Principles of Microeconomics

Test 1 Fall 2002

Version 1


Answers are at the end of the test.


1.  An increase in the price of gasoline is most likely to

a.       increase the demand for automobiles

b.      decrease the demand for automobiles

c.       decrease the demand among consumers for public provided bus transportation

d.      decrease the demand for gasoline


2.  Suppose that the production possibilities curve for a country consists of only two goods, watches and textbooks.  If the economy is currently at full employment and is producing both watches and textbooks, than an increase in the technology for watch production

a.       will only increase the amount of  watches that the economy can produce.

b.      will only increase the amount of textbooks that the economy can produce.

c.       can lead to an increase in both the number of watches and textbooks produced

d.      will decrease the amount of watches that it is possible for the economy to produce


3.  Which of the following is an example of a normative economic statement?

            a.  the government should save social security

            b.  an increase in the minimum wage will increase unemployment

            c.  the demand for an inferior good will decrease with an increase in income

            d.  the demand for an inferior good will increase with an increase in income


4.  The production possibilities curve is bowed out from the origin to reflect the fact that

            a.  consumer goods are perfect substitutes for each other

            b.  resources are perfect substitutes for each other

            c.  resources are perfect complements for each other

            d.  resource are imperfect substitutes for each other


5.  Which of the following will increase the demand curve for VCRs?

            a.  a decrease in the cost of producing VCR’s thus lowering their price

            b.  a decrease in consumer income

            c.  a decrease in the number of producers making VCRs.

            d.  a decrease in the price of VHS tapes


6.  The name of the factor payment to capital is

            a.  interest

            b.  wages

            c.  profits

            d.  rent


7.  If the economy is producing at a point that is lying inside the production possibilities curve than

            a.  the economy is efficient if that is where society want to be

            b.  the economy is producing the wrong types of goods and services

            c.  the economy is not operating efficiently

            d.  this is a trick question.  It is not possible to produce at a point inside the

production possibilities curve.


8.  In the circular flow model, resources are owned by

            a.  the government

            b.  the firms

            c.  foreign investors

            d.  the households.


9.  An increase in demand will ____ price and ______ quantity.

            a.  increase; increase

            b.  decrease; decrease

            c.  increase; decrease

            d.  decrease; increase


10.  Assume that the equilibrium price for gasoline is at $1.50 and the government places a price ceiling at $1.00.  The result on the market will be

            a.  a surplus

            b.  a shortage

            c.  equilibrium

            d.  first a surplus than the market will move towards equilibrium


11.  Who is the price ceiling designed to “protect”? 

            a.  consumers of gasoline

            b.  gasoline producers

            c.  foreign suppliers

            d.  everybody


12.  The demand curve slopes up because

            a.  of diminishing marginal utility

            b.  it costs more to make more

            c.  of income and substitution effects

            d.  this is a trick question.  The demand curve slopes down


13.  Which of the following will cause a decrease in the production possibilities curve? 

            a.  an increase in capital

            b.  a shift in consumer preferences for one good over the other

            c.  a decrease in the education levels of the nation’s workforce

            d.  a increase in the technology of an unimportant good


14.  If there is an increase in the number of pizza restaurants in Valdosta, than we should expect

            a.  the price of pizza to decrease and the number of pizzas sold to decrease

            b.  the price of pizza to decrease and the number of pizzas sold to stay constant

            c.  the price of pizza to increase and the number of pizzas sold to decrease

            d.  the price of pizza to decrease and the number of pizzas sold to increase


15.  People have to wait their turn to use the athletic equipment, such as stair machines and cycling bikes, at the YMCA because

            a.  the demand for the equipment is greater than the supply at the current price

            b.  the supply of the equipment is greater than the demand at the current price

            c.  the supply of athletic equipment equals the demand for athletic equipment

            d.  the “price” of admission to the YMCA is too high.


16.  The income effect says that

            a.  an increase in the price of a good gives you more “income”

            b.  an increase in the price of a good gives you less “income”

            c.  you will substitute one good for another

            d.  your income depends upon the amount of education you receive


17.  An increase in the price of a good will

            a.  increase the quantity supplied of the good

            b.  increase the supply of the good 

            c.  decrease the demand for the good

            d.  decrease the quantity supplied of the good


18.  Which of the following is NOT an important economic concept?

            a.  the value of a good is objective

            b.  incentives alter people’s behavior

            c.  economic actions can generate long term effects that are different from the

short term effects.

            d.  information is important but costly to obtain


19.  An increase in the price of a cigarettes, a substitute good for cigars, tends to

            a.  increase the demand for cigars

            b.  decrease the demand for cigars

            c.  increase the demand for cigarettes

            d.  lower the price of cigars


20.  The law of increasing opportunity costs states that

            a.  as society makes more of one good, its opportunity cost decreases

            b.  society can make more of any good without any changes in price

            c.  as society makes more of one good, its opportunity cost increases

            d.  opportunity cost is irrelevant unless its negative


21.  The law of demand states that

            a.  as price increases, demand decreases

            b.  as price increases, the quantity demanded decreases

            c.  as price increases, the quantity supplied increases

            d.  as price decreases, demand usually increases


22.  The law of supply

            a.  is usually ignored in a market based economy

            b.  is only relevant for luxury goods

            c.  states that as price increases, the quantity supplied increases

            d.  is a major factor in price gouging by firms


23.  If the PPC between two goods is a straight line, then the

            a.  opportunity cost would not be a ratio

            b.  resources would be equally productive for both goods

            c.  line would not qualify as a PPC

            d.  both (a) and (c) are correct


24.  The term ceteris paribus refers to how economists

            a.  omit irrelevant facts and circumstances

            b.  speak of “laws, principles, theories, and models”

