ECONOMICS 2301

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Economics
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is the study of how to use limited resources to fully satisfy unlimited wants
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Four categories of economic resources
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labor, capital, entrepreneurship, and land
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In economics, the term “capital” means
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machinery and other human-made aids to production
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The opportunity cost of the U.S. space exploration program is
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whatever other goods and services could have been produced with the resources devoted to the space program
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The opportunity cost of a college education is
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the other goods you must sacrifice plus any foregone income and activities
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A production possibilities curve shows
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the combinations of tow products that an economy is capable of producing with its finite resource stock
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Suppose an economy is operating at a point on its production possibilities curve showing clothing and food. If the economy desires to produce additional clothing
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it must reduce its output of food
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If a nation could produce 300 units of civilian goods and 300 units of military goods or 350 units of civilian goods and 200 units of military goods
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the opportunity cost of 100 units of military goods is 50 units of civilian goods.
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If a society is operating inside its production possibilities curve for guns and butter, then
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some economic resources are unemployed.
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An economy’s production possibilities curve would shift outward as a result of
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a resource-saving advance in production technology
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Economic growth would be depicted by
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an outward shift of the production possibilities curve
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Given its present resource stock and existing techniques of production, an economy is capable of producing any combination of products
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on its production possibilities curve, but no combination outside the curve.
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According to the law of increasing costs
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if a society desires more of some particular product, it must sacrifice larger and larger amounts of other products
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Based on the figure above, if the economy is operating at point C, the opportunity cost of producing 20 additional units of food would be
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60 units of clothing
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Based on the figure above, which of the following statements is FALSE? A) If the economy is operating at point A, it is producing only clothing. B) If the economy is operating at point B, the opportunity cost of producing 20 additional units of food would be 40 units of clothing. C) If the economy is operating at point D, the opportunity cost of acquiring 100 additional units of clothing would be 40 units of food. D) If the economy is operating at point E, the opportunity cost of producing 80 additional units of clothing would be 30 units of food. E) If the economy is operating at point D, the opportunity cost of acquiring 20 additional units of food would be 80 units of clothing.
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If the economy is operating at point E, the opportunity cost of producing 80 additional units of clothing would be 30 units of food
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Based on the figure above, if the economy were operating at point F
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additional food could be produced at no opportunity cost in terms of sacrificed clothing.
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Based on the figure above, point G on the graph represents
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a combination of products that is beyond the economy’s current production capability.
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Which of the following is not an economic resource? A) capital B) land C) money D) entrepreneurship E) labor
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money
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Economic efficiency requires that
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the economy produce the goods and services most desired by consumers.
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Which of the following is an example of a normative statement?
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College students ought to spend more time studying and less time partying.
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“The federal government ought to spend more money on medical treatment for the poor and less on the military.” This sentence is an example of
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a normative judgment
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Economic theories
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leave out some of the complexities of the real world
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The term ceteris paribus means
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other things being equal
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When the outcome predicted by a theory is inconsistent with the outcome observed in the real world
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we should consider discarding the theory unless the assumption of ceteris paribus has been violated.
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Microeconomics differs from macroeconomics in that
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microeconomics looks at the individual units in the economy, while macroeconomics studies the economy’s overall performance
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Which of the following is an example of macroeconomic analysis?
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a study of the factors that influence the overall unemployment rate
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An inverse relationship exists between two variables if
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the value of one variable increases as the value of the other decreases.
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If two variables are directly (or positively) related, then
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as one variable increases, the other increases
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The equation of the demand curve to the right, in inverse form, is
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P = 10 – (1/2)Q
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The equation of the above demand curve, in standard form, is:
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Q = 20 – 2P
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In the “general form of a straight line” equation (i.e., Y = a + bX), “a” is:
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the vertical-axis intercept
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In the “general form of a straight line” equation (i.e., Y = a + bX), “b” is:
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the slope of the line
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In the above Lorenz Curve diagram, what proportion of income do the bottom 20% of families receive?
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10%
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In the above Lorenz Curve diagram, what proportion of income do the top 20% of families receive?
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40%
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Which of the following economists do you associate with the “Circular Flow” model?
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Alfred Marshall
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With regard to the “Circular Flow” model, which of the following is a “leakage?”
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Saving
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With regard to the “Circular Flow” model, which of the following is an “injection?”
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Investment
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Which business organizational form suffers the disadvantage of “double taxation?”
