Economics 1Unit 1 Testclass Time:Name

Economics 1Unit 1 TestClass Time:Name:

Part A. Answer the following 7 questions. Each question is worth 4 points.

1. Use a supply and demand diagram to show what will happen to the price and quantity of smart phones as the production technology used to make the computer chips that power smart phones advances. Mark the starting price of the smart phones P1, the ending price P2, the starting quantity Q1, and the ending quantity Q2. Be sure to label both axis on the diagram and any lines you draw in the diagram with the proper letter; and if you move a line, mark the first line with a subscript 1 and the second with a subscript 2. Next to the diagram, write whether price is rising or falling and whether quantity is rising or falling.

1. Use a supply and demand diagram to show what will happen to the price and quantity of steak if the income of the country increases and steak is a normal good. Mark the starting price of the steak P1, the ending price P2, the starting quantity Q1, and the ending quantity Q2. Be sure to label both axis on the diagram and any lines you draw in the diagram with the proper letter; and if you move a line, mark the first line with a subscript 1 and the second with a subscript 2. Next to the diagram, write whether price is rising or falling and whether quantity is rising or falling.

1. Answer whether the following statement is true, false, or uncertain, and explain your answer. It is possible for an inefficient point to be better than some of the efficient points. Illustrate your answer with a PPF diagram (one that assumes there is increasing opportunity cost). Make sure to include at least one efficient point and one inefficient point in your diagram and make clear which is which.

1. Fill in the following 2 lists. Each pair of correct answers is worth 1 point.

a. List 4 of the 5 factors that affect demand.

1) 3)

2) 4)

b. List 4 of the 6 factors that affect supply.

1) 3)

2) 4)

5. Below is a table of 3 workers and how much calculators and butter they can make. Currently

all the workers are making butter. Mark the best order to move these workers out of

butter and into making calculators on the line before each worker’s name (writing 1, 2,

and 3). Then draw the PPF line for this economy, putting butter on the horizontal axis.

CalculatorsButter

_____ Arnold 2 6

_____ Betty 6 4

_____ Charles 8 8

6. Answer whether the following statement is true, false, or uncertain, and explain your answer.

If the price of gasoline is higher than many people want to pay, the government can pass a

law setting a maximum legal selling price below the equilibrium price, and now everyone

whowants to buy gasoline for that cheaper price will be able to do so. Use a supply and

demand diagram to support your answer.

7. Answer whether the following statement is true, false, or uncertain, and explain your answer.

It is a good example of the law of increasing opportunity cost that it costs more to make two

aircraft carriers than to make one aircraft carrier.

8. A grocery store has noticed that when they raise the price of breakfast cereal from $8 to

$12, the number of gallons of milk they sell falls from 22 to 18. Answer the following 2

questions.

a. What is the cross-price elasticity of milk with respect to the price of cereal?

This part of the question is worth 2 points.

b. What does the number you found for answer a mean? This question is worth 2 points.

Part B. Answer the following 32 multiple choice questions by marking the letter of the best answer on your scantron. Each question is worth 1 point.

1. Economics is the study of:

a. the role of money in the economy and how a society should properly utilize it.

b. decision making when our wants exceed our resources.

c. how market economies use the technique of supply and demand to determine prices and

quantities.

d. supply and demand.

2. What is macroeconomics?

a. The study of individual consumers, businesses, and markets.

b. The study of how the total economy or aggregate economy is doing.

c. The study of money.

d. The study of how a society allocates scarce resources to satisfy unlimited wants.

3. Which of the following is on the list of things that affects demand (shifts the demand curve)?

a. Expectation of future price.

b. Price of a related good.

c. Both of the above.

d. None of the above.

4. Which of the following is on the list of things that affects supply (shifts the supply curve)?

a. The price of the good.

b. Taxes.

c. Demographics

d. Both a and b.

5. If two goods are complement goods, then:

a. if income rises, people buy more of them.

b. if income rises, people buy less of them.

c. if people have more of one, they will want more of the other one.

d. if people have more of one, they will want less of the other one.

6. If two goods are inferior goods, then:

a. if income rises, people buy more of them.

b. if income rises, people buy less of them.

c. if people have more of one, they will want more of the other one.

d. if people have more of one, they will want less of the other one.

7. Why does the law of increasing opportunity cost exist?

a. The experience a worker gets making a product, the better he gets at making it.

b. The more of a good you make, the more advertising you can afford for it, so the more of

it you can sell.

c. It costs twice as much to make twice as much of anything.

d. As you hire additional workers, the additional workers are probably worse than the

already hired workers.

8. If buyers think the price of a good is going to fall, and it is a storable good, the demand curve will:

a. move to the right.

b. move to the left.

c. stay where it is.

9. If the demand curve shifts to the left and the supply curve shift to the right, what happens to price?

a. It always increases.

b. It always decreases.

c. It may increase or decrease, there is not enough information to tell.

d. In the real world, both curves could never move at the same time.

10. Which of the following can move both the supply and demand curves?

a. Change in expectation of future price.

b. Change in technology.

c. Change in price of the good.

d. Both a and c.

