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Economics David Colander 11th Edition- Test Bank
Sample Questions
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Chapter 2 The Production Possibility Model, Trade, and Globalization
1) The production possibility model can be used to demonstrate the concept of opportunity cost.
Answer: TRUE
Explanation: The production possibility model shows all the possible production combinations and also demonstrates the trade-offs involved in moving from one combination to another.
Difficulty: 1 Easy
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) Production possibility curves are upward-sloping because increased production of one good implies reduced production of another good.
Answer: FALSE
Explanation: Production possibility curves are downward-sloping. The rest of the statement is correct.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3) An economy that operates inside its production possibility curve is less efficient than it would be if it were operating on its production possibility curve.
Answer: TRUE
Explanation: The production possibility curve represents the most output we can get with a given level of inputs. Operating inside that curve would mean that we can produce more with the given inputs and, as long as we prefer more to less, represents a less efficient point than a point on the production possibility curve.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) If the principle of increasing marginal opportunity cost holds, the opportunity cost of producing each additional unit of a good should fall as production of that good rises.
Answer: FALSE
Explanation: See the definition of the principle of increasing marginal opportunity cost in the text.
Difficulty: 1 Easy
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) Productive efficiency is not achieved at any point inside the production possibility curve.
Answer: TRUE
Explanation: Since it is always possible to reallocate resources at any point inside the production possibility curve in a way that increases output, these points do not represent productive efficiency. Productive efficiency is achieved on the production possibility curve.
Difficulty: 2 Medium
Topic: Comparative Advantage
Learning Objective: 02-02 Relate the concepts of comparative advantage and efficiency to the production possibility curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6) If a country has a comparative advantage in the production of a good, its resources are better suited to the production of that good than are the resources of other countries.
Answer: TRUE
Explanation: See the definition of comparative advantage in the text.
Difficulty: 1 Easy
Topic: Comparative Advantage
Learning Objective: 02-02 Relate the concepts of comparative advantage and efficiency to the production possibility curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) Two nations with differing comparative advantages will be able to consume more if they specialize and trade with each other than if they did not specialize or trade with each other.
Answer: TRUE
Explanation: Trade shifts production of each good to the country or countries with the lowest opportunity costs. As a consequence, total production rises and hence so does total consumption, allowing each country to consume more than if it did not trade.
Difficulty: 2 Medium
Topic: Trade and Comparative Advantage
Learning Objective: 02-03 State how, through comparative advantage and trade, countries can consume beyond their individual production possibilities.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) Two nations with differing comparative advantages will be able to consume more if each produces the good for which the opportunity cost is highest and trades for the good for which opportunity cost is lowest.
Answer: FALSE
Explanation: Each country should produce the good for which opportunity cost is lowest (for which it has a comparative advantage in producing) and trade for the good for which opportunity cost is highest.
Difficulty: 2 Medium
Topic: Trade and Comparative Advantage
Learning Objective: 02-03 State how, through comparative advantage and trade, countries can consume beyond their individual production possibilities.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9) The law of one price means that prices eventually will be the same in all countries and eventually countries will not have a reason to trade.
Answer: FALSE
Explanation: Although the law of one price means that prices eventually will be the same in all countries, this happens because countries do trade. As long as the comparative advantages differ, there is a reason to trade. Multiple Choice Questions
Difficulty: 1 Easy
Topic: Globalization and the Law of One Price
Learning Objective: 02-04 Explain how globalization is guided by the law of one price.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10) Which of the following cannot be determined by using a production possibility table?
- A) What combination of outputs can be produced?
- B) How much less of one output must be produced if more of another output is produced?
- C) What combination of outputs is best?
- D) How much output can be produced from a given level of inputs?
Answer: C
Explanation: A production possibility table indicates what combinations of goods can be produced, not what combination is best.
