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Essentials of Economics Bradley Schiller 11th Edition- Test Bank

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Chapter 02 Test Bank KEY

In order to measure what a country produces, we

summarize total output in physical terms.
count units of output.
count the weight of different products.
summarize the monetary value of output.

Using monetary value instead of physical units to compare total output, the accounting is easier.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

GDP can be found by

adding the monetary value of all final goods and services produced during a given period of time.
adding the physical amount of all final goods and services produced during a given period of time.
taking the difference between exports and imports during a given period of time.
adding the value of all final output produced and measuring it in constant prices during a given period of time.

GDP is a summary measure of a nation’s output.

AACSB: Reflective Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Ceteris paribus GDP most closely measures

output per worker.
a summary of the world’s output.
the total value of all final goods and services produced within a nation’s borders in a given year.
the rate of change in capital stock.

GDP can be found by adding the monetary value of all final goods and services.

AACSB: Reflective Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

The output of cell phones can be added to the output of refrigerators in order to compute GDP by

multiplying the quantity of output of each by the corresponding prices and adding these dollar values.
dividing the output of each by price and adding these dollar values.
adding up the physical number of cell phones and refrigerators produced.
dividing dollar values of output for each by price and adding the results.

By multiplying the physical output of each good by its price the total value of each good produced can be determined.

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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Country-level GDP is

the sum of the physical amounts of goods and services in the economy.
a dollar measure of output produced within a nation’s borders during a given time period.
a measure of the per capita economic growth rate of the economy.
a physical measure of the capital stock of the economy.

GDP enables us to sum production of all goods and services

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Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Which of the following is NOT included in U.S. GDP?

toys produced by a U.S. firm located in China
beer brewed in Colorado and purchased by a German tourist
a car made by a Japanese auto producer in Kansas
corn grown in Iowa and exported to Africa

GDP measures only those products produced within a nation’s borders.

Which of the following is NOT included in U.S. GDP?

the construction of new homes to replace those destroyed by fires in California
the salary of the President of the United States
shoes produced abroad and imported by a U.S. company
the purchase of U.S. soybeans by a food manufacturer in Canada

To be counted in GDP goods must be produced within a nation’s borders.

The value of output produced in the United States in current prices measures

GDP growth.
real GDP.
per capita GDP.
nominal GDP.

Nominal GDP is the value of output measured in current prices.

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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Nominal GDP measures the

inflation-adjusted value of output.
real value of output per worker.
value of output produced in current prices.
value of output produced in constant prices.

Nominal GDP is the value of output in the U.S. in current prices.

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Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Nominal GDP is affected by changes in

output only.
output and prices.
income transfers.
prices only.

Nominal GDP measures the value of output produced in current prices.

Changes in real GDP serve as a better measure of the health of the economy than changes in nominal GDP because real GDP is affected by changes in

output only.
prices and output.
prices only.
average wages.

Real GDP is the inflation-adjusted value of GDP. When calculating the value of products, it holds prices constant to a base year and this allows us to isolate changes in output.

The inflation-adjusted value of final goods and services produced in the United States measures

nominal GDP.
real GDP.
per capita GDP.
GDP per worker.

Real GDP is adjusted for inflation.

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Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Real GDP is a more accurate measure of economic growth than nominal GDP because

nominal GDP is a total dollar measurement.
nominal GDP only increases because of an increase in production.
nominal GDP can increase due to an increase in production, prices, or both.
real GDP is a measurement of the overall price level.

Real GDP adjusts for changes in price or inflation.

Which of the following is the best measure of an increase in actual output?

nominal GDP
real GDP
per capita GDP
GDP per dollar

Real GDP is the best measure because it adjusts for changes in price due to inflation.

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Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Which of the following countries currently has the largest GDP?

Japan
China
Britain
United States

Because of advanced production techniques and technological advancement, the U.S. has the largest GDP of any of these countries.

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Difficulty: 1 Easy
Learning Objective: 02-02 Describe the absolute and relative size of the U.S. economy.
Topic: What America Produces

The economy of the United States is important because it

produces as much output as China, Japan, and Western Europe combined.
produces more than 20 percent of total world output.
exceeds the combined production of all other countries in the world.
accounts for over 20 percent of total world population.

Of the $90 trillion of global output in 2018, the U.S. had $20 trillion in output.

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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Describe the absolute and relative size of the U.S. economy.
Topic: What America Produces

U.S. GDP for 2018 was approximately

$11 trillion.
$100 billion.
$18 trillion.
$20 trillion.

Refer to 2018 statistical data in Chapter 2.

To compare the standard of living of one country to another, economists use

per capita GDP.
real GDP.
nominal GDP.
output per worker.

Per capita GDP is an indicator of how much each person would receive of output if output would be divided equally.

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Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Per capita GDP is the most practical way to

measure how much income households receive
measure how much output can be consumed on a sustainable basis
measure how much output is potentially available to the average person
analyze the growth rate of the economy over time

Per capita GDP is an indicator of how much each person would receive of output if output would be divided equally.

In 2018, per capita GDP in the United States was approximately

$41,000.
$53,000.
$35,000.
$59,000.

Refer to 2018 statistical data in Chapter 2.

Per capita GDP will always rise when

the population rises.
the rate of economic growth increases.
there is an increase in the rate at which the economy’s labor force grows.
the rate of economic growth exceeds the rate of population growth.

When GDP growth exceeds population growth per capita GDP will rise.

If output growth exceeds population growth for a country, then

average living standards will increase.
GDP must have grown at a very rapid rate.
per capita GDP will decrease.
this country must have overcome the problem of scarcity.

Real GDP per capita is a measure of the standard of living. This takes output and divides it by the size of the population. If output rises faster than the population, this will increase the size of real GDP per capita and so average standards of living will increase.

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Difficulty: 3 Hard
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

If all of our GDP were distributed equally across the United States, each individual would receive

their current income divided by the U.S. population.
the market value of final goods and services produced in the U.S. per year.
the value of total world output divided by the population.
the market value of final goods and services produced in the U.S. per year divided by the population.

Per capita GDP is an indicator of how much output each person would get if all output were divided evenly among the population.

AACSB: Reflective Thinking
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Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

When comparing GDP per capita globally, which list ranks countries correctly from largest to smallest?

China, Mexico, Germany
Japan, Mexico, Haiti
Mexico, France, India
Greece, Japan, Indonesia

See Figure 2.1 in text.

AACSB: Reflective Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Country A and Country B both recorded an increase in real GDP of 5 percent per year from 1980 to 2012. During this time, the population for Country A grew at 6 percent per year and the population for Country B grew at 4 percent. Which of the following is true during this period?

Per capita GDP was the same for both Country A and Country B.
Per capita GDP decreased for Country B only.
Per capita GDP decreased for both Country A and Country B.
Per capita GDP decreased for Country A only.

Although both countries experienced the same GDP growth rate, Country A’s GDP per capita decreased because its population increased at a rate that was greater than the rate at which its GDP grew. Since the population grew faster than GDP (output), there was less output per person over time.

AACSB: Analytical Thinking
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Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Country D and Country E both recorded an increase in real GDP of 4 percent per year from 1997 to 2012. During this time, the population for Country D grew at 3 percent per year and the population for Country E grew at 2 percent. Which of the following is true during this period?

Per capita GDP decreased for both Country D and Country E.
Per capita GDP increased for both Country D and Country E.
Per capita GDP increased for Country D only.
Per capita GDP decreased for Country E only.

Since the percentage of growth in population is lower that the percentage of growth in real GDP, both countries experience per capita increases.

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Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Economic growth implies that

prices have risen.
total value of the output produced has increased.
per capita GDP has declined.
resources are limited.

Continued economic growth implies more output per person.

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Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Economic growth

is an increase in output or real GDP.
causes a contraction in the production possibilities curve.
involves reduced capacity in the short run.
cannot be sustained over time.

Economic growth is an increase in output (real GDP), an expansion of production possibilities.

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Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Ceteris paribus, economic growth involves an

increase in imports.
expansion of production possibilities.
increase in GDP due to inflation.
increase in government spending.

Economic growth will expand production possibilities outward.

On average, U.S. real GDP has grown roughly _____ percent per year.

one
three
seven
five

Due to America’s technological advancements, real GDP increases by 3 percent per year.

Which of the following statements is true?

Nominal GDP is a good measure of social welfare.
GDP per capita is a complete measure of social welfare.
Crime and pollution reduce social welfare which reduces GDP.
GDP is not necessarily the best measure of social welfare.

GDP is simply a measure of the volume of goods and services produced.

A country’s total output includes all of the following except

household consumption.
business investment.
imports.
government services.

Total output is measured by what is produced within a country. Imports are produced in another country and shipped in so they should not count toward output measures.

AACSB: Reflective Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Recount how the mix of U.S. output has changed over time.
Topic: What America Produces

According to your textbook, which of the following spending categories ranks the contribution to GDP in correct order (from largest to smallest for the United States)?

consumer goods, total government purchases, investment goods, net exports
consumer goods, investment goods, total government purchases, net exports
investment goods, consumer goods, total government purchases, net exports
total government purchases, consumer goods, investment goods, net exports

See Figure 2.2 in the textbook.

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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-04 Recount how the mix of U.S. output has changed over time.
Topic: What America Produces

Suppose during a year an economy produces $6 trillion of consumer goods, $1 trillion of investment goods, $2 trillion in government services, and has $3 trillion of exports and $2 trillion of imports. GDP would be

$8 trillion.
$10 trillion.
$12 trillion.
$14 trillion.

Imports must first be subtracted from exports to get net exports. Then, add consumer spending, investment spending, government spending, and net exports together.

AACSB: Knowledge Application
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Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Suppose during a year an economy produces $10 trillion of consumer goods, $4 trillion of investment goods, $6 trillion in government services, and has $4 trillion of exports and $5 trillion of imports. GDP would be

$19 trillion.
$21 trillion.
$24 trillion.
$29 trillion.

