy
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Q1) In response to a severe recession, the Fed more than doubled the monetary base and pushed short-term interest rates to near zero during 2009-2010. What happened in 2011?
A) The inflation rate soared to double-digit levels.
B) Aggregate demand increased and the economy recovered rapidly.
C) The large budget deficit of the earlier years was transformed into a budget surplus.
D) The high rate of unemployment continued.
Q2) Which of the following is true of home mortgage loans since the late 1990s?
A) Government regulations required homebuyers to make larger down payments in order to obtain a mortgage.
B) Traditional fixed-rate, long-term mortgages grew in popularity.
C) There was a substantial increase in the volume of mortgage loans extended with little or no down payment.
D) High interest rates made it less attractive to lock in to a fixed-rate, long-term loan.
Q3) Indicate how changes in monetary policy are transmitted to the goods and services market? Discuss for the case of an expansion in the money supply.
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Chapter 15: Stabilization Policy, Output, and Employment
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Q1) The index of leading indicators has
A) turned down prior to six of the eight recessions since 1959.
B) turned up prior to each of the periods of inflation since 1959.
C) turned down prior to each of the eight recessions since 1959, but it has also falsely forecast several others.
D) turned down only eight times since 1959, and each downturn has been followed by a recession.
Q2) The time period between when economic conditions change and when policy makers are aware of the change is called the
A) index of leading indicators.
B) administrative lag.
C) recognition lag.
D) impact lag.
Q3) When there is an abrupt reduction in the rate of inflation,
A) the actual rate of unemployment will tend to fall below the natural rate.
B) the actual rate of unemployment will tend to rise above the natural rate.
C) the actual and natural rate of unemployment will generally be equal.
D) the natural rate of unemployment will tend to rise.
Q4) What is the index of leading indicators, and what is it used for?
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Chapter 16: Creating an Environment for Growth and Prosperity
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Q1) When a nation's institutional environment is more favorable, it will A) attract more physical investment.
B) encourage individuals to invest more heavily in human capital.
C) encourage the development and efficient use of natural resources. D) all of the above.
Q2) An increase in real per capita income will generally lead to A) a cleaner environment and more time for recreation.
B) a reduction in life expectancy because working conditions are less desirable.
C) an increase in the number of hours worked by residents.
D) an increase in real GDP that is less rapid than the increase in population
Q3) Measured in 1990 dollars, the GDP per person of the world was $667 in 1813. By 2003, the world's income per person had risen to
A) nearly $1200, almost twice the level of 1813.
B) $2,422, almost four times the level of 1813.
C) a little more than $3,600, approximately six times the level of 1813.
D) $6,516, nearly ten times the level of 1813.
Q4) Are abundant natural resources good or bad for economic growth?
Q5) How can increased investment help a country achieve increased economic growth? What costs are involved?
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Chapter 17: Institutions, Policies, and Cross-Country
Differences in Income and Growth
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Q1) Which of the following is true of technology?
A) Technological improvements are less important today than was true in the past.
B) Lack of access to modern technology is a major barrier restraining the growth of low-income countries.
C) Often, perverse institutions and policies in low-income countries undermine the potential gains from adoption of modern technology.
D) Countries with high investment rates will be unable to apply modern technology effectively.
Q2) In a majority-rules democracy, economic thinking suggests that we should expect to see institutions and policies that
A) are short-sighted.
B) take the long view, sacrificing current benefits to get larger future benefits.
C) benefit the common citizen at the expense of narrow special interest groups which, after all, have fewer voters.
D) are biased against income transfer programs, regardless of constitutional limits.
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Chapter 18: Gaining From International Trade
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Q1) Refer to Figure 17-10. With trade and without a tariff, the price and domestic quantity demanded are
A) P and Q .
B) P and Q .
C) P and Q .
D) P and Q .
Q2) Refer to Figure 17-10. Producer surplus with the tariff is A) G.
B) C + G.
C) A + C + G.
D) A + B + C + G.