Difficulty: 1 Easy
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
11) Suppose each of the following rows represents the choice faced by policy makers given the current set of U.S. institutions and technology. What is the opportunity cost of reducing unemployment from 8 percent to 4 percent?
| Unemployment | Inflation |
| 10 | 3 |
| 8 | 4 |
| 6 | 5 |
| 5 | 7 |
| 4 | 10 |
- A) 4 percentage points of unemployment
- B) 6 percentage points of unemployment
- C) 6 percentage points of inflation
- D) 4 percentage points of inflation
Answer: C
Explanation: The opportunity cost is what must be given up. In this case, to reduce unemployment from 8 percent to 4 percent, inflation must rise from 4 percent to 10 percent. The change in the inflation rate is the opportunity cost of lowering unemployment.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) Investment in capital goods is one way to increase the standard of living in the future. Investment in capital goods, however, means that we must forgo consumption today. One of the trade-offs facing an economy is the balance of consumption today with that of the future. The following table shows such a trade-off. With this information we know that the opportunity cost of which of the following is the greatest?
| Current consumption | Future consumption |
| 800 | 100 |
| 750 | 260 |
| 650 | 340 |
| 600 | 380 |
| 550 | 400 |
- A) Increasing current consumption from 750 to 800
- B) Increasing current consumption from 650 to 750
- C) Increasing current consumption from 600 to 650
- D) Increasing current consumption from 550 to 600
Answer: A
Explanation: Increasing current consumption creates a greater opportunity cost. The opportunity cost of increasing consumption from 750 to 800 is 160 future consumption units, but the opportunity cost of increasing current consumption from 550 to 600 is only 20 future consumption units.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13) With the resources available, you can make the combinations of Ums and Umies (trinkets from a place called Bandarban) shown in the table. The opportunity cost of producing 60 Umies instead of 30 Umies is:
| Number of Ums | Number of Umies |
| 60 | 0 |
| 40 | 30 |
| 20 | 60 |
| 0 | 90 |
- A) 10 Ums
- B) 20 Ums
- C) 30 Ums
- D) 40 Ums
Answer: B
Explanation: Producing an extra 30 Umies means not producing 20 (40 − 20) Ums.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) Evan can grow both roses and carnations in his garden. His production possibility table is shown below. If he is currently producing 110 roses, his opportunity cost of producing 40 more roses is:
| Number of roses | Number of carnations |
| 0 | 155 |
| 60 | 135 |
| 110 | 109 |
| 150 | 78 |
| 180 | 0 |
- A) 20 carnations
- B) 26 carnations
- C) 31 carnations
- D) 78 carnations
Answer: C
Explanation: Producing an extra 40 roses means not producing 31 (109 − 78) carnations.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) Consider the table below, in which each production choice represents a point on a production possibility curve.
| Choice | Eggs | Rye |
| A | 10 | 0 |
| B | 8 | 10 |
| C | 6 | 20 |
| D | 4 | 30 |
| E | 2 | 40 |
| F | 0 | 50 |
This production possibility table could be graphed as a:
- A) straight line with negative slope.
- B) curved line with negative slope.
- C) straight line with zero slope.
- D) curved line with positive slope.
Answer: A
Explanation: Graph each point to find out that the graph of the table is a straight line. One can also discern from the table that the opportunity cost of 10 rye is always 2 eggs. Constant opportunity costs are represented by a straight-line production possibility curve.
Difficulty: 3 Hard
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16) Refer to the graph below.
Suppose that the opportunity cost of producing 10 chickens is always 8 turkeys. Given this, the relevant production possibility curve must be:
- A) I.
- B) II.
- C) III.
- D) IV.
Answer: B
Explanation: This is the only curve along which opportunity cost is constant and equal to 0.8 turkeys per chicken. The curve is straight and negatively sloped.
Difficulty: 3 Hard
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) The production possibility table below is for growing broccoli and asparagus in a 320-square-foot garden in one season.
| Production Possibility | |
| Broccoli | Asparagus |
| 30 | 0 |
| 20 | 18 |
| 10 | 26 |
| 0 | 30 |
Which curve on the graph on the right corresponds to this table?
- A) I
- B) II
- C) III
- D) IV
Answer: D
Explanation: Each curve has the same beginning and end points. To determine the correct curve, look at how opportunity cost changes as you choose more broccoli. As you choose more broccoli, the opportunity cost per broccoli increases, meaning the production possibility curve is bowed outward.
Difficulty: 3 Hard
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18) Because you can get more of one good only by giving up some of another good, the shape of a production possibility curve is:
- A) upward-sloping.
