# Section 1 scarcity, choice, opportunity cost

SECTION 1 SCARCITY, CHOICE, OPPORTUNITY COST

SECTION 1 SCARCITY, CHOICE, OPPORTUNITY COST

-People respond to incentives blank_______.

by ignoring negative incentives and responding to positive incentives only

only when they are irrational

by calculating their individual costs and benefits and determining which is greater

when they have low incomes

-After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision?

The marginal benefit of going to Cancun increases.

The marginal cost of going to Cancun decreases.

The marginal benefit of going to Ft. Lauderdale decreases.

The marginal cost of going to Ft. Lauderdale decreases.

-A tradeoff exists between a clean environment and a higher level of income in that blank_______.

studies show that individuals with higher levels of income pollute less than low-income individuals

efforts to reduce pollution typically are not completely successful

laws that reduce pollution raise costs of production and reduce incomes

employing individuals to clean up pollution causes increases in employment and income

-An incentive blank_______.

is the opposite of a tradeoff

could be a reward but could not be a penalty

could be either a reward or a penalty

could be a penalty but could not be a reward

-Bill is restoring a car and has already spent \$4000 on the restoration. He expects to be able to sell the car for \$5800. Bill discovers that he needs to do an additional \$2400 of work to make the car worth \$5800 to potential buyers. He could also sell the car now, without completing the additional work, for \$3800. What should he do?

He should sell the car now for \$3800.

He should keep the car since it wouldn’t be rational to spend \$6400 restoring a car and then sell it for only \$5800.

He should complete the additional work and sell the car for \$5800.

It does not matter which action he takes since the outcome will be the same either way.

-Economists assume that people are motivated by blank_______.

altruism

rational self-interest

benevolence

greed

-The fundamental reason people must choose between goods to buy and consume is because of blank______.

people engaging in exchange

specialization

scarcity

great abundance of free resources

-A rational student will continue studying in a given study session until blank______.

the expected grade is an A

the expected grade is a B

the marginal value of the last unit studied equals the marginal cost of the last unit

-In economics, the cost of doing something is blank_______.

the opportunity cost only

the money, out-of-pocket expenditure

the value of the next best opportunity not taken

the value that you place on the opportunity taken

-The optimal amount of studying is determined by comparing the blank_______.

marginal benefit and the total cost of studying

marginal benefit and the total benefit of studying

marginal benefit and the marginal cost of studying

total benefit and the total cost of studying

SECTION 2 SUPPLY AND DEMAND

-A shift in the demand curve denotesblank_______.

a shift in the supply curve

a change in the price

a movement

a change in demand

-Consider inferior goods. As real incomes rise, consumers tend to buy inferior goods inblank________.

unchanged quantity

higher quantity

a manner to start looking for other inferior goods

less quantity

-The law of supply states that, holding other factors constant, as price increases blank_______.

quantity supplied increases

quantity supplied decreases

quantity demanded increases

quantity demanded decreases

-A restriction on the number of people allowed to be medical doctors in the United States would most likely blank_______.

increase doctors’ fees

decrease the demand for doctors

decrease the demand for nurses

decrease the number of people who get sick

-Suppose the price of hamburgers rises, and you observe that as a result, the demand for hotdogs rises. This makes hotdogs and hamburgers blank_______.

normal goods

complements

substitutes

inferior goods

-March was unusually rainy and windy, leading more car owners to take their cars to the car wash. Prices at local car washes did not change. Economists might describe that change in consumer behavior this way?

The weather caused an increase in the demand for car washes.

The weather caused a shift in both the supply and demand for car washes.

The demand for car washes increased while the supply of car washes fell.

The weather caused an increase in the supply of car washes.