Imports must first be subtracted from exports to get net exports. Then, add consumer spending, investment spending, government spending, and net exports together.

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Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

The largest component of U.S. GDP is

government services at the federal, state and local levels combined.
business investment.
household consumption.
net exports.

Consumer goods dominate the U.S. mix of output.

Consumer goods

account for over two-thirds of total U.S. output.
include nondurable goods but not durable goods.
account for a smaller portion of GDP than government services.
include durable and nondurable goods but not services.

See Figure 2.2 in the textbook.

Consumer goods

account for half of total U.S. output.
include expenditures for durable goods, nondurable goods, and services.
include government expenditure on welfare and food stamps.
account for the smallest portion of U.S. GDP.

The vast array of products consumers purchase is classified as either durable goods, nondurable goods, or services.

Which of the following components of consumer spending is the most cyclical?

services
agricultural goods
nondurable goods
durable goods

Because they are big ticket items and last 3–5 years, durable goods are most cyclical, meaning spending on durable goods varies significantly depending on the strength of the economy.

Which of the following is included in investment, according to economists?

production of plant and machinery
purchases of corporate stock
money put into a pension fund
dollars spent in the stock market

Investments include plants, machinery, equipment, and inventories held for later sale to consumers.

Investment includes all of the following EXCEPT:

the production of new factories.
the purchase of new machinery and equipment.
money in a retirement fund.
business inventories.

Economic investments enhance our capacity to produce.

Which of the following is NOT an example of investment, according to economists?

A business builds a new factory.
A private college buys a new copy machine to replace an old worn out machine.
A family buys $10,000 worth of bonds.
A department store buys additional men’s jeans just before Christmas.

Economic investments enhance our capacity to produce.

Which of the following is an example of investment, as a component of GDP?

the purchase of a truck by a delivery company
the purchase of Ford stock by an individual saving for retirement
the purchase of land by an individual
the purchase of bridges and dams by the government

GDP is the measurement of all final goods and services.

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Blooms: Understand
Difficulty: 2 Medium
Topic: What America Produces

Which of the following expenditures is the most important in expanding a country’s production possibilities?

consumer goods
investment goods
government services
net exports

Investment goods are critical to continuing growth because they expand our ability to produce.

Which of the following is NOT true about investment goods?

They add to the nation’s stock of capital.
They can be used to replace worn-out equipment.
They can expand the nation’s production possibilities.
They increase the retirement benefits for individuals.

Economic investment enhances our capacity to produce.

According to your textbook, for the United States, investment accounts for approximately _____ percent of GDP.

See Figure 2.2 in the textbook.

Which of the following is true about government services as a component of GDP?

It includes welfare benefits.
It includes spending on national defense.
It includes Social Security benefits.
It includes federal government spending but not state and local spending.

Only the part of federal spending used to acquire resources and produce services is counted in GDP.

Government services

are larger than consumption in the United States.
include the dollars spent on income transfers.
include federal, state, and local government purchases of goods and services.
equal approximately $10 trillion per year in the United States.

These branches of government build highways, write law, and police the streets to name just a few items.

Which of the following is not included in GDP as part of government services?

Social Security benefits
military equipment
highways and bridges
education

Social Security is an income transfer; therefore it is not a part of output because no good or service is exchanged.

As a portion of GDP, government purchases include

food stamps.
national defense expenditures.
unemployment benefits.
welfare checks.

National defense spending is production of real goods and services. The others are transfer payments.

Government income transfers are NOT included in the calculation of GDP because

it is difficult to measure the value of these payments.
most of these payments are paid to foreign immigrants.
these payments do not have an impact on the WHAT question.
these payments do not reflect the production of goods and services.

Only that part of federal spending used to acquire resources and produce services is counted in GDP.

AACSB: Reflective Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Describe how (un)equally incomes are distributed.
Topic: What America Produces

Income transfers include

food provided by a privately funded food bank.
housing provided at a reduced cost by the government.
free medical care provided by a retired doctor.
the money saved when clothing is purchased on sale.

Reduced-cost housing is a type of transfer payment; the government subsidizes the cost of rent with nothing in exchange from those receiving the subsidies.

The goods and services sold to foreign buyers are

imports.
exports.
income transfers.
externalities.

Goods and services that are shipped abroad are exports.

Exports represent

goods and services sold to foreigners.
goods and services bought from foreigners.
a larger number than imports for the United States.
a negative number when calculating GDP.

Goods and services that are shipped abroad.

The goods and services purchased from foreign sources are

investment.
exports.
imports.
income transfers.

Imports are goods and services which are purchased from foreign sources.

Imports

are goods and services sold to foreigners.
increase the value of GDP.
are a larger dollar value than exports for the United States.
equal exports in dollar value for most countries.

We import more goods and services than we export.

GDP is the sum of consumption, investment, government purchases, and

the factors of production.
net exports.
saving.
capital stock.

Exports are factored into GDP while imports are pulled out because, while consumed domestically, imports are not produced within the consuming nation’s borders.

U.S. net exports are

equal to the value of exports minus the value of imports.
positive if the U.S. imports more than it exports.
a larger portion of GDP than investment.
always equal to zero.

The value of exports minus the value of imports equals net exports.

Net exports measures the

total dollar value of U.S. exports.
dollar amount of imports.
quantity of goods produced abroad.
dollar value of exports minus the dollar value of imports.

U.S. net exports are equal to the value of exports minus the value of imports.

The decline in employment in the farm sector in the U.S. during the 1900s can be attributed primarily to

new technology that made it possible to grow more food with fewer workers.
an increase in the importance of the manufacturing sector.
competition from imported agricultural products.
a decline in the amount of food consumption per person.

New technology makes it possible to grow more food with fewer workers.

Over the last century in the United States there has been an increase in _______ as a percentage of total output.

construction and mining
farming
manufacturing
services

The relative decline in manufacturing is due primarily to the rapid expansion of the service sector.

Over the last century in the United States there has been an increase in _______ as a percentage of total output.

manufacturing, government, and services
farming, international trade, and manufacturing
services, government, and international trade
services, farming, and construction

The service industry and the government generate over 70 percent of total output. About one-eighth of the output Americans produce is exported.

Currently, the U.S. economy is best described as

a service economy.
a manufacturing economy.
an agricultural economy.
a government economy.

Much of the growth in the US economy is in the service sector. Projections indicate that 98% of net job growth in the US economy from 2018 through 2028 will be in services.

Which of the following sectors contributes the largest amount to the U.S. GDP?

farming
manufacturing
services
exports

The service sector generates over 70 percent of total output.

Which sector is expected to grow most rapidly for the United States in the future?

farming since Americans are getting fatter
services since Americans have high relative incomes
manufacturing since Americans demand more and more luxury items
mining since Americans use a lot of natural resources

The service industry is predicted to contribute 98 percent of job growth in the next ten years.

Which of the following plays an increasingly important role in the U.S. economy?

international trade
manufacturing
farming
construction and mining

Advances in communications and transportation technologies make international trade and investment easier.

The growth of international trade for the United States has been enhanced by

an increase in trade barriers.
improved communication and transportation technologies.
a decline in the government and services sectors.
an increase in domestic manufacturing.

Advances in communications and transportation technologies make international trade and investment easier and cheaper.

The factors of production include all of the following EXCEPT

money.
land.
labor.
entrepreneurship.

Money is not a factor of production.

AACSB: Reflective Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain why the U.S. economy can produce so much.
Topic: How America Produces

The factors of production

are unlimited for the United States since the country is so wealthy.
include land, capital, and money.
are the resource inputs used to produce goods and services.
include consumption, investment and government spending.

The factors of production are: Land, Labor, Capital, and Entrepreneurship.

Which of the following statements is true?

A country’s GDP includes all output produced by its factors of production.
A country’s GDP includes all output produced within its borders.
A country’s GDP is equal to its exports minus its imports.
A country’s GDP is equal to all output produced and consumed within its borders.

GDP measures all output produced within a county’s border.

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Learning Objective: 02-03 Explain why the U.S. economy can produce so much.
Topic: How America Produces

Which of the following is NOT a reason why the United States is able to produce such high levels of GDP?

abundant factors of production
labor-intensive production process
high levels of investment in human capital
high quality of capital

The high productivity of the U.S. economy results from using highly educated workers in a capital-intensive production process.

Which of the following contribute to high levels of U.S. production?

abundant factors of production
labor-intensive production
barriers to trade
immigration restrictions

America’s greater economic strength is explained by the abundance of factors of production.

Capital intensive means

the production process uses a high ratio of capital to labor inputs.
the production process uses a high ratio of labor to capital inputs.
the production process is inefficient because it requires too much capital.
that there are fewer jobs for workers and the economy will begin to decline.

The use of capital goods is at a higher level than the use of labor in production.

A capital-intensive production process

reduces productivity because few workers are being employed.
is necessary if a country has few factors of production.
uses a high ratio of capital to labor inputs.
is used in poor countries.

America invests each year in better plants and equipment and so the use of these capital goods is rising faster than the amount of labor employed.

American production is described as capital intensive, which means that

foreign investment is relatively small.
the ratio of machinery to labor is high.
the ratio of labor to machinery is high.
government control of production processes is high.

In the production of goods, more capital goods are used than labor.

Productivity measures

output per worker.
the dollar value of investment.
final goods minus intermediate goods.
the total amount of goods produced in the United States.

Productivity defines how much output an input is capable of producing.

The productivity of American workers reflects all of the following EXCEPT:

capital intensity of the production process.
investment in human capital.
high quality of capital.
scarcity of plant and equipment.

America invests in better plants and equipment and educated workers.