Q3) If domestic producers have a comparative advantage in producing a good,
A) trade restrictions will be required before the producers can benefit from their comparative advantage.
B) trade restrictions will still be required before the domestic producers can compete with low-wage producers abroad.
C) they will be able to compete effectively in a competitive world market.
D) the government should subsidize production of the good so the domestic producers will be able to achieve a larger share of the world market.
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Chapter 19: International Finance and the Foreign Exchange Market
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Q1) Any country with highly attractive domestic investment opportunities and a low savings rate will tend to
A) run a current account deficit that is equal to its capital account surplus.
B) run a current account surplus deficit over a long period.
C) tend to be relatively poor (compared with other countries).
D) run a current account deficit.
Q2) Suppose a German-produced car becomes very popular in the United States. This would tend to
A) affect the U.S. balance of payments but not the balance of trade.
B) reduce any existing balance of trade deficit in the United States.
C) increase a balance of trade surplus in the United States.
D) increase a balance of trade deficit in the United States.
Q3) If the U.S. dollar depreciates, it means that
A) the value of the U.S. dollar has increased.
B) the value of foreign exchange has decreased.
C) fewer U.S. dollars are required to purchase foreign exchange.
D) more U.S. dollars are required to purchase foreign exchange.
E) exports will immediately fall.
Q4) What are the three categories of transactions in the balance of payments? Give an example of each.
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Chapter 20: Consumer Choice and Elasticity
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Sample Questions
Q1) If the demand for a good is elastic, then total revenue
A) increases as price increases.
B) remains constant as quantity demanded increases.
C) increases as price decreases.
D) decreases as quantity demanded increases.
E) decreases as price decreases.
Q2) Tele-Com, Inc., a large cable TV company, tested the effect of a price reduction for the Disney Channel. It lowered prices from $10.75 to $7.95 and found that the number of customers more than doubled. This means the
A) demand curve for the Disney Channel shifted to the right.
B) supply curve of the Disney Channel shifted to the left.
C) demand for the Disney Channel is elastic in this price range.
D) demand for the Disney Channel is inelastic in this price range.
Q3) If the price of apples rises from $.50 to $1.50 and quantity demanded falls from 1,000 to 900, we can conclude that the price elasticity for apples is A) -20.
B) inelastic.
C) elastic.
D) unitary.
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Page 28
Chapter 21: A : Costs and the Supply of Goods
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Q1) Which of the following is most likely to be an implicit cost of production?
A) the "competitive rate" salary the owner of the business pays herself for services provided
B) the property taxes on a building owned by the firm
C) the rental income foregone because the business owns its building
D) the interest paid on outstanding loans of the business
Q2) The difference between zero accounting profit and zero economic profit is that
A) economists include opportunity cost in zero economic profit, while accountants do not include opportunity cost in zero accounting profit.
B) economists do not include opportunity cost in zero economic profit, while accountants do include opportunity cost in zero accounting profit.
C) economists include opportunity cost in zero accounting profit, while accountants do not include opportunity cost in zero economic profit.
D) economists do not include opportunity cost in zero accounting profit, while accountants do include opportunity cost in zero economic profit.
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Chapter 21: B : Costs and the Supply of Goods
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Q1) Andy wants to maximize his grade-point average. Having spent six hours studying for his final exam in economics, Andy calculates his grade and discovers that even with a perfect score on the final, he will not pass the course. He decides to study two more hours so he will not have wasted the first six hours. Is this a good decision? Why or why not?
Q2) The boss observes that her 10 workers produce 1,000 widgets a day. She concludes that she can employ 20 workers and make 2,000 widgets, 30 to make 3,000, or 40 to make 4,000. Explain why this observation is either correct or incorrect.
Q3) Mr. Jones pays his employees by the hour. He believes they purposely work slowly to maximize their personal satisfaction. What can he do to provide them with a stronger incentive to work efficiently?
Q4) The AB Manufacturing Company has hired an economist to evaluate its financial situation. She explains to the board of directors that the company is making zero economic profit. Should the company go out of business?