- B) perfectly vertical.
- C) perfectly horizontal.
- D) downward-sloping.
Answer: D
Explanation: The negative slope of a production possibility curve represents the opportunity cost concept—you get more of one benefit only if you get less of another.
Difficulty: 1 Easy
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
19) Refer to the production possibility curve for Ricardia below.
The graph indicates that with the resources and technology it has available, Ricardia:
- A) can produce either 40 units of rye or 20 units of eggs.
- B) can produce both 40 units of rye and 20 units of eggs.
- C) cannot produce both 20 units of rye and 10 units of eggs.
- D) cannot produce both 20 units of rye and 5 units of eggs.
Answer: A
Explanation: From this graph we can tell that with the given inputs, the following combinations are possible [eggs, rye]: (20, 0), (15, 10), (10, 20), (5, 30), and (0, 40).
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) Refer to the graph below.
Laura’s production possibility curve for math and economics problems in one night is shown in the graph. Her opportunity cost of finishing six math problems instead of four math problems is:
- A) one economics problem.
- B) two economics problems.
- C) three economics problems.
- D) four economics problems.
Answer: A
Explanation: Finishing two more math problems means not finishing one (4 − 3) economics problem.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21) Given the production possibility curve shown below, the opportunity cost of listening to each additional album when moving from point B to point A is on average:
- A) 1/2 article.
- B) 1 article.
- C) 2 articles.
- D) 3 articles.
Answer: A
Explanation: Moving from point B to point A means giving up 4 articles for 8 albums. Thus, the opportunity cost is 4/8, or 1/2 article.
Difficulty: 3 Hard
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) Refer to the graph shown. Given the production possibility curve, the opportunity cost of reading 2 more articles when you are already reading 11 articles is on average:
- A) 1/2 album per article.
- B) 2 albums per article.
- C) 2/3 album per article.
- D) 3 albums per article.
Answer: B
Explanation: Moving from C to B means giving up 4 albums for 2 articles, or 2 albums per article.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23) If a production possibility curve representing a trade-off between a grade in English and a grade in math has a negative slope, we know that:
- A) there is a direct relationship between grades in English and grades in math.
- B) there is no relationship between grades in English and grades in math.
- C) there is an inverse relationship between grades in English and grades in math.
- D) one can get better grades in English only if one gets better grades in math.
Answer: C
Explanation: The negative slope of the production possibility curve implies that one can get better grades in English only by sacrificing better grades in math, which is an inverse relationship as opposed to a direct one.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
24) Given a production possibility curve for good X (on the x-axis) and good Y (on the y-axis), the opportunity cost of increasing good X is greatest when the slope of the production possibility curve is:
- A) −6.
- B) −4.
- C) 6.
- D) 4.
Answer: A
Explanation: A slope of –6 means that one must give up 6Y to get 1X. A slope of –4 means that one must give up only 4Y to get 1X. This analysis implies an inverse relationship between the production of the two goods.
Difficulty: 3 Hard
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25) Refer to the graph shown. In the graph, the opportunity cost of good X in terms of good Y is:
- A) higher along segment AB than along segment BC.
- B) lower along segment AB than along segment BC.
- C) the same on both segments.
- D) always increasing as we move from A to C.
Answer: B
Explanation: The slope of the production possibility curve represents the opportunity cost of producing one good in terms of another. Since this slope is greater along BC than along AB, the opportunity cost of producing X in terms of Y is higher along the former. Note that the slope is constant along both BC and AB and slope changes only when we move from one segment to the other.
Difficulty: 3 Hard
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26) In the graph shown, what change would increase production efficiency?
- A) Moving from A to D
- B) Moving from A to B
- C) Moving from C to D
- D) Moving from D to B
Answer: D
Explanation: Efficiency is increased when a given quantity of inputs is reallocated in such a way as to produce more of each good. Operating inside the production possibility curve is less efficient than an economy operating on its production possibility curve would be.
Difficulty: 2 Medium
Topic: Comparative Advantage
Learning Objective: 02-02 Relate the concepts of comparative advantage and efficiency to the production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27) England has a relatively cool and cloudy climate that is ill suited for grape growing. It can produce 200 units of wine for every 400 units of cloth. Portugal, in contrast, has a relatively warm and sunny climate that is good for growing grapes. It can produce 200 units of wine for every 100 units of cloth. Which country has the higher opportunity cost of producing cloth?