Which of the following does NOT contribute to an increase in productivity?

technological advances
high quality of capital
high quantity of labor
highly skilled labor

Quantity of workers does not contribute to an increase in productivity. It is the quality of the workers that is most important.

Education and job training are part of

business inventory spending.
consumer spending on durables since the impact is long lasting.
human capital investment.
income transfers.

Human capital refers to workers’ productive capabilities.

Factor mobility refers to

how easily factors of production can be reallocated.
the quantity of resources a country has.
how rapidly resources depreciate.
the quality of the factors of production.

Continuing ability to produce the goods and services that consumers demand also depends on the ability to reallocate resources from one industry to another.

When World War II ended, some resources moved easily from the production of military goods to the production of consumer goods. In economics, this phenomenon is described as

production equality.
capital adaptation.
resource flexibility.
factor mobility.

Factor mobility is the agility in reallocating resources from one industry to another.

The primary way to distinguish among corporations, partnerships, and proprietorships is by observing

ownership characteristics.
the size of the industry.
the number of firms in each classification.
the size of profits.

A single proprietorship is a firm owned by one individual. A partnership is owned by a small number of individuals. A corporation is owned by the stockholders.

Sole proprietorships

are each owned by many individual stockholders.
are owned by one individual.
account for most business sales and assets.
are the least common type of business firm.

The characteristic of a proprietorship is one owner.

Proprietorships

dominate market transactions.
are owned by many individual stockholders.
are known for their large assets.
are the most common type of business firm.

The single proprietorship is the most common type of business firm in America.

Most businesses in the U.S. are classified as

corporations.
partnerships.
proprietorships.
non-profit.

The single proprietorship is the most common type of business firm in America.

In the United States, corporations

dominate market transactions.
are owned by one or two people.
are the most common type of business firm.
typically have less than $10,000 in assets.

Corporations account for over 60 percent of all business sales.

Which of the following is NOT true about U.S. corporations?

the owners have limited liability for the actions of the company.
they account for the majority of business sales.
the typical asset size is in excess of $4 million.
they are the most common type of business firm.

Proprietorships are the most common type of business firm.

In the United States, government regulation is primarily designed to

protect the environment through government ownership of natural resources.
prevent businesses from competing with each other.
protect labor, consumers, and the environment.
determine all the answers to the WHAT, HOW and FOR WHOM questions.

Government lays the foundation for market transactions, protecting consumers, labor and the environment.

Which of the following is NOT viewed as a role for the U.S. government?

providing a legal framework for business
owning the factors of production
protecting consumers from exploitation
protecting the environment

In a mixed economic system, the factors of production are owned by individuals.

The government has an impact on the HOW to produce question when it does all of the following EXCEPT

limits environmental pollution.
forbids the use of child labor.
sets a minimum wage.
follows a policy of laissez faire.

If the government followed the doctrine of laissez faire (hands off), it would not be involved in the HOW to produce question.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 02-04 Recount how the mix of U.S. output has changed over time.
Topic: How America Produces

A monopoly is

a firm that produces the entire market supply of a particular good or service.
not likely to charge a high price because if it does consumers will switch to a different product.
rarely affected by government regulation since there is only one firm in the industry.
the most common type of U.S. business firm.

A monopoly is a sole producer of a good and could dictate price, quality, and the quantity of the product.

A firm that produces the entire market supply of a certain good or service is known as

a competitive firm.
an oligopoly.
a monopsony.
a monopoly.

A monopoly is a sole producer of a good and could dictate price, quality, and the quantity of the product.

In a market characterized as a monopoly

prices tend to be lower and output tends to be higher.
output tends to be lower and prices tend to be higher.
quality and output tend to be higher.
prices tend to be lower and quality tends to be higher.

Monopolies may control price, quantity, and quality of a good’s production.

The term externalities refers to

black-market economic activity.
some costs and benefits of a market activity borne by a third party.
the impact on markets of goods imported from foreign countries.
illegal economic activity.

An example of an externality is pollution. The cost of pollution is borne by a third party who was not responsible for causing the pollution.

The dumping of chemicals into a lake, which contaminates the drinking water, is an example of

income transfers.
a monopoly.
an externality.
factor mobility.

In this case the cost of drinking water is borne by an innocent third party who was not involved in the pollution of the lake, but must pay for clean drinking water.

If government intervention forces the economy inside the production possibilities curve, there is

market failure.
government failure.
an externality.
income inequality.

There is no guarantee that government regulation of HOW goods are produced always makes us better off.

Too much government regulation might do all of the following EXCEPT

inhibit production.
raise product prices.
limit consumer choices.
cause a market failure.

Government intervention causes government failures.

The basic economic issue concerning the FOR WHOM question is specifically interpreted to mean, who

gets the available jobs.
gets to consume the goods and services that are produced.
inherits the accumulated wealth in the economy.
produces the goods and services.

The FOR WHOM question helps divide the “economic pie” of goods and services among consumers.

Which of the following is least likely to determine individual income in a market economy?

the quantity of resources owned
the quality of resources owned
the prices of resources in the marketplace
the government

The U.S. government generally takes a laissez faire position in the distribution of income in a market economy.

Which of the following statements is true concerning income inequality?

Income is distributed equally in poor countries.
Rich countries have greater income inequality than poor countries.
The government has no mechanism for altering income inequality.
A free market economy tends to produce an unequal distribution of income.

Markets reward individuals on the basis of their contribution to output.

Which question does the “distribution of income” relate to most directly?

For whom is output produced?
How is output produced?
What output is produced?
Why is output produced?

The FOR WHOM question answers the way total personal income is divided.

In terms of income distribution, if a person moves from the lowest fifth of households to the highest fifth over many years, this is known as

income migration.
income mobility.
global migration.
union membership.

Income mobility takes into consideration how long a person stays in any income level and the ability that person has to change their income level relative to others.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 02-05 Describe how (un)equally incomes are distributed.
Topic: For Whom America Produces

The purpose of the U.S. tax-transfer system is to

eliminate the economic power of the rich.
preserve the Social Security system for future generations.
furnish lower income households with more goods and services than the market alone provides.
equalize all household incomes in the U.S.

The mechanisms for re-slicing the income pie are taxes and income transfers.

By definition, a progressive income tax

generates greater tax revenues from the poor.
imposes a higher marginal tax rate as income increases.
imposes a lower marginal tax rate as income increases.
implies that the same marginal tax rate is paid at all income levels.

A progressive tax makes after-tax incomes more equal than before-tax incomes.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe how (un)equally incomes are distributed.
Topic: For Whom America Produces

Which of the following is true about the income-transfer system in the United States?

The system provides more output for lower-income households than the market alone provides.
Transfer payments solve the problem of income inequality.
The system does not affect the distribution of income because of regressive taxes.
The system is actually progressive and gives more income to rich households.

Income transfers give lower-income households more of the income pie than they got in the marketplace.

Income transfers include all of the following EXCEPT

food stamps.
medicaid.
wages.
welfare benefits.

Wages are not income transfers. Remember that transfers are one directional—there is no exchange taking place. Wages are paid in exchange for services rendered. The remaining options all represent a payment from the government to individuals who are not obligated to give anything back to the government.

One News Wire article in the text, “Income Share of the Rich,” reports: “In most developing countries the top tenth of all households receives 30–50 percent of all income.” Which of the following forms of government intervention is designed to reduce this market situation?

Antitrust laws.
Public goods.
Laissez-faire.
Income transfers.

Income-transfer system gives lower-income households more output than the market itself would provide.

GDP is a measure of the market value of final goods and services produced within a nation’s borders in a given period.

TRUE

GDP measures the market value of final goods and services produced within a nation’s borders in a given period.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

In periods of rising prices, real GDP will always rise more rapidly than nominal GDP.

FALSE

Nominal GDP will rise more rapidly than real GDP because real GDP ignores price changes. In other words, if prices rise and the quantity of output remains the same, then nominal GDP would rise and real GDP would remain the same.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Per capita GDP measures the distribution of income within a country.

FALSE

Per Capita GDP measures the distribution of income each person would get if all output were divided evenly among the population.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Growth in GDP per capita is achieved when population grows more rapidly than GDP.

FALSE

Growth in GDP per capita occurs when GDP grows more rapidly than population.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Economic growth is desirable because it usually creates more jobs and income.

TRUE

Growth is essential to maintain or increase production possibilities.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

One reason that GDP is not the best measure of social welfare is because it does not include volunteer activities.

TRUE

Social welfare may not contribute to production and so would not be counted in some cases.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Consumer goods account for approximately 70 percent of total U.S. output.

TRUE

Consumer goods dominate the U.S. mix of output.

Since investment spending in the United States is a smaller percentage of GDP than consumer spending, it is not essential for economic growth.

FALSE

Investment is essential for economic growth.

If an individual purchases stock in the stock market, this is included in the economic definition of investment as a component of GDP.

FALSE

Individual purchases of stock do not contribute to economic growth. This personal investment is not an economic investment. Stock purchases may later contribute to growth, however, this would require that firms take the money raised from stock sales and reinvest it internally. When they do, this would count as investment and be factored into GDP. If this were counted as an investment and as a stock sale, one transaction would be counted twice, which is not permitted.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 02-04 Recount how the mix of U.S. output has changed over time.
Topic: What America Produces

In the United States, all of the state and local governments combined use more of our scarce resources than does the federal government.

TRUE

State and local governments use far more of our scarce resources than does the federal government.

In the United States, net exports account for two-thirds of GDP.

FALSE

Net exports account only for a small portion of GDP.

If the United States imports more than it exports, this implies that the country uses more goods and services than it produces.

TRUE

Imports represent goods and services that are used by Americans but are not produced in the U.S.

The manufacturing share of output has increased in the United States since World War II.

FALSE

The manufacturing and agricultural shares have decreased while the services share has increased.