Q5) If the ABC Company decides to take over the XYZ Corporation by purchasing all of the stock of XYZ, what does this tell us about the view ABC holds of XYZ?
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Chapter 22: A : Price Takers and the Competitive Process
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Sample Questions
Q1) The entry of new firms into a competitive market will
A) increase market supply and increase market prices.
B) increase market supply and decrease market prices.
C) decrease market supply and increase market prices.
D) decrease market supply and decrease market prices.
Q2) If a product is manufactured under conditions of constant cost, an increase in the demand for the product will increase
A) both equilibrium quantity and equilibrium price in the long run.
B) equilibrium price, but equilibrium quantity will be unchanged in the long run.
C) equilibrium price but reduce equilibrium quantity in the long run.
D) equilibrium quantity, but equilibrium price will be unchanged in the long run.
Q3) In the short run, a firm that is a price taker will stay in business as long as
A) price equals average revenue.
B) marginal revenue is greater than or equal to marginal cost.
C) price exceeds average variable cost.
D) price is less than average variable cost.
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Chapter 22: B : Price Takers and the Competitive Process
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Q1) Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.
Q2) When a competitive price-taker market is in long-run equilibrium
A) the firms in the market will earn zero economic profit.
B) the average total cost of the firms in the market will be minimized.
C) every unit of the relevant good that is valued more than its opportunity costs will be produced and sold.
D) all of the above are correct.
Q3) Why is it considered "ideal" for price to just equal marginal cost?
Q4) When an economist states that a firm is earning zero economic profit, this statement implies that the firm
A) will be forced out of business unless market conditions change.
B) is doing as well as it could in any other line of business.
C) is earning a zero rate of return on its assets.
D) could earn a higher rate of return in other industries.
Q5) If a technological advance lowers a firm's production costs, why do prices typically fall? Shouldn't the firm maintain the same price and earn economic profit?
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Page 32
Chapter 23: Price-Searcher Markets With Low Entry Barriers
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Q1) When an entrepreneur introduces a new improved product that is highly valued relative to cost
A) consumers will be worse off.
B) the demand for the products that are good substitutes for the new product will increase.
C) some of the existing products will become obsolete and businesses producing those products will fail.
D) total employment will decline if there are business failures.
Q2) (I) The entrepreneurial discovery and development of improved products and production processes is a central element of economic progress. (II) Traditional economic models of the firm accurately capture the role of the entrepreneur.
A) I is true; II is false.
B) I is false; II is true.
C) Both I and II are true.
D) Both I and II are false.
Q3) The market for home-delivered pizza is extremely competitive in Introville, Utah, and prices continue to fall. Assume they have fallen so low that the 20 pizza delivery firms are all suffering economic losses. What will likely happen in the long run?
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33
Chapter 24: A : Price-Searcher Markets With High Entry
Barriers
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Q1) In the case where a natural monopoly exists in an industry, A) a competitive market structure will be costly and difficult to maintain.
B) a competitive market structure will be more efficient and more equitable.
C) government regulations will always improve efficiency in this industry.
D) economies of scale will not be a consideration when analyzing the proper structure of the industry.
Q2) If the government wants a natural monopoly to earn a "fair return" or zero economic profit, it will set
A) price equal to marginal cost.
B) price equal to average total cost.
C) price equal to average revenue.
D) marginal cost equal to marginal revenue.
E) marginal cost equal to average total cost.
Q3) Refer to Figure 11-17. If the monopoly firm wants to maximize its profit, it should operate at a level of output equal to
A) Q .
B) Q .
C) Q .
D) Q .
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Chapter 24: B : Price-Searcher Markets With High Entry
Barriers
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Q1) Monopoly is a word derived from Greek origins that means, roughly, single seller. Why is the definition of monopoly as single seller inadequate in economic terms?
Q2) Suppose all automobile manufacturers have collusively agreed to sell their cars at a uniform price. If a firm wanted to break this agreement and not be detected, what would be one way to do this?