- A) Portugal: 2 units of wine for every unit of cloth
- B) England: 2 units of wine for every unit of cloth
- C) Portugal: 1/2 unit of wine for every unit of cloth
- D) England: 1/2 unit of cloth for every unit of wine
Answer: A
Explanation: The opportunity cost for England in producing 1 unit of cloth is 1/2 unit of wine. The opportunity cost for Portugal of producing 1 unit of cloth is 2 units of wine. Therefore, Portugal has the higher opportunity cost.
Difficulty: 3 Hard
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) Increasing marginal opportunity cost means that the production possibility curve is:
- A) bowed in so that for every additional unit of one good given up, you get fewer and fewer units of the other good.
- B) bowed in so that for every additional unit of one good given up, you get more and more units of the other good.
- C) bowed out so that for every additional unit of a good given up, you get fewer and fewer units of the other good.
- D) bowed out so that for every additional unit of one good given up, you get more and more units of the other good.
Answer: C
Explanation: Increasing marginal opportunity cost means that as you continue to give up equal amounts of one good, you obtain less and less of the other good.
Difficulty: 2 Medium
Topic: The Production Possibility Model
Learning Objective: 02-01 Demonstrate trade-offs with a production possibility curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Economics, 11e (Colander)
Chapter 4 Supply and Demand
1) If cigar prices tripled while sales of cigars rose 30 percent, this would likely be due to a shift in demand.
Answer: TRUE
Explanation: The most likely explanation for the data is that a shift out in demand resulted in both rising prices and sales.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) According to the law of demand, only the price of a good influences the amount people will choose to purchase.
Answer: FALSE
Explanation: When stating the law of demand, it is necessary to assume other things constant. However, this does not imply that other things do not influence demand.
Difficulty: 1 Easy
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3) A demand curve is downward-sloping because as the price of a good falls, demanders will substitute some other good for that good whose price has fallen.
Answer: FALSE
Explanation: The law of demand does depend upon individuals’ ability to substitute, but as the price of a good falls, demanders will substitute away from some other good toward the good whose price has fallen.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) A change in the price of carrots will cause a movement along the demand curve for carrots and a shift in the demand for substitute vegetables.
Answer: TRUE
Explanation: This statement correctly illustrates the distinction between a movement along and a shift in the demand curve.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) Movements down the rows (A to E) in the demand table are represented by movements up along a demand curve.
| Price | Quantity | |
| A | 0 | 50 |
| B | 1 | 40 |
| C | 2 | 30 |
| D | 3 | 20 |
| E | 4 | 10 |
Answer: TRUE
Explanation: A demand curve can be constructed from a demand table by plotting the quantity demanded at various prices given in a demand table. Rows A through E show various quantities demanded as price increases, thus showing a movement up along a demand curve.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6) The law of supply states that more of a good will be supplied the lower its price, other things constant.
Answer: FALSE
Explanation: The law of supply states that the amount of a good supplied is positively related to a good’s price.
Difficulty: 1 Easy
Topic: A Limitation of Supply/Demand Analysis
Learning Objective: 04-04 Discuss the limitations of demand and supply analysis.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) Suppliers will supply more of a good when the price of that good rises because the opportunity cost of not producing that good has risen.
Answer: TRUE
Explanation: The law of supply depends upon opportunity cost. Higher prices mean higher profits. The opportunity cost of not producing that good (for instance, producing another good. has risen by the amount of the increased expected profits. Suppliers will switch production to capture those higher profits.
Difficulty: 2 Medium
Topic: A Limitation of Supply/Demand Analysis
Learning Objective: 04-04 Discuss the limitations of demand and supply analysis.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) An increase in the number of firms causes the price firms are able to charge to fall, which results in a movement along the market supply curve.
Answer: FALSE
Explanation: An increase in the number of firms in a market will cause the market supply curve to shift to the right, resulting in a movement along the market demand curve.
Difficulty: 2 Medium
Topic: Supply
Learning Objective: 04-02 State the law of supply and distinguish shifts in supply from movements along a supply curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9) An improvement in the technology for producing a good will shift the supply curve for that good to the left.