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Corporation
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Which business organizational form has the advantage of being most easily transferable?
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Corporation
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Which of the following economic goals was included in the “Employment Act of 1946?”
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maximum employment, stable prices, growth
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Pure capitalism is characterized by
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competition
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In a “laissez-faire” economy
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the role of government is very limited
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According to the “invisible hand” doctrine
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as individuals pursue their own interest, they also promote the good of the society as a whole
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In pure capitalism, the production decisions of businesses are guided by
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the way that consumers spend their incomes
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In pure capitalism,
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output is distributed to those who are willing and able to pay for it
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Which of the following is not a function of prices in a capitalist economy?
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ensuring that income is distributed fairly
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In pure capitalism, consumers are protected from shoddy products and high prices by the presence of
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competition
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In pure capitalism, the scarcest resources tend to be employed very conservatively because
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they tend to have high prices
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In pure capitalism, the prices of economic resources would influence
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the answers to all three fundamental questions
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In pure capitalism, the answer to the “how to produce” question
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would be influenced by the prices of the economic resources
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According to the circular flow model
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households sell economic resources to businesses
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The payments to the owners of land, labor, capital, and entrepreneurship are, respectively
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rent, wages, interest, and profits
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According to the concept of consumer sovereignty
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businesses attempt to produce the products that are most desired by consumers
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Which of the following is not a characteristic of pure command socialism?
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decentralized decision-making
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In pure command socialism,
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central planning coordinates economic decisions
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In pure command socialism, the job of ensuring that specific production objectives agree (so that ax handle manufacturers don’t produce 500,000 handles, while ax head manufacturers produce only 250,000 heads) is performed by
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commands from the central authority
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A likely weakness of pure command socialism is
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its inefficient use of economic resources
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One reason the United States is not an example of pure capitalism is because
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there is significant government intervention in the economy
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Which of the following countries is commonly associated with an industrial policy?
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Japan
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Which of the following functions of government is most consistent with the model of pure capitalism?
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establishing a legal framework
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Codetermination, the requirement that corporations have worker representatives on their boards of directors, is associated with which of the following countries?
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Germany
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Which of the following is a true statement?
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Sweden uses government policy primarily to alter the income distribution
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Which of the following countries pursue an industrial policy?
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South Korea, Taiwan, and Japan
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Which of the following statements about Russia’s efforts to reform its economy is false?
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The legal system has been dramatically reformed to protect private property rights
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Which of the following is an accurate description of the difference between the Russian and Chinese efforts at economic reform?
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Russia introduced market reforms in a relatively short time period, while China has taken a very cautious, go-slow approach
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According to the law of demand, a reduction in the price of a product will
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increase the quantity demanded of the product
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If the price of hamburgers increases, this is likely to
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reduce the quantity demanded of hamburgers
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If the price of gasoline declined, we would expect
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consumers to move down along their stationary demand curve to a higher quantity
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One reason that consumers choose to buy more of a product at a lower price than at a higher price is because the product becomes more attractive relative to other items serving the same function. This is called
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the substitution effect
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The “income effect” of a price reduction will cause consumers to purchase more of a product because
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their income will stretch farther than before
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An increase in the price of beef will result in a lower quantity demanded because
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some consumers will now choose to substitute fish and other meat products in the place of beef
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An increase in per capita income will cause the demand curve for lobster to
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shift to the right, if lobster is a normal good
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If consumers expect the price of a product to increase in the future they will probably
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increase their current demand for the product
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If chicken and fish are substitutes, then an increase in the price of chicken will
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shift the demand curve for fish to the right
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If sour cream and baking potatoes are complements, an increase in the price of baking potatoes would tend to
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decrease the demand for sour cream
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A leftward shift in demand curve for new cars could be caused by
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a decrease in per capita income
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All of the following would shift the demand curve for pond-raised catfish to the right EXCEPT
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an increase in the price of pond-raised trout
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If the price of wheat increases and other factors remain unchanged, then we can expect
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a decrease in the supply of wheat
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According to the law of supply
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price and quantity supplied are directly related
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If the price of leather increases, then
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the supply curve of leather shoes will shift to the left
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New technology has reduced the cost of mining gold. This discovery will probably
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cause the supply curve of gold to shift to the right
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If a severe drought destroyed much of the hay crop,
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the price of hay would tend to rise
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If demand increases and supply remains constant,
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the equilibrium price and quantity will rise
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If supply declines, and demand remains constant,
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the equilibrium price will rise; the equilibrium quantity will fall
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If both supply and demand increase,
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the equilibrium quantity will rise; the equilibrium price will be indeterminate
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If demand increases, and supply decreases
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the equilibrium price will rise; the equilibrium quantity will be indeterminate
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Which of the following statements is not correct?