Q3) One answer to the problem of natural monopoly is provision of the good by a government-owned and operated firm. Why is that option not used very often?
Q4) Even though a cartel is often profitable for its members, cartel arrangements contain the seeds of their own disintegration because
A) a price maintained above each cartel member's marginal cost provides each member with an incentive to offer secret price reductions to attract additional customers.
B) the profits earned by cartel members will induce others to enter the industry.
C) cartel members will attempt to garner more of the total profit for themselves by cheating on their agreement with other members.
D) all of the above are correct.
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Page 35
Chapter 25: The Supply of and Demand for Productive Resources
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Q1) The Hardboard Construction Company hired Bob at $10 an hour, but its output of doll houses only increased by three units a day. Two weeks later, the company purchased an $8 hammer for Bob and output increased by twelve units. Since the hammer increased the marginal product more than Bob did, and at less cost, Hardboard fired Bob. Is this consistent with the theory of marginal productivity? Why or why not?
Q2) The demand for a resource is generally more
A) elastic in the short run because it takes time to alter the ratio of resources used in many production processes.
B) inelastic in the short run because it takes time to alter the ratio of resources used in many production processes.
C) elastic in the short run because an increase in the price of the resource may not be expected to last.
D) inelastic in the short run because once resource suppliers find out they can charge a higher price, they will do so in the long run.
Q3) There is an Italian soccer player who makes more than $10 million a year. Why?
Q4) Why is it more expensive to acquire a new house in an urban area than in a rural area if the costs of labor and building materials are the same?
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Chapter 26: Earnings, Productivity, and the Job Market
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Q1) Which of the following best explains why productive workers can command high wages?
A) the bargaining power of labor unions.
B) the presence of minimum wage legislation.
C) wage and price controls that reflect the political power of labor organizations.
D) competition among employers for productive workers.
Q2) Which of the following would cause the demand for mathematicians to increase?
A) a decrease in the productivity of mathematicians.
B) an increase in the wage of mathematicians.
C) an increase in the productivity of mathematicians.
D) an increase in the productivity of physicists.
Q3) If all persons had identical preferences and productivity factors (ability, skill level, education, experience, etc.), the highest paying jobs would be the most
A) prestigious.
B) convenient.
C) undesirable.
D) easily learned.
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Chapter 27: Investment, the Capital Market, and the Wealth of Nations
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Q1) In order to fully realize the gains from entrepreneurial innovation, A) the government should subsidize potential entrepreneurs.
B) it must be relatively easy for people to put their ideas in motion.
C) it must be relatively difficult to continue implementing a bad idea.
D) both a and b must be true.
E) both b and c must be true.
Q2) If the money rate of interest is 12 percent and the real rate of interest 7 percent, the inflationary premium is
A) 5 percent.
B) 7 percent.
C) 12 percent.
D) 19 percent.
Q3) When economists say an individual possesses a "positive rate of time preference," they mean that she prefers to
A) save rather than consume.
B) invest now rather than in the future.
C) consume goods and services in the future rather than now.
D) consume goods and services now rather than in the future.
Q4) In a barter economy that had no form of currency, how could interest exist?
Page 38
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Chapter 28: Income Inequality and Poverty
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Q1) "There is considerable movement up and down the economic ladder. Relative income positions often change over time." This statement is
A) true; at different points in time people tend to change position in the income distribution
B) only true for industrialized countries
C) false; people tend to stay in the same place within the income distribution
D) false; people tend to stay in the same quintile that their parents were in
Q2) The phenomenon that describes how transfer programs, which significantly reduce the adversities of poverty, also reduce the opportunity cost of choices that often lead to poverty is known as
A) the implicit marginal tax rate.
B) Gibson's paradox.
C) the Phillips curve
D) the Samaritan's dilemma.
Q3) Andy observes that the income distribution between the richest and poorest people in the population has remained fixed for decades. He concludes that the rich stay rich and the poor stay poor. Is this a valid conclusion, or has Andy missed something?