Answer: FALSE
Explanation: An improvement in the technology for producing a good will lower the cost of production. Suppliers would be willing to supply more at every price, so there will be a shift of the supply curve for that good to the right.
Difficulty: 2 Medium
Topic: Supply
Learning Objective: 04-02 State the law of supply and distinguish shifts in supply from movements along a supply curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10) At a price of $3.50, the quantity supplied by the market will be 14.
| Price | Ann’s Supply | Barry’s Supply | Charlie’s Supply | Market Supply |
| $0.00 | 0 | 0 | 0 | 0 |
| 0.50 | 1 | 0 | 0 | 1 |
| 1.00 | 2 | 1 | 0 | 3 |
| 1.50 | 3 | 2 | 0 | 5 |
| 2.00 | 4 | 3 | 0 | 7 |
| 2.50 | 5 | 4 | 0 | — |
| 3.00 | 6 | 5 | 0 | — |
| 3.50 | 7 | 5 | 2 | — |
| 4.00 | 8 | 5 | 2 | — |
Answer: TRUE
Explanation: The market supply is constructed by summing the quantities supplied by each supplier.
Difficulty: 2 Medium
Topic: A Limitation of Supply/Demand Analysis
Learning Objective: 04-04 Discuss the limitations of demand and supply analysis.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
11) When quantity demanded is greater than quantity supplied, the resulting shortage causes the price to fall.
Answer: FALSE
Explanation: A shortage causes the price to rise.
Difficulty: 2 Medium
Topic: The Interaction of Supply and Demand
Learning Objective: 04-03 Explain how the law of demand and the law of supply interact to bring about equilibrium.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
12) An increase in demand causes equilibrium price and quantity to rise, other things constant.
Answer: TRUE
Explanation: When the demand curve shifts to the right, supply and demand intersect at a higher price and quantity.
Difficulty: 1 Easy
Topic: The Interaction of Supply and Demand
Learning Objective: 04-03 Explain how the law of demand and the law of supply interact to bring about equilibrium.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
13) The law of demand states that the quantity demanded of a good is inversely related to the price of that good. Therefore, as the price of a good goes:
- A) up, the quantity demanded also goes up.
- B) up, the quantity demanded goes down.
- C) down, the quantity demanded goes down.
- D) down, the quantity demanded stays the same.
Answer: B
Explanation: The law of demand states that more of a good will be demanded the lower its price, other things constant, and less of a good will be demanded the higher its price, other things constant.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
14) The law of demand states that consumers buy more of a good when its price declines:
- A) because their income increases at the same time.
- B) only if their income increases at the same time.
- C) even if other demand determinants change at the same time.
- D) provided all else remains constant.
Answer: D
Explanation: The law of demand states that more of a good will be demanded the lower its price, other things constant, and less of a good will be demanded the higher its price, other things constant.
Difficulty: 1 Easy
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
15) According to the law of demand, an increase in the price of baseball trading cards causes:
- A) people to buy fewer trading cards.
- B) people to buy more trading cards.
- C) the scarcity of baseball trading cards to increase.
- D) baseball trading cards to grow in abundance.
Answer: A
Explanation: The law of demand is the inverse relationship between price and quantity demanded, as illustrated by the correct response.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
16) Which of the following situations best demonstrates the law of demand?
- A) Movie-goers react to an increase in the price of a theater ticket by seeing fewer movies per year.
- B) Movie-goers see fewer movies per year due to an overall decrease in the quality of newly released motion pictures.
- C) A drought causes a decrease in the availability of pumpkins, resulting in fewer jack-o-lanterns displayed on Halloween.
- D) An increase in the number of people writing Economics textbooks results in a decrease in average textbook prices.
Answer: A
Explanation: The correct answer focuses on the relationship between price and quantity demanded so it is the best demonstration of the law of demand.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
17) Refer to the graphs shown. The curve that best demonstrates the law of demand is:
- A) I.
- B) II.
- C) III.
- D) IV.
Answer: D
Explanation: The law of demand states that price and quantity demanded are inversely related. An inverse relationship is shown graphically by a curve with a negative slope (downward-sloping).