AACSB: Understand
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-04 Recount how the mix of U.S. output has changed over time.
Topic: What America Produces

A capital-intensive production process increases the level of output per worker.

TRUE

Capital goods greatly assist in increasing the level of output per person.

The reason that U.S. productivity is so high is because the United States has more natural resources and a larger population than any other country in the world.

FALSE

Population does not contribute to productivity.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 02-03 Explain why the U.S. economy can produce so much.
Topic: How America Produces

The United States has invested heavily in human capital by promoting education and skill training.

TRUE

More than other places in the world, the U.S. has higher rates of high school and college graduation.

U.S. corporations account for the majority of output in the country even though proprietorships outnumber corporations.

TRUE

Corporations dominate market transactions, accounting for almost 90 percent of all business sales.

In a monopoly situation, government regulation is incapable of improving market outcomes.

FALSE

Government regulations are intended to protect the interests of consumers, preventing firms from becoming too powerful. The government could enforce competition laws, price regulations, or quantity regulations to effectively protect consumers and improve market outcomes.

Externalities are costs or benefits of a market activity borne by a third party.

TRUE

The cost or benefits of externalities are spread to innocent third parties.

Incomes are distributed more equally in poor countries than in rich ones because of transfer payments.

FALSE

Most poor countries do not have a system of transfer payments like welfare and disparities in income tend to be more amplified.

The U.S. federal income tax is an example of a progressive tax.

TRUE

A progressive tax makes after-tax incomes more equal than before-tax incomes.

The U.S. tax-transfer system gives more output to lower-income households than does the market alone.

TRUE

The income-transfer system gives lower-income households more output than the market itself would provide.

Why is using real GDP a better measurement of GDP than using nominal GDP?

GDP is based on both physical output and prices. From one year to the next either rising prices or an increase in physical output could cause nominal GDP to increase. However, the goal of GDP is to see how production, or output, changes from one year to the next. As a result, we want to ignore the impacts of changing prices on the value of the goods and services produced so GDP numbers must be adjusted for inflation. These inflation adjustments delete the effects of rising prices by valuing output in constant prices. The result is called real GDP and is more reflective of production levels than nominal GDP.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Investment goods are a different type of output. Discuss the types of investment goods and their relationship to the production possibilities of an economy.

Investment goods include the plant, machinery, and equipment that are produced for use in the business sector. These investments are often used to replace worn-out equipment and factories, which maintains the production possibilities of an economy. We can say, then, that investment goods maintain, increase, or improve the stock of capital. Depending on the size of the investment relative to equipment becoming more worn out, production possibilities should improve with greater investment.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 02-04 Recount how the mix of U.S. output has changed over time.
Topic: What America Produces

What does the government do to protect consumers from monopolies? List specific steps the government takes to protect consumers.

The government tries to prevent individual firms from dominating specific markets. Antitrust laws prohibit mergers or acquisitions that threaten competition. The U.S. Department of Justice and the Federal Trade Commission also regulate pricing practices, advertising claims, and other behavior that might put consumers at an unfair disadvantage in product markets.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 02-03 Explain why the U.S. economy can produce so much.
Topic: How America Produces

China is incorrectly regarded, by many, as the largest economy in terms of GDP. In fact it is the U.S. that has the largest GDP in the world. List some of the reasons why this is so.

The U.S. has a smaller population than China. However, due to capital intensive productivity and a highly skilled workforce combined with the other factors of production, the U.S. leads the world in production. China’s economy has been growing more rapidly, though, as it invests more in the workforce and capital goods. Many believe that in the near future, China will have the largest economy in terms of GDP.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

Explain the importance of consumer durable goods spending as it relates to the economy.

Durable goods spending by consumers will increase when the economy is performing well. When consumers are confident about the economy, they will purchase the expensive big ticket items. When the economy is doing poorly, durable good spending declines because consumers are worried about their incomes. As a result, changes to durable goods spending can be used as a barometer for the perceptions that consumers have about the health of an economy.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 02-03 Explain why the U.S. economy can produce so much.
Topic: What America Produces

Give some examples of nondurable goods and explain why they could be considered nondurable.

Examples include: gasoline, food, clothing, and medicine. Each of these goods has a relatively short lifespan and is used up rather quickly. In this way, they are considered less durable than something like a car or a house, which is supposed to last for decades.

What specific programs are available through government for the poor to provide financial assistance?

Taxes collected by the government are redistributed to the poor through income transfers. These would include food stamps, welfare benefits, and Medicaid.

Which of these in NOT included in GDP?

government transfer payments to Social Security beneficiaries
consumer spending on durable and nondurable gods
business investment in new equipment
net exports

Government transfer payments to Social Security beneficiaries is the correct answer because there is no production associated with government transfer payments.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

GDP is the total value of all _____ goods and services produced within a nation’s borders in a given time period.

final
unfinished
intermediate
non-exported

GDP only includes final goods and services.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain how an economy’s size is measured.
Topic: What America Produces

_____ GDP is adjusted for inflation.

Nominal
Real
Current
Per capita

“Real” means adjusted for inflation in economics.

In the United States, per capita GDP is

determined by dividing total GDP by total population.
more than four times the world average.
a measure of how much output each person in an economy would get if all of the output of the economy was divided up evenly.
All of these choices are correct.

All of these describe per capita GDP, which is calculated as GDP divided by population.

Which type of output leads to increased output in the future?

consumption
investment
government services
net exports

Investments sacrifice current consumption so that resources may be used for future output.

The United States’ economy is the largest in the world because

it has a high quantity and quality of capital resources.
the government directs resources to the most desirable outcomes.
it has abundant natural and human resources.
Both a high quantity and quality of capital resources and an abundance of natural and human resources are correct.

The United States benefits from an abundance of the factors or production—including land (natural resources) and labor (human resources), as well as having capital resources in sufficient quantity and quality to raise productivity levels.

Durable goods

are goods produced with minerals and metals.
tend to be big-ticket items like cars.
include clothes, food, and gasoline.
Both goods produced with minerals and metals and big-ticket items like cars are correct.

Durable goods are larger purchases that tend to last for three years or longer. Some goods produced with minerals and metals may not last that long and so we would need more information to define them as durable.

Consumer goods account for more than _____ of total U.S. output.

One-third
One-half
Two-thirds
Nine-tenths

Consumer spending represents about two-thirds of total U.S. output.

In a market economy, an individual’s income depends on

the quantity and quality of resources owned.
the price that resources command in the market.
natural resource availability.
Both the quantity and quality of resources owned, as well as the price that resources command in the market are correct.

Income depends on wages, which are determined in the labor market, as well as the quantity of hours worked and quality of labor provided.

Which of these statements about income distribution in the United States is correct?

People often move up and down the income ladder.
The poorest fifth of households account for 3 percent of total income.
The richest fifth of households account for 51 percent of total income.
All of these choices are correct.

All of these statements are true of income distribution in the United States.

Chapter 02 Test Bank Summary

Category	# of Questions
AACSB: Analytical Thinking	3
AACSB: Knowledge Application	2
AACSB: Reflective Thinking	140
AACSB: Understand	1
Accessibility: Keyboard Navigation	146
Blooms: Analyze	3
Blooms: Apply	2
Blooms: Remember	65
Blooms: Understand	76
Difficulty: 1 Easy	72
Difficulty: 2 Medium	63
Difficulty: 3 Hard	11
Learning Objective: 02-01 Explain how an economy’s size is measured.	38
Learning Objective: 02-02 Describe the absolute and relative size of the U.S. economy.	7
Learning Objective: 02-03 Explain why the U.S. economy can produce so much.	30
Learning Objective: 02-04 Recount how the mix of U.S. output has changed over time.	53
Learning Objective: 02-05 Describe how (un)equally incomes are distributed.	17
Topic: For Whom America Produces	14
Topic: How America Produces	39
Topic: What America Produces	93

Chapter 04 Test Bank KEY

The largest portion of the average U.S. consumer’s dollar is spent on:

Food.
Entertainment.
Health care.
Housing.

Housing is the largest single portion of consumer spending, at approximately 33 cents of every dollar of overall spending.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Patterns of Consumption

The second largest portion of the average U.S. consumer’s dollar is spent on:

Transportation.
Housing.
Insurance and pensions.
Food.

Transportation is the second largest portion of consumer spending, at approximately 16 cents of every dollar of overall spending.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Patterns of Consumption

Which of the following ranks the top three components of U.S. consumption correctly from largest to smallest?

Housing, medical care, entertainment.
Housing, transportation, food.
Transportation, housing, clothing.
Transportation, health care, insurance and pensions.

The largest portion of consumer spending goes towards necessities.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Patterns of Consumption

Which of the following is true about consumer spending over time?

Spending habits do not change.
Spending habits show no consistent pattern.
Spending habits are likely to change when new products enter the market.
Spending habits change monthly.

Consumer spending habits change over time due to changing market conditions and consumer tastes.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Patterns of Consumption

Which of the following does NOT influence an individual consumer’s demand?

The consumer’s ability to pay.
The consumer’s fears, psychological complexes, and anxieties.
The consumer’s ego and status.
Producer behavior.

Producer behavior would be a determinant of supply and so would not influence an individual consumer’s demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Sociopsychiatric explanations of consumer demand for a good or service include the:

Desire for ego and status.
Level of income.
Level of wealth.
Prices of other goods.

Ego and status are elements of consumer taste which affect consumer behavior.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

The law of demand states that:

The greater the number of buyers in a marker, the lower the price.
Price and quantity demanded are directly related.
The lower the cost the lower the price.
Price and quantity demanded are inversely related.

It is an inverse relationship because for most goods the higher (lower) the price, the less (more) quantity demanded.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Which of the following is true about American spending habits?