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Special Topic 1 : Government Spending and Taxation
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Sample Questions
Q1) Compared to 1980, the top marginal federal income tax rate today is
A) substantially lower and the rate structure is less progressive than in 1980.
B) substantially lower and the rate structure is more progressive than in 1980.
C) substantially higher and the rate structure is less progressive than in 1980.
D) substantially higher and the rate structure is more progressive than in 1980.
Q2) As government becomes larger and larger as a share of the economy, economic growth is likely to decline because
A) taxes are reduced to levels that are inconsistent with economic efficiency.
B) governments are involved in many activities for which they are ill-suited.
C) tax-transfer activities are reduced and sometimes virtually eliminated.
D) governments do not spend enough on the provision of key public goods like education.
Q3) Because of which provision in the tax code did more than one-third of all taxpayers either have a zero tax liability or actually receive money from the IRS in 2006?
A) Earned Income Tax Credit
B) Standard Deduction
C) Marginal Tax Rate
D) Families with Low Income Credit
Q4) Discuss how size of government can negatively affect economic growth.
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Special Topic 2 : The Economics of Social Security
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Sample Questions
Q1) The current Social Security System surplus of revenues relative to expenditures is used to purchase
A) U.S. Treasury bonds.
B) bonds issued by domestic corporations.
C) U.S. stock.
D) U.S. and foreign stock.
Q2) The Social Security system of the United States is based on the pay-as-you-go principle. This indicates that funding of the benefits paid to current retirees comes primarily from
A) the income generated by the system's ownership of stock.
B) the tax payments of current workers.
C) the funds that current retirees paid into their personal savings accounts during their working years.
D) money created by the Federal Reserve system.
Q3) By 2030, the number of workers per Social Security beneficiary will be approximately A) two.
B) three.
C) four.
D) six.
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Page 41
Special Topic 3 : The Stock Market: Its Function,
Performance, and Potential as an
Investment Opportunity
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Q1) Which of the following has enhanced the ability of investors, without any special business skills, to benefit from the ownership of corporate America?
A) the increased availability of mutual funds that make it possible for even small investors to purchase a diverse stock portfolio at a low cost
B) an increased tendency of small investors to buy and sell stock frequently, using stock tips from investment experts
C) the virtual disappearance of business failures among corporations with publicly traded stock shares
D) all of the above
Q2) "My broker studies the stock market and the management of specific firms. When he advises me to buy, I listen because he is an expert." Analyze this view.
Q3) The present value of $1 million to be received in the future will
A) increase if the interest rate rises.
B) increase if the payment is received at a more distant time in the future.
C) be greater than $1 million.
D) increase if the interest rate were to fall from 8 percent to 4 percent.
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Special Topic 4 : Great Debates in Economics: Keynes
Versus Hayek
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Q1) According to the Keynesian view, capitalism
A) is a highly productive form of economic organization that works best when government intervention is least.
B) experiences booms and busts because of the instability of private investment that is driven by fickle changes in business optimism.
C) experiences booms and busts that are primarily the result of inappropriate monetary policy.
D) experiences fluctuations in aggregate demand that cannot be controlled with fiscal policy.
Q2) According to Friedrich Hayek and his followers, the booms and busts of the business cycle are primarily the result of
A) fluctuations in aggregate demand.
B) the "animal spirits" of private investors.
C) excessive credit expansion and artificially low interest rates that trigger malinvestment.
D) the unwillingness of political decision-makers to follow the advice of macroeconomists who know how to alter fiscal policy in a manner that would virtually eliminate the ups and downs of the business cycle.
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Special Topic 5 : The Crisis of 2008: Causes and Lessons for the Future
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Q1) Which of the following is most central to the understanding of the economic crisis of 2008?
A) the decline of the stock market in late 2007
B) the housing boom (2001-2005) and bust (2007-2008)
C) the sharp rise in oil prices in 2008
D) unethical investment practices beginning in 2000
Q2) The leverage ratio of an investment firm refers to
A) the ratio of its investment holdings relative to its vault cash.