            c.  use inductive and deductive reasoning

            d.  assume that all variables except one are held constant


25.  “The 1990’s have seen increased global temperatures.  Also, there has been an increase in industrial production over the past 150 years.  Therefore, the increase industrial production of humanity is responsible for global warming.”  This statement as written is

            a.  incorrect due to the post hoc fallacy

            b.  incorrect due to bias

            c.  incorrect due to the fallacy of composition

            d.  correct due to the principle of economic production


26.  “VSU should increase the minimum wage so that its employees can earn a living wage.”  This statement is an example of

            a.  positive economics

            b.  economic goods

            c.  good policy

            d.  normative economics


27.  The minimum wage is an example of

            a.  a price floor

            b.  a price ceiling

            c.  a price maximum

            d.  wage gouging


28.  Suppose that a farmer is growing oranges on his land and is earning $400 per acre.  Assume that the same acre of land could grow tomatoes for $100, corn for $50, wheat for $250, or hay for $10 per acre.  What is the opportunity cost of growing oranges?

            a.  $410

            b.  $400

            c.  $250

            d.  $10


29.  If both the demand and supply of staplers increases at the same time, then the equilibrium price will ____ and the equilibrium quantity will _____.

            a.  increase; be unknown

            b.  decrease; be unknown

            c.  be unknown; increase

            d.  be unknown; decrease


30.  The principal of absolute advantage states that       

            a.  only firms should produce goods and services

            b.  one economic agent can make more of a good than another economic agent

            c.  one economic agent can make a good cheaper than another economic agent

            d.  if nations specialize in the goods that they have an absolute advantage in, they will be better off


31.  Tiffany decides against working to attend a one hour review session for her economics exam.  Tiffany is paid $10 per hour.  What is her opportunity cost of attending the review session?

            a.  it is equal to the benefits she gets from the review session

            b.  nothing, since the review session does not cost anything

            c.  the value of the review session minus the $10 she could have earned

            d.  the $10 she could have earned on the job


32.  If there is unemployment in the economy, then the

            a.  PPC will shift inwards

            b.  economy is operating at an unattainable point

            c.  PPC will shift outward

            d.  economy is operating at a point inside the PPC


33.  Assume that soda and hot dogs are complements.  If the price of water increases causing the price of soda to increase, then the

            a.  demand for hot dogs will decrease

            b.  demand for hot dogs will increase

            c.  quantity demanded of hot dogs will decrease

            d.  there will be an increase in the supply of hot dogs


34.  Suppose that electric cars and gasoline powered cars are substitutes.  Now assume that gasoline is expected to increase dramatically in the future due to stricter environmental controls.  Furthermore, there is expected to be great strides in the technology used in producing electric cars.  Given this we can say that in the future the price of electric cars will ____ and the quantity of electric cars will ___.

            a.  increase; increase

            b.  increase; be unknown

            c.  unknown; increase

            d.  huh???


35.  Immediately after a Pink Floyd concert you notice that the price of CD’s being sold by the vendors is higher than the price in record stores.  Since you’ve had Dr. Mitchell for you microeconomics class, you know that this probably is due to

            a.  an increase in costs of making CDs

            b.  an increase in demand by consumers

            c.  both an increase in demand and increase in supply of CDs

            d.  a decrease in demand by consumers


36.  Which of the following will not lower the price of computers?

            a.  consumer’s income decreases

            b.  the wages of people used to make computers falls

            c.  the computer industry begins to receive subsidies

            d.  the number of firms in the industry begins to decline


37.  If OPEC is successful in cutting the production of oil, then we can expect gas prices to ___ and gas quantities to ___.

            a.  rise; rise

            b.  rise; fall

            c.  fall; rise

            d.  fall; fall


38.  When Erin graduates from college and gets a full time job, she notices that she buys fewer hot dogs.  For Erin, we can conclude that hot dogs are a

            a.  luxury good

            b.  normal good

            c.  inferior good

            d.  substitute good


39.  Assume that the minimum wage is $5.15 and the current equilibrium wage rate is $6.  We can say that

            a.  the market is in equilibrium

            b.  the wage rate will fall

            c.  the wage rate will increase

            d.  there is a surplus of labor


40.  New York City notices that the number of abandoned apartment buildings increases after the implementation of rent control.  This is an example of

            a.  marginalism

            b.  policies that can create long run effects which are different from their short run effects

            c.  market efficiency

            d.  greedy landlords




1. B

2. C

3. A

4. D

5. D

6. A

7. C

8. D

9. A

10. B

11. A

12. D

13. C

14. D

15. A

16. B

17. A

18. A

19. A

20. C

21. B

22. C

23. B

24. D

25. A

26. D

27. A

28. C

29. C

30. B

31. D

32. D

33. A

34. C

35. B

36. D

37. B

38. C

39. A

40. B