Women spend more than men on alcohol and smoking.
Young men spend more than young women on clothing and personal care items.
Teenagers spend their money on electronics, cars, and clothes.
Young women are likely to go into debt because of their spending, but not young men.

Teenagers do spend their money on electronics, cars and clothes. The other answers’ spending habits are reversed.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Demand is defined as the:

Desire for goods and services.
Ability and willingness to sell goods at various prices.
Ability and willingness to buy specific quantities of a good or service at alternative prices in a given time period, ceteris paribus.
Sensitivity of buyers to a change in price.

Demand relies on both your want for a good or service and your ability to pay for it.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

If an individual currently demands a particular good, it means that he or she:

Is willing and able to purchase the good at the current price.
Has a strong desire for the good.
Must need the good.
Prefers the good over all other choices.

All of the answers describe the willingness to purchase a good but you must also have the ability.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Which of the following is true about demand?

Demand reflects the desire for a good but not necessarily the ability to buy it.
In order to demand a good, a person must be willing and able to buy the good.
When drawing a demand curve, influences such as price do not change.
Demand reflects the ability to buy a good but not necessarily the desire to do so.

Demand reflects both the desire and the ability to buy a good.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Which of the following is NOT a determinant of demand for a good?

Tastes or preferences.
Income.
Prices of other goods.
Technological advances.

All of them are determinants of demand for a good except technological advances, which is a determinant of supply.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Which of the following is a determinant of demand for a good?

Consumer income.
The number of available workers.
Prices of factor inputs.
Technology.

Consumer income is a determinant of demand whereas available workers, the prices of factor inputs, and technology are determinants of supply.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Which of the following is NOT a determinant of demand?

Income.
Tastes.
The cost of factors of production.
Expectations of the future price.

While income, tastes, and expectations about future prices are determinants of demand, the cost of factors of production is a determinant of supply.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

The market demand curve is calculated by:

Summing the price from individual demand curves.
Averaging the price demanded from individual demand curves at all prices.
Summing the quantities demanded from individual demand curves at all prices.
Averaging the quantities demanded from individual demand curves at all prices.

The market demand curve is defined as the sum of the individual demand curves.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Which of the following causes the market demand curve for a good to shift?

The cost of factors of production.
The number of buyers in the market.
The innovation in production process.
A producer’s income.

A change in the number of buyers in a market would shift the demand curve, while the other determinants would affect the supply curve.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Market demand represents the:

Sum of all individual demands for a product at each possible price.
Sum of all individual supply preferences.
Same thing as an individual’s demand.
Satisfaction from consuming an additional unit of a good.

The sum of demand for each individual demand at all prices yields market demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

In economic theory, utility refers to the:

Additional satisfaction obtained from one more unit of a good or service.
Satisfaction obtained from a good or service.
Willingness to buy specific quantities of a good or service at a particular price.
Decrease in satisfaction as more of a good or service is consumed.

Marginal utility refers to the additional satisfaction obtained from one more unit of a good or service whereas utility is a measure of overall satisfaction acquired from consuming a specific quantity of a good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Which of the following refers to the satisfaction a consumer receives from the consumption of a good?

Price elasticity.
Law of demand.
Equilibrium price.
Utility.

Utility is measure of the satisfaction received from the consumption of a good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The pleasure or satisfaction obtained from goods and services is known as:

Price elasticity of demand.
Total revenue.
Utility.
Ceteris paribus.

Utility is a measure of the satisfaction received from the consumption of a good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

In economic theory, total utility refers to:

The additional utility from consuming the last unit of a good or service.
The amount of utility obtained from the consumption of a certain amount of a good or service.
The change in utility from the last unit sold.
How useful a good or service is to the consumer.

The total amount of satisfaction derived from the consumption of a single good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The amount of utility obtained from the entire consumption of a good is known as:

Marginal utility.
Diminishing utility.
Total utility.
Price elasticity.

Total utility refers to the total amount of satisfaction derrived from the consumption of a single good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Marginal utility refers to the:

Additional utility from consuming the last unit of a good or service.
Change in utility from the last unit consumed of a good or service.
Utility derived from consuming all of the good or service.
Opportunity cost of a good or service.

Marginal utility is the extra utility that a consumer derives from one more unit of a good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The law of demand and the law of diminishing marginal utility are related since both:

Predict that consumers will continue to buy unlimited amounts of goods.
Address the budget constraints that consumers face.
Assume that the first units consumed have more utility than subsequent units.
Assert that consumer preferences are not as significant as price and income.

Since each additional unit of a good yields less and less additional consumer satisfaction, a consumer will only demand more at a lower price. This means the law of diminishing marginal utility contributes to the inverse relationship between price and quantity demanded described by the law of demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Marginal utility is an important economic concept because it:

Indicates the budget limitations of the consumer.
Is the total utility a consumer receives from a good.
Can be used to predict the amount of a good a rational consumer will purchase.
Predicts the amount of a good a business will produce.

A rational consumer will purchase additional units until the additional utility per dollar for the good is the same as for other goods.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The difference between total utility and marginal utility is that:

Total utility is the satisfaction from consuming one additional unit of a product while marginal utility is the complete satisfaction from consuming a product.
Total utility is the complete satisfaction from consuming a product while marginal utility is the satisfaction from consuming one additional unit of a product.
Both represent the satisfaction obtained from goods and services.
Total utility is the satisfaction from consuming a good while marginal utility is the satisfaction from consuming services.

Marginal utility determines a consumer’s willingness to pay for a good which, in turn, determines the price that the consumer will pay, whereas total utility tells us the total amount of satisfaction from consuming a certain amount of a product.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Which of the following best represents the law of diminishing marginal utility?

Total utility from consuming a good always rises.
Total utility from consuming one more unit of a good eventually falls.
Marginal utility of a good eventually declines as more of it is consumed in a given time period.
Marginal product of labor declines as more of a variable input is used.

For a normal good, each successive unit consumed yields less and less additional utility, ceteris paribus.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

When the additional satisfaction from a good or service declines as more of it is consumed, this illustrates the law of:

Diminishing marginal utility.
Exceptional marginal utility.
Declining demand.
Increasing opportunity costs.

At some point, the consumption of additional units of a good or service yields less and less additional utility, ceteris paribus.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

At some point during a meal, each extra bite provides less and less additional satisfaction. This can be explained by:

The law of demand.
The law of diminishing marginal utility.
The law of increasing opportunity cost.
A shift in the demand curve.

Beyond some point, the consumption of additional units of a normal good or service yields less and less additional utility, ceteris paribus.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Javier goes to an all-you-can-eat buffet and consumes three plates of food. Which of the following explains why the third plate of food does not provide as much satisfaction as the second plate?

The law of expanding externalities.
The rule of total utility.
The law of supply.
The law of diminishing marginal utility.

When Javier orders at the buffet, each additional plate yields less and less additional satisfaction as he consumes the dinner, ceteris paribus. This describes the law of diminishing marginal utility.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The law of diminishing marginal utility helps to explain the:

Upward-sloping supply curve.
Equilibrium price.
Downward-sloping demand curve.
Equilibrium quantity of a good in the marketplace.

The demand curve is downward-sloping because as quantity consumed increases, marginal utility diminishes and the consumer is only willing and able to consume additional units at a lower price.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Which of the following is the best reason why we typically pay a relatively low price for water?

Additional units of water are normally not worth much to us.
Because water is abundant, the total utility we receive from water is relatively low.
Because water is abundant, the marginal utility we receive from water is relatively high.
Although additional units of water are normally worth a lot to us, the supply of water is so great we refuse to pay a high price for these additional units.

Since water is relatively abundant, the additional units yield low additional utility even though the total utility of water is high. When marginal utility is relatively low, a consumer will only be willing to pay relatively low prices for the last unit consumed.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Maximum total utility is achieved where:

Total revenue equals zero.
The price elasticity of demand is 1.0.
Marginal utility equals zero.
Marginal revenue equals zero.

Any additional units added after the additional utility falls to zero will be negative and therefore reduce total utility.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Total utility is maximized where:

Price is less than marginal utility.
Price is equal to marginal utility.
Marginal utility is maximized.
Marginal utility is zero.

When marginal utility is greater than zero, each additional unit will add to total utility and so when marginal utility equals zero total utility is maximized.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

With a greater amount of consumption, total utility:

Always decreases.
Increases as long as marginal utility is positive.
Increases only if marginal utility increases.
Always increases.

When consuming a good if marginal utility is positive, total utility must be increasing since total utility is the sum of marginal utility provided by each unit of the good consumed.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

If the marginal utility for slices of pizza is decreasing but positive, then:

The total utility for slices of pizza is increasing.
The total utility for slices of pizza is decreasing.
The total utility for slices of pizza is negative.
Additional slices of pizza yield zero satisfaction.

Since each successive unit of a good is still yielding a positive amount (although declining) of marginal utility, total utility must be increasing (at a decreasing rate).

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

If the marginal utility of one more piece of candy is positive, then the:

Total utility is at a maximum.
Total utility will decrease with additional consumption.
Candy is an inferior good.
Total utility will increase with additional consumption.

Since total utility is equal to the sum of marginal utility for all units consumed, an additional amount of positive marginal utility will increase total utility.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

If marginal utility is positive, then total utility must be:

Decreasing.
Increasing.
Zero.
Less than zero.

Since total utility is equal to the sum of marginal utility for all units consumed, an additional amount of positive marginal utility will increase total utility.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

If marginal utility is negative, then:

Total utility is at a minimum.
Total utility will increase with additional consumption.
Total utility will decrease with additional consumption.
The good in question is an inferior good.

Since total utility is equal to the sum of marginal utility for all units consumed, an additional unit that adds negative marginal utility will actually decrease total utility.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The assumption of ceteris paribus is important because it:

Allows us to focus on the effects of a change in one variable at a time on another variable of interest.
Explains the concept of diminishing marginal utility.
Determines the point where total utility is maximized.
Explains the reason for government failure.