B) the ratio of its investment holdings relative to its capital.
C) the percentage of deposits held by the firm relative to its deposits with Federal Reserve banks.
D) the percentage of down payments made to the investment firm relative to the size of mortgages issued by the firm.
Q3) Which of the following contributed to the soaring housing prices during 2002-2004?
A) the Fed's high-interest rate policy
B) the tightening of loan standards by commercial lenders
C) the increasing popularity of fixed-rate, long-term loans to lock in low interest rates
D) the Fed's low-interest rate policy
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Special Topic 6 : Lessons from the Great Depression
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Q1) Which one of the following was a secondary effect of the stock market crash of 1929?
A) an increase in the money supply in the early 1930s
B) a decline in consumption expenditures because of the reduction in the wealth of stockholders
C) an increase in the supply of loanable funds as people transferred funds from the stock market into savings accounts
D) an increase in tax revenues as the sellers of stocks paid the capital gains tax on stocks that had appreciated during the 1920s
Q2) The Agriculture Adjustment Act of the Roosevelt Administration attempted to boost prices of agriculture products by
A) increasing the money supply from year to year at a constant rate.
B) decreasing the money supply through a policy of monetary contraction.
C) increasing demand through lower taxes and budget deficits.
D) reducing supply through the planned destruction of agricultural crops and livestock.
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Special Topic 7 : Lessons from Japan and Canada
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Q1) Which of the following was a similarity between the Japanese recession of the early 1990s and the U.S. recession of 2008-2009?
A) Following the recession, there was a sizeable increase in the population over 65 in both countries.
B) Balancing the budget was the focus of fiscal policy during the recessions in both countries.
C) Both countries followed a restrictive monetary policy in response to the recessions.
D) Neither country increased government expenditures in response to the recessions.
Q2) Which of the following most accurately describes Japan's fiscal and monetary policies during the 1990s?
A) Both fiscal and monetary policy were expansionary.
B) Both fiscal and monetary policy were restrictive.
C) Fiscal policy was restrictive, but monetary policy was expansionary.
D) Fiscal policy was expansionary, but monetary policy was restrictive.
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Special Topic 8 : The Federal Budget and the National Debt
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Q1) The idea that a large public debt is "mortgaging the future of our children and grandchildren" is misleading because
A) it is the Federal Reserve that will be responsible for making interest payments on the debt.
B) future generations will have to bear the opportunity costs of the resources that are used today.
C) future generations will not be liable for the interest obligations of the national debt.
D) future generations will inherit the interest income as well as the interest obligations.
Q2) Refer to Table ST8-1. Which of the following is correct regarding this government?
A) In the third year, it had a $50 national debt and ran a $30 deficit.
B) In the third year, it ran a $50 deficit and its national debt after the third year was $60.
C) In the third year, it ran a $50 surplus and its national debt after the third year was $30.
D) In the third year, it ran a $50 deficit and its national debt after the third year was $30.
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Special Topic 9 : The Economics of Healthcare
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Sample Questions
Q1) If a third party pays for an individual to consume a good, how is the decision making of consumers affected? How does this affect the actions of suppliers?
Q2) In countries such as Canada that have socialized health care, the government operates hospitals, and health-care services are financed through tax revenue. In these countries,
A) the government is able to provide as much health care, free of charge, as citizens would like.
B) methods other than price, such as political rules and waiting lists, must be utilized to allocate health-care services.
C) a large number of services, such as MRIs, that involve expensive equipment are performed.
D) citizens are usually so satisfied with their health-care system that they never travel to other countries to purchase health-care services.
Q3) The only two options to control the growth of healthcare spending are
A) price controls and political rationing or competition and market prices.
B) taxation or political mandates.
C) subsidizing of healthcare insurance or government provision of healthcare.
D) free healthcare or subsidized healthcare.
