Economics Chapters 1-4 Test Questions

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Economics is best defined as the study of
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Choices made by people faced with scarcity
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Economics is the study of
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how society uses limited resources
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_______ is a situation in which resources are limited in quantity and can be used in different ways.
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Scarcity
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Scarcity can best be defined as a situation in which
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resources are limited in quantity and be used in different ways
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Because resources are limited
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people must make choices
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Normative economics
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answers the question “What ought to be?”
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What is an example of a normative question?
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Should the government provide free prescription drugs to senior citizens?
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What is an example of a question answered with positive economic analysis?
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If the college increased tuition, will class sizes decline?
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An arrangement that allows buyers and sellers to exchange things is called
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a market
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Adam Smith used the metaphor of the invisible hand to explain how
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people acting in their own self-interest promote the interest of society as a whole
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When economists assume that people are rational and respond to incentives, they mean
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people act in their own self-interest
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Which is not a question answered with normative economic reasoning?
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If the college increased tuition, will class sizes decline?
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In a modern market, most answers to the questions of how much to produce, how to produce it, and who should get the production are made by
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individuals and firms
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Tradeoff is
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sacrificing one thing for another
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Which of the following is not an economic decision in a modern economy?
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Where will the products produced be consumed?
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Deciding if a company will produce automobiles by manual labor or robotics answers the economic question of
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How will we produce it?
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Adam Smith is
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considered the founder of economics
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A variable measures
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something that can take on different values
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Ceteris paribus is the Latin expression meaning
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other variables are held fixed
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To think at the margin means to consider
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how a small change in one variable affects another variable
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Microeconomics is best described as the study of
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the choices made my individual households, firms, and governments
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Microeconomic analysis can be used to
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better understand how markets work, make personal or managerial decisions, and evaluate the merits of public policies
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Macroeconomics is best described as the study of
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the nation’s economy as a whole
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The opportunity cost of something is
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what you sacrifice to get it
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The principle of opportunity cost
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is applicable to all decision-making
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The opportunity cost of going to college
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includes wages you lose by going to school instead of working
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The principle of opportunity cost is related to
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scarcity
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The period of time over which a firm can change all the factors of production is the
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long run
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According to the principle of diminishing returns, if all factors of production but one are held constant and if that one factor is doubled, then eventually output will most likely
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less than double
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Spending money on a fixed budget is an example of
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the principle of opportunity cost
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The saying that: “There is no such thing as a free lunch” refers to
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the principle of opportunity cost
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If an economy is fully utilizing its resources, it can produce more of one product only if it
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produces less of another product
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If you remove resources from factory production, the quantity of factory goods will
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decrease
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The extra benefit resulting from a small increase in an activity is called the
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marginal benefit
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The additional cost resulting from a small increase in some activity is called the
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marginal cost
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The principle that individuals and firms pick the activity level where the incremental benefit of that activity equals the incremental cost of that activity is known as the
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marginal principle
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When people act in their own self interest, it is described as the
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principle of voluntary exchange
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The principle of diminishing returns implies that as one input increases while the other inputs are held fixed, output
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increases at a decreasing rate
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The principle that “as one input increases while the other inputs are held fixed, output increases at a decreasing rate” is known as the
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principle of diminishing returns
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The period of time over which one or more factors of production is fixed is the
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short run
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A firm produces its product using both capital and labor. When it does not change its capital usage, but doubles its labor input, its output increases by less than 50%. What is the most likely explanation of this?
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The principle of diminishing returns
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According to the principle of diminishing returns, if the number of workers is increased beyond the point of diminishing returns, then the additional worker
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increases total output by less than the amount of previous workers
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The principle of diminishing returns occurs
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only in the short run
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The face value of money or income is called its ______
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real value
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The real value of money
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reflects the purchasing power of the sum of money
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The principle of diminishing returns doesn’t apply to labor in the long run because
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a firm can build an additional production facility so each worker’s share of the facility doesn’t necessarily decrease
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Diminishing returns occurs because
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one of the inputs to the production process is fixed
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The principle that what matters to people is the real value or purchasing power of money is the
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real-nominal principle
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If real salaries decrease but nominal salaries do not, this means that
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prices have risen
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In modern economies, individuals in markets make most of the decisions about
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what to produce, how to produce, and for whom to produce
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The more times a worker performs a particular task, the more proficient the worker becomes at that task. This is called
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repetition
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A specialized worker doesn’t spend time switching from one task to another. This is called
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continuity
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When a specialized worker gains insights into a particular task that leads to better production methods it is called
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innovation
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The theory of comparative advantage states that
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specialization and free trade will benefit all trading partners
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The production advantage enjoyed by one country over another when it uses fewer resources to produce a product than another country is
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an absolute advantage
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According to the theory of comparative advantage, a country
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exports the goods in which it has a comparative advantage
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Country A has a comparative advantage over Country B in the production of shoes if
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Country A can produce shoes at a lower opportunity cost than Country B can
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According to the theory of comparative advantage a country should
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specialize and export goods with the lowest opportunity cost
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When one country can produce a product at a lower opportunity cost in terms of other goods, that country is said to have
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A comparative advantage
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Markets work better thanks to the invention of
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contracts, insurance, patents
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Under a market economy, decisions are guided by
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prices
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Entrepreneurs are driven by
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prices and profits
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Pollution is an example of market failure because
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polluters may be able to avoid bearing the full cost of their decisions
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How can a government make markets more efficient?