For example, if we assume that other things are equal, then we can focus on the effect of a change in price (or another determinant of demand) on the demand for a good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Ceteris paribus means:

Nothing is allowed to change.
The determinants of demand may change, but all else must be held constant.
Only one variable is allowed to change while all others remain constant.
Consumers try to keep all things constant so that prices will be lower.

Ceteris paribus means that factors other than those being considered are constant so that the effect of the change in one factor, whether price or a determinant of a variable, can be measured.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

According to the law of demand:

If consumer’s income increases, the demand curve will shift to the right.
As the price of a good rises, the quantity demanded will increase in a given time period, ceteris paribus.
As the price of a good falls, the quantity supplied will increase in a given time period, ceteris paribus.
As the price of a good falls, the quantity demanded will increase in a given time period, ceteris paribus.

The law of demand suggests an inverse relationship between price and quantity demanded, holding all other factors fixed.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The Law of Demand states that quantity demanded increases in a given time period if:

The price of the good falls.
Incomes increase.
Preferences change.
Expectations improve.

When the price of a normal good or service declines, the quantity demanded increases during a given time period.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The law of demand explains why people:

Crave certain goods.
Are willing to buy more of a good or services as the price falls.
Are willing to pay more for a good or services as marginal utility diminishes.
Are able to buy more of a good or service as supply increases.

Since each additional unit of a good or service yields less and less satisfaction to a consumer, the quantity demanded will increase only by lowering the price.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Ceteris paribus, a demand curve shows the:

Quantity of a good or service that producers are willing to bring to market.
Prices a consumer and producer can both agree upon.
Quantity of a good or service consumers are willing and able to purchase at alternative prices.
Change in quantity demanded divided by the change in price.

A demand curve shows the various amounts of a product that consumers are willing and able to purchase at alternative prices.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The downward slope of the demand curve is related to the:

Law of diminishing total returns.
Law of diminishing marginal utility.
Upward sloping supply curve.
Opportunity cost of producing the good.

Since each additional unit of a good yields less and less additional consumer satisfaction, a consumer will only purchase more with a lower price.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The demand curve is downward-sloping because:

Producers are willing to supply more of the good only at higher prices.
Consumers are willing to buy less of the good only at lower prices.
Producers are willing to supply more of the good only at lower prices.
Consumers are willing to buy more of the good only at lower prices.

Since each additional unit of a good yields less and less consumer satisfaction, a consumer will only demand a greater quantity at a lower price.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Price elasticity of demand shows how:

To compute the slope of the demand curve.
Quantity demanded responds to price changes.
Quantity demanded responds to changes in the price of other goods.
Price responds to demand changes.

The responsiveness (or sensitivity) of consumers to a price change is measured by the price elasticity of demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-02 Describe what the price elasticity of demand measures.
Topic: Price Elasticity

The response of quantity demanded to price changes is shown by:

The price elasticity of demand.
The determinants of demand.
Opportunity cost.
Income elasticity of demand.

The responsiveness (or sensitivity) of consumers to a price change is measured by the price elasticity of demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Describe what the price elasticity of demand measures.
Topic: Price Elasticity

Which of the following statements is NOT correct?

If demand is unitary elastic, an increase in the price of a good will not change total revenue.
If demand is elastic, a higher price will actually decrease total revenue.
Total revenue will fall if consumer’s response to a price cut is relatively smaller than the price cut.
If the relative change in price is greater than the relative change in the quantity demanded associated with it, demand is inelastic.

If a firm cuts the price of a good and the resulting change in quantity demanded is large, total revenue will increase because the increase in revenue generated by the increase in quantity demanded will be greater than the decrease in revenue generated by the decrease in price.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 04-02 Describe what the price elasticity of demand measures.
Topic: Price Elasticity

Price elasticity of demand indicates the consumer’s response to changes in:

Quantity.
Demand.
Price.
Supply.

Price elasticity of demand measures consumer’s sensitivity to price changes.

The price elasticity of demand is defined as the:

Percentage change in quantity demanded times the percentage change in price.
Unit change in price divided by the unit change in quantity demanded.
Percentage change in quantity demanded divided by the percentage change in price.
Unit change in quantity demanded times the unit change in price.

Using percentages rather than absolute amounts to measure price elasticity allows us to compare different products with different prices.

Suppose the price elasticity of demand for tacos is 0.80. If the price of tacos increases by 10 percent, then the quantity demanded of tacos should, ceteris paribus:

Decrease by 8 percent.
Increase by 8 percent.
Decrease by 1.25 percent.
Increase by 1.25 percent.

Since elasticity is measured in terms of percentages, a coefficient of 0.80 would cause the quantity demanded to fall by 80% of the increase in price (80% X 10% = 8%). Recall also that the price elasticity of demand is typically reported as an absolute value, since the law of demand would indicate that price of elasticity of demand should always be negative.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-02 Describe what the price elasticity of demand measures.
Topic: Price Elasticity

If the price elasticity of demand for a product is 2.3, this means that quantity demanded will increase by _______ for each _______ decrease in price, ceteris paribus.

1 percent; 2.3 percent
1 unit; $2.30
2.3 percent; 1 percent
2.3 units; $1

The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price, therefore a coefficient of 2.3, would mean a quantity change 2.3 times a price change. This is the only response that fits that mathematical description.

Assume that we are using the midpoint method of calculating the price elasticity of demand. If a firm finds that it can sell 20,000 units at a price of $5 per unit and 25,000 units at a price of $4 per unit, then demand in this price range is:

Elastic
Inelastic
Unitary elastic
Cannot be determined with the information given.

The percentage change in quantity demanded divided by the percentage change in price is 1 so it is unitary elastic.

Assume a price elasticity of demand of 0.50. If the tobacco lobby is successful in reducing a tax on the price of cigarettes by 10 percent, the quantity demanded will:

Decrease by 5 percent.
Decrease by 2 percent.
Increase by 5 percent.
Increase by 2 percent.

Since elasticity is measured in terms of percentages, a coefficient of 0.50 would cause the quantity demanded to increase by 50% of the decrease in price (50% × 10% = 5%).

If the price elasticity of demand is 1.5, and the prices rise by 20 percent, the quantity sold will, ceteris paribus:

Rise by 13.3 percent.
Fall by 13.3 percent.
Rise by 30.0 percent.
Fall by 30.0 percent.

Since elasticity is measured in terms of percentages, a coefficient of 1.50 would cause the quantity demanded to decrease by 150% of the decrease in price (150% × 20% = 30%). Remember that the price elasticity of demand is always reported as a positive value knowing that the measure will always be negative by calculation to indicate the inverse relationship between price and quantity demanded.

If the price elasticity of demand is 2.5, then a 40 percent decrease in the price of the good will lead to a _______ percent increase in the quantity demanded.

150.00
100.00
66.7
22.5

Since elasticity is measured in terms of percentages, a coefficient of 2.50 would cause the quantity demanded to increase by 100% given the decrease in price (250% × 40% = 100%).

If the price elasticity of demand is 1.8, then a 30 percent decrease in the price of the good will lead to a _______ percent increase in the quantity demanded.

0.60
0.55
54.00
16.67

Since elasticity is measured in terms of percentages, a coefficient of 1.80 would cause the quantity demanded to increase by 54% given the decrease in price (180% × 30% = 54%).

Suppose a university raises its tuition by 8 percent and as a result the enrollment of students drops by 4 percent. The price elasticity of demand for this circumstance would be:

8.0.
4.0.
2.0.
0.5.

The elasticity of the demand for tuition is the percentage change in quantity demanded (4%) divided by the percentage change in price (8%).

Suppose Suzuki increases the price of a particular motorcycle model by 12 percent and as a result the quantity demanded for that model decreases by 4 percent. The price elasticity of demand for that model is:

0.33.
3.0.
4.0.
12.0.

The elasticity of the demand for the motorcycle is the percentage change in quantity demanded (4%) divided by the percentage change in price (12%).

Suppose a cosmetics company increases the price of eyeliner by 10 percent and as a result the quantity demanded of eyeliner decreases by 2.5 percent. The price elasticity of demand for eyeliner is:

4.0.
2.5.
0.4.
0.25.

The elasticity of the demand for eyeliner is the percentage change in quantity demanded (2.5%) divided by the percentage change in price (10%).

If demand is elastic, then:

Quantity demanded is not very responsive to changes in price.
Quantity demanded is very responsive to changes in price.
Consumer spending does not respond to changes in income.
Total revenue falls in response to a price decrease.

A small percentage change in price leads to a relatively large percentage change in quantity demanded.

Suppose the local government decides to reduce traffic congestion on a bridge by imposing a toll. The toll will be most effective if the price elasticity of demand for the bridge is:

Inelastic.
Elastic.
Unitary.
Either unitary or inelastic.

If the percentage change in quantity is greater than the percentage change in price, a small price increase will lead to a larger quantity reduction. This would be most beneficial to reduce congestion as more drivers would respond by avoiding the bridge.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 04-02 Describe what the price elasticity of demand measures.
Topic: Price Elasticity

Which of the following is most likely to be elastic with respect to demand?

Cigarettes.
Shoes.
Gasoline in the short run.
Airline travel in the long run.

The more discretionary the product and the longer the time frame, the more elastic the demand tends to be for that product.

The demand for _______ is relatively elastic.

water
electricity
vacation travel
coffee

Vacation travel would be elastic because it is discretionary and has many close substitutes (e.g., recreation locally).

If demand is inelastic, then:

Consumer spending does not respond to changes in income.
Total revenue rises in response to a price decrease.
Quantity demanded is very responsive to changes in price.
Quantity demanded is not very responsive to changes in price.