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Special Topic 10 : Education: Problems and Performance
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Q1) When a good or service is supplied under competitive conditions, economic analysis indicates that with the passage of time, the quality of the product will
A) tend to improve, but its real price will generally rise.
B) tend to improve, and its real price will generally fall.
C) decline, and its real price will generally rise.
D) decline, and its real price will fall.
Q2) Which of the following is true regarding the average achievement (SAT) scores of high school graduates in the United States?
A) The average achievement (SAT) scores of high school graduates fell during the 1970s.
B) The average achievement (SAT) scores of high school graduates is lower today than it was 35 years ago.
C) The average achievement (SAT) scores of high school graduates rose slightly during the 1990s.
D) All of the above are true.
Q3) What are some of the criticisms of voucher programs? How would a voucher program be modified to address these concerns?
Q4) What does the evidence suggest regarding the effects of school choice programs?
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Special Topic 11 : Earnings Differences Between Men and Women
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Q1) Women earn less on average than men. Which of the following would be the logical conclusion?
A) Women must be the victim of employment discrimination.
B) Women must be less productive.
C) Men must be more highly motivated and materialistic.
D) Without consideration of preferences and productivity factors, differences in unadjusted mean earnings do not necessarily reflect employment discrimination.
Q2) Since the 1970s, the percentage of women preparing for careers in professions has been ____, while the female/male earnings ratio has been ____ during this same period.
A) rising; declining
B) rising; increasing
C) falling; increasing
D) falling; declining
Q3) Evaluate the following: "Employers who discriminate against women will have lower costs than rival firms that hire employees strictly on the basis of merit (productivity)."
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Special Topic 12 : Do Labor Unions Increase the Wages of Workers?
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Q1) If a firm operates in a competitive industry and its unionized labor force is successful in bargaining for a wage increase, where is the firm likely to get the money to pay the higher wages?
Q2) A union representing a group of workers will tend to be stronger when
A) there are no good substitutes for the labor services of the unionized workers.
B) the domestic producers of the good produced by the unionized workers face intense competition from foreign suppliers of the good.
C) the cost of employing the unionized workers is a large part of the total cost of the product that they produce.
D) the demand for the good produced by the unionized workers is highly elastic.
Q3) Firms will be much more willing to consent to significant wage increases when
A) right-to-work laws are present.
B) the demand for the final product is weak.
C) the firm has low product inventory.
D) the demand for the final product is elastic.
Q4) List some factors that might make the threat of a strike more effective.
Q5) What common goals, if any, do labor and management share?
Q6) In a strike, what does the union have to lose? What does management lose?
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Special Topic 13 : The Question of Resource Exhaustion
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Q1) Empirical evidence suggests that the relative scarcity of most resources is A) declining.
B) increasing slowly.
C) increasing rapidly.
D) largely unchanged over the past four decades.
Q2) Water, when it is not tradeable among current and potential users, is often kept that way
A) by governments who demand tight controls on who gets the water.
B) by nature, as water cannot be easily moved from place to place in large quantities.
C) to protect fish and other wildlife, rather than for any other reason.
D) by monopoly owners in the private sector.
Q3) Water supply problems are generally the result of A) missing or incomplete markets for water.
B) too much trading of water.
C) too few government subsidies to desalination.
D) all of the above.
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Special Topic 14 : Difficult Environmental Cases and the
Role of Government
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Q1) Environmental regulation by the government A) leads to ideal outcomes in most cases.
B) is often based on goals for pollution levels that were determined by market signals. C) is most appropriate when the pollution of concern comes from many sources. D) is most likely to be economically efficient when the regulation provides substantial benefits for special-interest groups.
Q2) "Since the wind and the flowing rivers can take away industrial waste without charge, polluting is a profitable activity even when people are seriously harmed downwind or downstream, unless environmental regulators stop it." This statement is A) false if the property rights of downwind or downstream individuals are protected. B) true if the property rights of industrialists are enforced.
C) never true.
D) always true.
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