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by protecting private property
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The ability of one person or nation to produce a good at a lower absolute cost than another is called
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absolute advantage
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Trade results from
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comparative advantage
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A rich nation will trade with a poor nation because the
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poor nation has the comparative advantage in a product
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How do governments intervene in international trade?
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They erect barriers to trade through and other restrictions
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For Country A, an export is a good produced in
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Country A and purchased by residents in Country B
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When the government helps to enforce contracts
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people trade with more confidence and so markets operate efficiently
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Most economies have what economists call
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mixed economies
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In the US, the primary responsibility for paving highways and running colleges and universities rests with
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state government
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A change in the quantity demanded of a product is the result of a change in
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the price of the product
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A demand curve is defined as the relationship between
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the price of a good and the quantity of that good that consumers are willing to buy
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The law of demand states that the quantity demanded of a product increases as
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the price of the product falls
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The substitution effect of a price change implies that as the price of a good falls, people are like to
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buy more of a good
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A supply curve is defined as the relationship between
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the price of a good and the quantity that producers are willing to sell
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The law of supply states that
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firms supply more of a product as the price of the product rises
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Suppose that the quantity supplied of pizza exceeds the quantity demanded for pizza. We would expect that
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the price of pizza will decrease
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The income effect of a price change implies that
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as the price of a good falls, people are likely to buy more of all normal goods
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Suppose that bananas and apples are normal goods, and that the price of bananas falls. If the income effect outweighs the substitution effect, we would predict that people consume ______ bananas and ________ apples.
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more;more
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Which of the following is best described by the statement: “As the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower”?
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the substitution effect
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If we observe that the price is rising in the sugar market, it is likely due to
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an excess demand for sugar
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When consumers are willing to buy more than producers are willing to sell
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there is excess demand for product in the market
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Bananas and apples are substitutes. When the price of bananas rises, the equilibrium quantity of apples will ______ and the equilibrium price of apples will ______
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rise;rise
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Peaches and cream are complements. When the price of peaches falls the equilibrium quantity of cream will ______ and the equilibrium price of cream will _______
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rise;rise
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In the event of excess demand in the coffee market
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the price of coffee will increase
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Judy demands more peanuts as her income increases. From this, we can conclude that, for Judy
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peanuts are a normal good
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When Mary’s income increases, she purchases less hamburger. We can conclude that for Mary, hamburger is a ______ good
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inferior
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A normal good is defined as a good for which demand decreases when
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income increases
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Two goods are substitution if
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the demand for one good decreases when the price of the other decreases
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When the price of apples goes up
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the quantity demanded for apples will decrease
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Assume that chicken and beef are substitutes. When the price of beef increases
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the demand for chicken increases
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The price of oranges has risen dramatically. Which of the following is likely to happen
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The quantity of oranges supplied will increase
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Suppose that a product benefits from a successful advertising campaign. The result is that
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the demand for the product increases
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Suppose that consumers expect that the price of a product will increase in the future. The result is that
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the current demand for the products increases
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Suppose that a market for a product is in equilibrium at a price of $5 per unit. At any price above $5 per unit
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there will be an excess supply of the product, and the quantity supplied of the product will be greater than the quantity demanded of that product
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Assume that tortilla chips and salsa are complements. When the price of tortilla chips decreases
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the demand for salsa increases
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An inferior good is defined as a good for which demand decreases when
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income increases
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If the number of beer producers decreases
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the supply of beer decreases
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If consumers have an expectation of a product’s price increasing in the near future, they will usually
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purchase more at the current price
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Flour is used to produce bread. If the price of flour increases
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the supply of bread decreases
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If a technological advance makes it possible to produce bananas at a lower cost
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the supply of bananas increases
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If the equilibrium price of a good increases and the equilibrium quantity of the good decreases, we can conclude that
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supply decreased
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If the equilibrium price of a good decreases and the equilibrium quantity of the good decreases, we can conclude that
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demand decreased
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When a consumers income decreases the consumer
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has less to spend, buys in smaller quantities, buys inferior goods
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When the price of the substitute product decreases, the demand for a substitute product
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decreases
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If there is an advance in the technology used to produce a product, what is the likely effect it may have on the supply?
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If would increase the supply
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If consumers have an expectation of higher future prices, the quantity of the good that is currently available
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will decrease

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