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
18) Refer to the graphs shown. If the quantity demanded by consumers is the same for every price, then the demand curve would look like:
- A) I.
- B) II.
- C) III.
- D) IV.
Answer: B
Explanation: This describes a vertical or perfectly inelastic demand curve.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19) Suppose that college tuition is higher this year than last year and that more students are enrolled in college this year than last year. Based on this information, we can best conclude that:
- A) the law of demand is invalid.
- B) despite the increase in price, quantity demanded rose due to some other factor changing.
- C) this situation has nothing to do with the law of demand.
- D) the demand for a college education is positively sloped.
Answer: B
Explanation: Some factor such as an increase in income could have caused the demand to increase, resulting in a higher equilibrium price and quantity.
Difficulty: 3 Hard
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20) The explanation for the law of demand involves:
- A) suppliers’ ability to substitute inputs.
- B) consumers’ ability to substitute different goods.
- C) the government’s ability to set prices.
- D) the market’s ability to equate supply and demand.
Answer: B
Explanation: The explanation for the law of demand, as stated in the text, involves demanders’ ability to substitute some other good for the good whose price has risen.
Difficulty: 1 Easy
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
21) If the price of movies on DVD rises while the price of movies purchased on demand through the Internet remains the same, the law of demand predicts that consumers will:
- A) substitute movies on DVD for movies on the Internet.
- B) substitute movies on the Internet for movies on DVD.
- C) buy only movies on DVD.
- D) buy only movies on the Internet.
Answer: B
Explanation: The law of demand is based on the principle that consumers will substitute away from products that have become relatively more expensive; this does not mean that they will necessarily stop buying more expensive products.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
22) If the price of chicken rises and the price of beef does not rise, consumers will respond by:
- A) substituting beef for chicken.
- B) substituting chicken for beef.
- C) reducing purchases of beef and chicken.
- D) increasing purchases of beef and chicken.
Answer: A
Explanation: If the price of chicken has risen but the price of beef has not, the quantity of chicken demanded will fall as demanders substitute beef for chicken.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
23) According to the law of demand an increase in the price of gasoline will:
- A) increase the quantity demanded of gasoline, other things constant.
- B) decrease the quantity demanded of gasoline, other things constant.
- C) increase the demand for gasoline.
- D) decrease the demand for gasoline.
Answer: B
Explanation: The law of demand states that less of a good will be demanded the higher its price, other things constant.
Difficulty: 1 Easy
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
24) The distinction between demand and the quantity demanded is best made by saying that:
- A) demand is represented graphically by a curve and quantity demanded is a point on that curve.
- B) the quantity demanded is represented graphically by a curve and demand is a point on that curve.
- C) the quantity demanded is in a direct relation with prices, whereas demand is in an inverse relation.
- D) the quantity demanded is in an inverse relation with prices, whereas demand is in a direct relation.
Answer: A
Explanation: Demand refers to a schedule of quantities that will be bought per unit of time at various prices. It refers to the entire demand curve. Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price. It refers to a point on a demand curve.
Difficulty: 1 Easy
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
25) The use of the phrase “other things constant” in supply and demand analysis indicates that:
- A) an equilibrium price has been reached.
- B) an equilibrium quantity has been reached.
- C) we are considering changes in just one factor.
- D) we are considering all the changes which might take place in actual markets.
Answer: C
Explanation: Other things constant means that all other factors that could affect the analysis remain constant whether they actually do or not. It does not indicate when equilibrium has been reached.
Difficulty: 1 Easy
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
26) Three hurricanes, combined with the already high real-estate prices, have made people reconsider whether to retire to Florida. The cost of homeownership has increased due to stricter building codes. The influx of retirees is expected to rise. Which of the following factors is tending to move the demand curve for Florida housing to the right?
- A) The aging of the baby boomers, increasing the number of people who are retiring
- B) The increase in the cost of insurance
- C) The already high real-estate prices
- D) The current high construction costs
Answer: A
Explanation: An increase in the number of buyers moves the demand curve right.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
27) Sometimes price cuts can have an unintended result of consumers waiting for deeper discounts. What does this waiting suggest about supply and demand?