If a product or service has no close substitutes, then it will not be sensitive to price changes.

If quantity demanded rises only slightly following a moderate price cut, then the response would be considered:

Elastic.
Inelastic.
Unitary elastic.
Abnormal.

In general, the demand for goods or services will tend to more inelastic if the goods and services are necessities, or if their price represents a low proportion of a consumer’s total income.

When the percentage change in quantity demanded is numerically less than the percentage change in price, ceteris paribus, demand is:

Elastic.
Inelastic.
Unitary elastic.
Perfectly elastic.

If the numerator (change in demand) is smaller than the denominator (change in price), the absolute value will be less than one and therefore inelastic.

Which of the following is most likely to be inelastic with respect to demand?

Illegal drugs.
Airline travel in the long run.
New cars.
HDTV sets.

Illegal drugs have no closes substitutes and will therefore be relatively inelastic.

The demand for _______ is relatively inelastic.

New cars
TVs
Gasoline in the short run
Airline travel

Gasoline in the short run is inelastic because it has no close substitutes and is a necessity.

If the percentage change in quantity demanded is exactly equal to the percentage change in price, then demand is:

Normal elastic.
Relatively inelastic.
Relatively elastic.
Unitary elastic.

The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. When the absolute value of this ratio is one, the response is considered to be unitary elastic.

For which of the following is the price elasticity of demand most likely to be unitary elastic?

Cigarettes.
Private education.
New cars.
Gasoline in the short run.

Cigarettes and gasoline have no close substitutes and so would be inelastic whereas new cars would be discretionary and so would be elastic. Therefore a private education would most likely be unitary elastic.

Total revenue is:

The price of a product times the quantity sold in a given time period.
The profit a company earns from the sales of goods.
Equal to revenue minus the cost of production.
The additional revenue earned from the sale of one more unit.

The sale of a good multiplied by its price equals total revenue—or the money a firm earns by selling its products.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-03 Depict the relationship of price elasticity, price, and total revenue.
Topic: Price Elasticity

If the price elasticity of demand is 1.0 and a firm raises its price by 15 percent, then total revenue will:

Rise by 15 percent.
Fall by 15 percent.
Rise by 6.67 percent.
Not change.

The percentage increase in price will be exactly offset by the percentage decline in quantity demanded because the response is unitary elastic. As a result, total revenue will remain the same.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-03 Depict the relationship of price elasticity, price, and total revenue.
Topic: Price Elasticity

Ceteris paribus, when the price elasticity of demand is unitary elastic, a decrease in:

Price results in no change to total revenue.
Total revenue indicates an increase in price.
Total revenue indicates a decrease in price.
Price results in an increase in total revenue.

The percentage decrease in price will exactly offset by the percentage increase in quantity demanded and so total revenue will remain the same.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-03 Depict the relationship of price elasticity, price, and total revenue.
Topic: Price Elasticity

If demand is unitary elastic, then a price cut:

Reduces total revenue.
Increases total revenue.
Does not change total revenue.
Sometimes increases and sometimes decreases total revenue.

The percentage decrease in price will exactly offset the percentage increase in quantity demanded and so total revenue will remain the same.

Ceteris paribus, a price increase will cause total revenue to stay the same for a producer only if the price elasticity demand for its product is:

Inelastic.
Elastic.
Unitary elastic.
Extremely high.

The percentage increase in price will be exactly offset by the percentage decline in quantity demanded. and so total revenue will remain the same.

A price cut will increase the total revenue a firm receives, ceteris paribus, only if the demand for its product is:

Elastic.
Inelastic.
Unitary elastic.
Perfectly inelastic (i.e., E = 0).

If the demand for a product is elastic, the percentage increase in quantity demanded will be greater than the percentage decrease in price.

If the price elasticity of demand for Baja Fresh tacos is 2.5, then Baja Fresh can:

Reduce the price of tacos by 25 percent and total revenue will remain the same.
Raise the price of tacos and total revenue will increase.
Reduce the price of tacos by less than 25 percent and total sales will remain the same.
Reduce the price of tacos and total revenue will increase.

If the price elasticity for tacos is 2.5, then the reduction in revenue from a reduction in the price will be more than made up by an increase in revenue from the increase in quantity demanded.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 04-03 Depict the relationship of price elasticity, price, and total revenue.
Topic: Price Elasticity

Ceteris paribus, total revenue definitely declines when price:

Falls and demand has unitary elasticity.
Falls and demand is elastic.
Rises and demand is elastic.
Rises and demand is inelastic.

If the demand for a product is elastic, then a price increase will cause total revenue to decrease since the percentage change in quantity demanded will fall more than the percentage increase in the price change.

Ceteris paribus, a price increase will cause total revenue to decrease for a firm if the demand for its product is:

Inelastic.
Elastic.
Unitary elastic.
Normal elastic.

If the demand for a product is elastic, then a price increase will have a lesser effect on total revenue than the corresponding decrease in quantity demanded has on total revenue.

Ceteris paribus, in which of the following instances will total revenue decline?

Price rises and demand is inelastic.
Price rises and demand is elastic.
Price falls and demand is elastic.
Price falls and demand is unitary elastic.

If the price rises and demand is elastic the percentage change in quantity demanded will be greater than the percentage change in price and total revenue will decline.

Ceteris paribus, a price decrease will cause total revenue to decrease for a firm if the demand for its product is:

Unitary elastic.
Inelastic.
Elastic.
Increasing rapidly.

If the demand for a product is inelastic, then the decreased revenue from a percentage decrease in price will not be made up by the increase in the quantity demanded.

Ceteris paribus, when a firm increases the price of its product, total revenue will:

Always increase because the firm will receive more revenue per unit sold.
Always decrease because the firm will sell fewer units.
Increase if the price elasticity of demand is inelastic.
Increase if the price elasticity of demand is elastic.

If the demand for a product is inelastic, a price increase will increase total revenue because consumers will not cut back on consumption as much as with a product that is elastic.

By which of the following means can the university reduce the size of the crowd at its football game and simultaneously earn more revenue to finance a new stadium?

By raising ticket prices when demand for tickets is inelastic.
By raising ticket prices when demand for tickets is elastic.
By lowering ticket prices when demand for tickets is inelastic.
By lowering ticket prices when demand for tickets is elastic.

A higher ticket price when demand is inelastic will increase total revenue because most fans will still want to attend the game and so therefore the percentage increase in price will be greater than the percentage decrease in quantity demanded. Some consumers will respond, however, and choose not to pay the higher prices and so the crowd size should fall.

Which one of the following generalizations is NOT correct?

The demand for luxury goods is relatively elastic
The demand for necessities is relatively elastic.
The greater the availability of substitutes, the higher the price elasticity of demand
The higher the price of an item is as compared to a consumer’s income the higher the elasticity of demand.

If a good or service is critical to our everyday life then it tends to be inelastic because there are few substitutes.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-04 Recite the factors that influence the degree of price elasticity.
Topic: Price Elasticity

Which of the following causes demand to be more elastic with respect to price?

Shorter periods of time to adjust to a change in price.
A higher ratio of price to consumers’ income.
Fewer substitutes.
A steeper demand curve for a given price and quantity.

If the price of a good or service represents a significant portion of a consumer’s income, they are more likely to notice price changes and will therefore likely respond more elastically.

Which of the following does NOT influence the price elasticity of demand?

The availability of substitutes.
The price of the item relative to your budget.
The costs of production.
Successful advertising.

The cost of production is a factor of supply and would not affect demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Recite the factors that influence the degree of price elasticity.
Topic: Price Elasticity

Which of the following causes the price elasticity of demand for a good to be more inelastic?

A shorter period of time to adjust to a change in price.
A higher ratio of price to consumers’ income.
The availability of many substitutes.
The good is a luxury.

The shorter the time period, the less time that a consumer can adjust to the price of a product.

People find it difficult to get along without necessities, therefore demand for necessities:

Is relatively elastic.
Is relatively inelastic.
Is relatively unitary elastic.
Does not change with changes in price.

Consumers need necessities and therefore will be relatively less sensitive to the price changes.

Which of the following is relatively inelastic with respect to demand?

A luxury good.
A good with few substitutes.
A good that is very expensive.
A good that is a complement.

If a good has few substitutes, then a consumer will not be able to switch to alternative goods and so will be less sensitive to price changes.

If the price of potato chips rises and the demand for pretzels rises, then potato chips and pretzels are:

Substitutes.
Complements.
Price inelastic goods.
Price elastic goods.

Consumers will try to buy the cheaper good between two substitutes. If the price of one good rises (potato chips), consumers would rather reallocate their spending to the substitute (pretzels). As they do, we would see an increase in demand for pretzels.

If the price of battery-powered flashlights falls and the demand for flashlight batteries rises, then flashlights and batteries are:

Substitutes.
Complements.
Price inelastic goods.
Price elastic goods.

Since flashlights and batteries are used together, they are complementary and the increase (decrease) in demand for one will increase (decrease) the demand for the other.

When income increases, the demand for most products:

Increases and the demand curve shifts to the left.
Increases and the demand curve shifts to the right.
Decreases and the demand curve shifts to the left.
Decreases and the demand curve shifts to the right.

Since a change in income is a determinant of demand, the demand for a normal good increases when consumer’s income increases.

When income decreases, the demand for most products:

Increases and the demand curve shifts to the left.
Increases and the demand curve shifts to the right.
Decreases and the demand curve shifts to the left.
Decreases and the demand curve shifts to the right.

When income falls, goods seem more expensive relative to income and so consumers are likely to purchase less.

The objective of advertising, from an economic perspective, is to shift the demand curve to the:

Right and decrease price elasticity of demand.
Right and increase price elasticity of demand.
Left and decrease price elasticity of demand.
Left and increase price elasticity of demand.