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If demand decreases and supply increases, equilibrium price will rise
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An increase in the price of lumber would probably result in
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a decrease in the supply of new homes and higher new home prices
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If the supply of apartments is increasing more rapidly than the demand, the likely result will be
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lower apartment rents
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If consumer preferences switch from pork to fish, this is likely to cause
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an increase in the price of fish and a reduction in the price of pork
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If the price of tea increases, the probable result would be
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a decrease in the supply of tea
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If a shortage exists, then
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the existing price is below the equilibrium price
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Suppose the average price of a new home in Eaton is $150,000. If the demand for new homes increases,
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there will be a temporary shortage of new homes at the $150,000 price. The shortage will be eliminated when competition between suppliers raises the equilibrium price
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Suppose that the supply of personal computers increases. Which of the following is consistent with the model of supply and demand?
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The increased supply will lead to a temporary surplus, which will result in competition between suppliers. This competition will lower the equilibrium price
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When economists speak of the “motivating” function of price changes, they are referring to the ability of price changes to
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provide incentive to producers to increase or decrease their output
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The process of dividing up or allocating scarce items among those who desire them is called
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rationing
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Which of the following will not shift the demand curve for color television sets to a new position?
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a reduction in the selling price of color TVs
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Which of the following will shift the demand curve for compact cars to the right?
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an increase in the price of full-size cars
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An increase in the supply of wheat would lead to
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a reduction in the price of wheat and an increase in the quantity of wheat demanded
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A reduction in the demand for steak would lead to
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a reduction in the price of steak and in the quantity of steak supplied
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The phrase “increase in demand” means that
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the demand curve for the product has shifted to the right
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If the U.S. government were to artificially maintain the selling price of beef above the equilibrium level, then
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there would be a surplus
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Suppose that a minimum wage is instituted at a level above the equilibrium wage rate. It is reasonable to expect
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a surplus of workers, because the quantity of labor supplied will exceed the quantity demanded
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Suppose that a minimum wage is instituted at a level above the equilibrium wage rate. It is likely that
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there will be a decrease in the demand for labor
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If the federal government provides wheat farmers with a subsidy of $1.00 a bushel, we would expect
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the equilibrium quantity of wheat to increase and the price of wheat to fall by less than $1.00 a bushel
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Which of the following is a true statement regarding producer subsidies and excise taxes?
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Excise taxes tend to reduce the supply of the taxed product
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A subsidy to corn producers would tend to
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reduce the market price of corn
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If the federal government imposes a $2.00 a bottle excise tax on wine, we would expect
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the equilibrium quantity of wine to decrease and the price of wine to rise by less than $2.00 a bottle
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When Trustworthy Airlines reduced its fares by 20 percent, it sold 35 percent more tickets than before. The coefficient of demand elasticity is equal to
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-1.75
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If the coefficient of demand elasticity is less than -1.00, demand is described as
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elastic
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On a linear, downward sloping demand curve
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demand is more elastic at the upper end
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If a decrease in price leads to a reduction in total revenue, it can be concluded that
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demand is inelastic
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The President of Ivy College just requested an increase in tuition in order to earn additional revenue to help defray rising expenses. Apparently the President believes that
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the demand for an Ivy College education is inelastic
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Total revenue will increase if
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price is reduced and demand is elastic
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If demand is inelastic,
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an increase in price will reduce the quantity of a product demanded, but total revenue will rise
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In general, demand for a product is more elastic
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the greater the number of substitutes and the smaller the fraction of the family budget spent on that product
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The demand for a product is described as inelastic if
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consumers are not very responsive to a price change
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If the coefficient of demand elasticity is -0.5, then
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a 20 percent reduction in price will increase the quantity demanded by 10 percent
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If local policymakers want to increase bus ridership by 20 percent, and bus service has an elasticity coefficient of -0.25, then bus fares should be
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reduced by 80 percent
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Suppose that an excise tax of $1 a pack is imposed on cigarette producers. Which of the following would be true?
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The more inelastic the demand for cigarettes, the more the price of a pack will rise

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