- A) The demand curve slopes the wrong way because price cuts have lead to smaller sales.
- B) If buyers are buying less when price falls, the supply curve must have moved left.
- C) If buyers are buying less when price falls, the supply curve must have moved right.
- D) Price cuts have changed buyers’ expectations, and the change in expectations has moved the demand curve left.
Answer: D
Explanation: A shift to the left of the demand curve would be associated with a decrease in expected price. Expectations can play a significant role in markets, often resulting in unanticipated consequences.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
28) Tuition and fees for four year colleges in the United States have risen over five percent per year recently. One cause for the increase in price has been an increase in demand for college education. In the standard model, what could be a possible explanation for the increase in the demand for college education?
- A) More colleges have been established
- B) The cost of two-year colleges has declined over the same period
- C) Income in the United States has risen
- D) The price of all other goods in the economy has risen 3 percent over the same period
Answer: C
Explanation: An increase in income shifts the demand curve to the right. More colleges shift the supply curve. A decrease in the price of substitutes would have the opposite effect as the one described. The fact that all other goods has risen by less than the rise in college tuition means that the price of college tuition has still increased relative to most other goods.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
29) The growing popularity of a commercial weight-loss diet that includes reducing the amount of carbohydrates consumed will cause:
- A) an increase in the demand for bread.
- B) a decrease in the demand for bread.
- C) a movement down and to the right along the demand for bread curve.
- D) a movement up and to the left along the demand for bread curve.
Answer: B
Explanation: Followers of a low-carb diet with little or no bread will decrease the demand for bread.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
30) Given that diesel cars get much better gas mileage than the typical car, an increase in the price of gasoline would be expected to:
- A) increase the demand for diesel cars.
- B) decrease the demand for gasoline.
- C) decrease the demand for diesel cars.
- D) increase the demand for gasoline.
Answer: A
Explanation: The change in the price of gasoline causes a movement along the demand for gasoline curve, not a shift. Higher gasoline prices lead to an increase in the demand for diesel cars as consumers seek to take advantage of better gas mileage.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
31) The effect of higher gasoline prices is most likely to:
- A) increase the demand for hybrid cars and increase the demand for gas guzzlers.
- B) decrease the demand for hybrid cars and decrease the demand for gas guzzlers.
- C) increase the demand for hybrid cars and decrease the demand for gas guzzlers.
- D) decrease the demand for hybrid cars and increase the demand for gas guzzlers.
Answer: C
Explanation: The demand for hybrids likely increases when gas prices rise. Since the short run supply is inelastic, the increased demand causes these cars to sell for markups over sticker price. The demand for larger vehicles, which can be gas-guzzlers, will.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32) Which of the following would likely result in an increase in the demand for beef?
- A) A decrease in the supply of beef
- B) An increase in family incomes
- C) An increase in the price of feed grains for cattle
- D) A decrease in the price of pork
Answer: B
Explanation: A decrease in the supply of beef would result in a movement along a demand curve as the market price of beef rises. An increase in family incomes would increase the demand for beef. An increase in the price of feed grains would shift the supply curve for beef to the left, resulting in higher market price for beef and a movement along the demand curve for beef. A decrease in the price of pork would decrease the demand for beef.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
33) Which of the following would cause quantity demanded to change without changing the demand curve?
- A) A change in income
- B) A change in the price of the good
- C) A change in tastes and preferences
- D) A change in the price of a substitute good
Answer: B
Explanation: A change in the sales price of the good results in an increase in quantity of that good demanded, not a shift in demand.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
34) Refer to the graphs shown. The effect of an increase in price on demand is best shown by which arrow?
- A) A
- B) B
- C) C
- D) D
Answer: B
Explanation: A change in price causes a movement along the demand curve. When price increases, the movement is upward and to the left.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35) Refer to the graphs shown. If consumers began purchasing more of this product due to a decrease in price, this would be shown by arrow:
- A) A.
- B) B.
- C) C.
- D) D.
Answer: A
Explanation: A change in price causes a movement down along the demand curve. When price falls, the movement is downward and to the right.
Difficulty: 2 Medium
Topic: Demand
Learning Objective: 04-01 State the law of demand and distinguish shifts in demand from movements along a demand curve.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
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