11. What does economics have to say about the value of a human life?

a. Every life is infinitely valuable.

b. There is never a cost that is too high to save a life.

c. Saving lives is a benefit, but sometimes it is too costly to be worth it.

d. Both a and b.

12. A store owner would most likely prefer to have a sale on an item that has many:

a. complements.

b. substitutes.

c. opportunity costs.

d. it doesn’t matter, each item is as good to have a sale on as any other.

13. For which situation are people mostlikely to bargain over the price of the good?

a. The good is cheap and it is a low wage country.

b. The good is cheap and it is a high wage country.

c. The good is expensive and it is a low wage country.

d. The good is expensive and it is a high wage country.

14. When the government lowered the speed limit to 55 miles per hour:

a. this had to be a good thing because at no monetary cost to drivers, the country saved

both gasoline and lives.

b. the cost to drivers can be accurately measured by the dollar value of the speeding ticket

fines they now had to pay.

c. the primary cost of the law was in the loss to the drivers of extra time they now had to

spend driving.

d. this had to be a bad thing because the government’s action had an opportunity cost.

15. Why does the law of increasing opportunity cost exist?

a. As more of a good is produced, the producer must move to using resources which are

getting worse and worse for production.

b. As more of a good is produced, the producer must move to using resources which are

getting better and better for production.

c. Because businesses can charge higher prices when they have more customers and thus

produce more.

d. It doesn’t, actually costs go down as more is produced.

16. Which of the following most accurately describes the U.S. economy?

a. Completely market economy.

b. Mostly market economy.

c. Mostly command economy.

d. Completely command economy.

17. Which of the following is a correct statement of part of the Law of Demand?

a. Whenprice goes up, quantity demanded goes up.

b. Whenprice goes up, quantity demanded goes down.

c. When price goes up, demand goes up.

d. When price goes up, demand goes down.

18. Where are the unattainable points on the PPF diagram?

a. Inside/under the PPF line.

b. On the PPF line.

c. Outside/over the PPF line.

d. All of the above.

19. The demand curve by itself (without the supply curve) gives enough information to know:

a. the price a good will have in the market, but not the quantity made.

b. the quantity of the good that is actually being sold in the market, but not the price.

c. both the actual price and quantity the good will be sold for in the market.

d. none of the above.

20. When a supply curve shows businesses making quantity Q1 if the price is P1, this is because:

a. at that price, customers don’t want to buy more than Q1 of the good.

b. it is past Q1 that the cost of production goes above the selling price.

c. by government law, they can only sell Q1 of the good.

d. there is no reason really, it is just a result of random chance.

21. Setting a price control price below the equilibrium price usually results in customers being

treated:

a. better.

b. worse.

c. sometimes better, sometimes worse.

d. it should not result in any difference in how customers are treated.

22. Between two people, one is said to have the comparative advantage when:

a. that person can produce a good faster than another person.

b. that person can produce a good for a lower opportunity cost than another person.

c. that person can produce a certain good and the other person can not.

d. that person is stronger than the other person.

23. Anything that raises the cost of production causes:

a. the demand curve to move right.

b. the demand curve to move left.

c. the supply curve to move right.

d. the supply curve to move left.

24. A model in economics is:

a. a realistic simulation of all the factors that could possibly affect a result.

b. a simpler version of reality that leaves some things out so that others can be understood.

c. a name for the person who explains what is going on, such as a model might make a

presentation at an event or on a game show.

d. trick question – there is no such thing as a model in economics.

25. Which type of economic system usually has more incentive to produce what buyers want?

a. Market economies.

b. Command economies.

c. There is no difference between the two.

26. Two of the problems that price solves for a market economy are:

a. Greed and unfairness.

b. Incentive and information.

c. Geographic distance and different languages.

d. Overpopulation and lack of resources.

27. Which of the following is an example of the invisible hand in action?

a. There is a pizza place near a college because the students like pizza.

b. Cigarette smoking in a crowded restaurant.

c. A cigarette smoker who gets cancer.

d. None of the above.

28. If the elasticity of a good is 0.5, then if the price is lowered, total revenue will:

1. rise.
2. fall.
3. stay the same.
4. there is not enough information to tell.

29. income elasticity is positive. This good is:

a. substitutes.

b. complements.

c. normal.

d. inferior.

30. If the price is raised on a good with elasticity of 1.5, then total revenue will:

a. rise.

b. fall.

c. stay the same.

d. it might be any of the above, there is not enough information to tell.

31. Pepsi has an elasticity of 2. This means:

a. if it raises its price $1, it sells 2 less cans.

b. if it raises its price $2, it wells 1 less can.

c. if it raises its price 1%, it sells 2% less cans.

d. if it raises its price 2%, it sells 1% less cans.

32. What is true about a good with infinite elasticity?

a. Zero people buy the good.

b. If the store raises its price, it loses 0 customers.

c. If price is increased, the business loses all its customers.

d. Revenue will stay the same if the store raises the price of the good.