-Movement down along a demand curve could be caused by blank_______.

an increase in the price of a substitute good

a decrease in consumer incomes

an increase in consumer’s desire or taste for the good

a decrease in the price

-IfA and B are complements, an increase in the price of good A would blank_______.

lead to an increase in demand for B

have no effect on the quantity demanded of B

lead to a decrease in demand for B

lead to a decrease in supply for B

-A drought in the Midwest will raise the price of wheat because of a blank_______.

leftward shift in the demand curve

rightward shift in the supply curve

rightward shift in the demand curve

leftward shift in the supply curve

-For a steel factory, a decrease in the cost of electricity to the plant will cause the supply curve to blank_______.

become parallel to the price axis

shift to the left

shift to the right

become flatter

SECTION 3 ELASTICITY

-If, for a certain good, the percent change in the quantity demanded is less than the percent change in price that caused the changeblank_______.

we can say that the demand is elastic

we can say that the demand is inelastic

we can say that the demand is unit elastic

we can say that the demand is zero elastic

-The price elasticity of demand refers to the extent to which the quantity demanded changes as a result of a change inblank_______.

quantity demanded

quantity supplied

price

elasticity

-Suppose the demand is perfectly inelastic. The implication would be that the smallest change in price would result inblank________.

no change in quantity

a small change in quantity

no change in price

a small change in price

-For goods and services that have an inelastic demand, if price is increased, total revenueblank_______.

does not change

is not a function of price

decreases

increases

-Goods and services that are independent of each other have a cross elasticity of demand that is blank________.

negative

positive

0

positive infinity

-Goods and services that are perceived to be close substitutes have a cross elasticity of demand that isblank________.

negative

positive

0

positive infinity

-A perfectly elastic demand is a blank___________curve.

vertical

horizontal

negative

positive

-Income elasticity of demand is the extent to which the demand in quantity of goods responds to changes inblank________________.

price

real income

the resources

supply

-The cross-price elasticity between two products is estimated to be 2. If the price of the first product is increased by 8%, demand for the second product will blank_______.

increase by 8%

decrease by 4%

increase by 4%

increase by 16%

-Which of the following products is likely to have the most elastic demand?

Cigarettes

Coca Cola.

Life-saving medicine

Gasoline.

SECTION 4 PRODUCTION AND COST

-Which one of the following represents factors of production?

The output of a production function.

Productivity.

Efficiency.

Land, labor, capital, technology, and entrepreneurship.

-All these curves are U-shaped except blank_______.

average fixed cost curve

average variable cost curve

average total cost curve

marginal cost curve

-Economies of scale occurs when the average total cost of production blank_______ as output _______.

decreases; increases

decreases; decreases

remains constant; increases

increases; increases

-A legal entity, in its own right, that can be closely held (with few shareholders) or widely held (with hundreds of thousands of shareholders is calledblank________.

sole proprietorship

partnership

cooperative

corporation

-Typically, a production functionblank_________.

demonstrates the ability of a firm to produce various combinations of goods and services, utilizing all of its resources

represents a technical relationship between the factors of production and the output

gives us insights about the least cost method of producing a given level of output

shows production costs at any level of output

-Suppose the marginal product of labor is 8 and the marginal product of labor is 2. If the wage rate is \$4 and the price of capital is \$2, then in order to minimize costs the firm should use blank_______.

more labor and less capital

two times more capital than labor

three times more capital than labor

more capital and less labor

-Hedge Fun is a landscaping firm that specializes in topiary. Last year, the firm had 60 employees and served 120 customers. This year, it had 70 employees and served 140 customers. What is the marginal product of labor?

4

3

2

5

-Fred works 40 hours a week managing Fred’s Convenience Store, without drawing a salary. He could earn \$600 a week doing the same work for Bob. Fred’s Convenience Store owes its bank \$100,000, and Fred has invested \$100,000 of his own money. If Fred’s accounting profits are \$1,000 per week while the interest on his bank debt is \$200 per week and savings account interest and loan interest are equal, his economic profits are blank_______.

\$1000 per week

\$400 per week

\$200 per week

\$0 per week

-To maximize profit, the firm should set output at the level where blank_______.

the average cost per unit is minimized

average revenue just equals average cost

marginal cost equals zero

marginal revenue is equal to marginal cost

-A firm should build an additional distribution center if blank_______.

the revenue generated from building the distribution center is big

the cost of building the distribution center is not too big

the marginal revenue of building the distribution center is larger than the marginal cost of building it

the revenue generated from building the distribution center is small

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