Advertising tries to increase brand name loyalty and reduce the substitution effect. This makes consumers desire the product more through changes to preferences and reduces their sensitivity to price changes as they view the product as more necessary.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-05 Discuss how advertising affects consumer demand.
Topic: Price Elasticity

When a firm advertises, it is attempting to:

Move consumers along the existing demand curve.
Decrease the marginal utility consumers receive from the product.
Decrease the price elasticity of demand for the product.
Shift the demand curve to the left.

When a firm advertises it tries to increase brand name loyalty and reduce the substitution effect. This makes consumers desire the product more through changes to preferences and reduces their sensitivity to price changes as they view the product as more necessary.

Complete the table and then use the information to answer the following question(s).

Utility Schedule Table

Quantity Consumed	Total Utility	Marginal Utility
1	32	32
2	—	12
3	52	—
4	—	5

In the utility schedule table, the marginal utility of the third unit is:

5 utils.
8 utils.
12 utils.
52 utils.

Since the total utility of the second unit is 44 (32 + 12), the change between 2 and 3 units is an increase of 8 utils. (See the utility schedule table.)

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Complete the table and then use the information to answer the following question(s).

Utility Schedule Table

Quantity Consumed	Total Utility	Marginal Utility
1	32	32
2	—	12
3	52	—
4	—	5

In the utility schedule table, the total utility when two units are consumed is:

12 utils.
20 utils.
30 utils.
44 utils.

Total utility for a certain number of units is equal to the sum of the marginal utilities for all units consumed to that point. For two units of consumption, total utility will be 44 utils (32 + 12). (See the utility schedule table.)

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Complete the table and then use the information to answer the following question(s).

Utility Schedule Table

Quantity Consumed	Total Utility	Marginal Utility
1	32	32
2	—	12
3	52	—
4	—	5

In the utility schedule table, the total utility when four units are consumed is:

Total utility is equal the sum of the marginal utilities which after four units equals 57. (See the utility schedule table.)

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Complete the table and then use the information to answer the following question(s).

Utility Schedule Table

Quantity Consumed	Total Utility	Marginal Utility
1	32	32
2	—	12
3	52	—
4	—	5

In the utility schedule table, diminishing marginal utility occurs:

With the second and fourth units only.
With the first and third units only.
Only with the second unit.
With all of the units after the first.

With each successive unit consumed, marginal utility falls. (See the utility schedule table.)

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The following is a hypothetical demand schedule for automobiles.

Demand Schedule for Automobiles

Price of New Autos (dollars per auto)	Number of New Autos (millions per year)
$24,000	2
$20,000	4

In the demand schedule for automobiles table, what is the total revenue from automobile sales at a price of $24,000 per auto?

$12 billion per year.
$26 billion per year.
$44 billion per year.
$48 billion per year.

At a price of $24,000 the quantity demanded would be 2 million autos per year and the total revenue is equal to the price times the quantity of automobiles sold, or $48 billion. (See the demand schedule for automobiles table.)

The following is a hypothetical demand schedule for automobiles.

Demand Schedule for Automobiles

Price of New Autos (dollars per auto)	Number of New Autos (millions per year)
$24,000	2
$20,000	4

In the demand schedule for automobiles table, what is the total revenue from automobile sales at a price of $20,000 per auto?

$80 billion per year.
$40 billion per year.
$24 billion per year.
$20 billion per year.

At a price of $20,000 the quantity demanded would be 4 million autos per year and the total revenue is equal to the price times the quantity of automobiles sold, or $80 billion. (See the demand schedule for automobiles table.)

The following is a hypothetical demand schedule for automobiles.

Demand Schedule for Automobiles

Price of New Autos (dollars per auto)	Number of New Autos (millions per year)
$24,000	2
$20,000	4

In the demand schedule for automobiles table, as price decreases from $24,000 per car to $20,000 per car:

The demand curve for cars shifts to the right.
Total revenue increases.
The quantity of cars demanded decreases.
The supply curve for cars shifts to the left.

The quantity demanded is elastic because although the price per auto declined, the increased quantity demanded more than made up for the price and total revenue increased. If the price were set at $24,000, the firm would make $48 billion per year while if the price were set at $20,000, the firm would make $80 billion per year. (See the demand schedule for automobiles table.)

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Knowledge Application
Difficulty: 3 Hard
Learning Objective: 04-03 Depict the relationship of price elasticity, price, and total revenue.
Topic: Price Elasticity

In recent years advertising expenditures in the United States have:

Been less than $500 per consumer per year.
Totaled over $200 billion per year.
Not had any effect on consumer expenditures
Shifted the demand curve for goods and services to the left.

Advertising expenditures now total over $200 billion per year or over $400 per consumer.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Discuss how advertising affects consumer demand.
Topic: Price Elasticity

Advertising can enhance economic efficiency when it:

Exploits our senses and lack of knowledge,
Encourages us to purchase only brand name merchandise.
Offers us pictures and promises of exoneration, recognition, and love.
Is intended to provide information about existing products or to bring new products to our attention.

While advertisers’ efforts to persuade us to buy have many motives, the information they provide consumers could add to the efficiency of market operation as consumers can make more informed choices.

The demand for such items as salt, sugar, and hand soap tend to be:

Relatively inelastic
Relatively elastic
Perfectly inelastic
Perfectly elastic

Items with a low price relative to income tend to be relatively inelastic.

The demand for such items as vacation travel, new cars, and HDTV cable packages tend to be:

Relatively inelastic
Relatively elastic
Perfectly inelastic
Perfectly elastic

Items that are luxury goods tend to be relatively elastic.

One NEWS WIRE article states that an increase in cigarette prices of 10 percent reduced cigarette sales by about 4 percent. What is the effect of higher prices in the market for cigarettes?

A leftward shift of the demand curve.
A rightward shift of the demand curve.
A movement up the demand curve.
A movement down the demand curve.

A decrease in price is represented by a movement down the demand curve.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The Policy Perspectives for this chapter identify that the United States spends more on advertising per person than most other countries. A successful advertising campaign should shift the:

Demand curve to the left.
Demand curve to the right.
Supply curve to the left.
Supply curve to the right.

Advertising affects a change in taste which would cause the demand curve to shift to the right.

On average, consumers spend the largest portion of their income on food.

FALSE

The largest portion of a consumer’s budget is spent on housing.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Patterns of Consumption

Housing and transportation account for the largest portion of the average consumer dollar.

TRUE

Housing and transportation represent over 50% of a consumer’s budget.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Patterns of Consumption

The goal of economic theory is to explain and predict choices.

TRUE

By observing consumer buying habits, an economist can better understand future consumption choices.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Patterns of Consumption

Status and ego concerns are sociopsychiatric explanations for consumption behavior.

TRUE

Taste is the determinant that applies to status and ego concerns.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Demand is the desire to purchase a particular good even if you cannot pay for it.

FALSE

Demand is the both the willingness and ability to purchase a particular good at a particular point in time.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Tastes and income are some of the determinants of demand.

TRUE

Tastes and income are two of the five determinants of demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Market demand is the horizontal sum of individual consumer demands.

TRUE

Each additional individual demand curve shifts the market demand curve to the right.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

Total utility is the additional satisfaction received from consuming one more unit.

FALSE

Total utility is the sum of the individual marginal utilities—or the additional satisfaction gained from consuming one more unit.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

At a point of diminishing marginal utility, marginal utility begins to decline as consumption increases.

TRUE

The law of diminishing marginal utility states that, beyond some point, marginal utility declines with additional units of consumption.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The law of diminishing marginal utility does not apply to goods that a person really enjoys.

FALSE

The law of diminishing marginal utility applies to all normal goods and services.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

According to the law of diminishing marginal utility, with the consumption of each additional candy bar, for example, the total satisfaction decreases.

FALSE

With the consumption of each additional candy bar total satisfaction increases at a decreasing rate until marginal utility turns negative. This statement is too strong as total satisfaction always decreasing would imply we should never have something like a candy bar.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

As long as marginal utility is positive, total utility must be increasing.

TRUE

Marginal utility adds to total utility whenever it is positive.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

If marginal utility is rising, total utility must be falling.

FALSE

If marginal utility is positive, total utility must be rising.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The inverse relationship between quantity demanded and price for a good can be explained by the law of diminishing marginal utility.

TRUE

Since marginal utility is diminishing, a consumer will only demand another unit if the price falls.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The price elasticity of demand measures the response of consumers to a change in price.

TRUE

Price elasticity is defined as the percentage change in quantity demanded divided by the percentage change in price.

If the price elasticity of demand is equal to 2.3, then a 1 percent increase in price will result in a 2.3 percent decrease in quantity demanded.

TRUE

The value of the price elasticity of demand explains by what percentage quantity will fall with a on percent change in price.

The demand is price-inelastic when the percentage change in quantity demanded is greater than the percentage change in price for a particular good.

FALSE

When the numerator (percent quantity demanded) is greater than the denominator (percent change in price), the price elasticity of demand will be greater than one and therefore the response would be considered elastic.

Demand is price-elastic when the percentage change in quantity demanded is greater than the percentage change in price for a particular good.

TRUE

When the numerator (percent quantity demanded) is greater than the denominator (percent change in price), price elasticity of demand will be greater than one and therefore the response would be considered elastic.

Ceteris paribus, a price cut will most likely decrease total revenue if demand is inelastic.

TRUE

If the demand for a good is inelastic, then a price cut will decrease total revenue because the percentage change in quantity demanded will be less than the percentage change in price.

Ceteris paribus, an increase in price will most likely decrease total revenue if the price elasticity of demand is 1.8.

TRUE

If the demand for a good is elastic, then a price increase will decrease total revenue because the negative percentage change in quantity demanded will be greater than the positive percentage change in price.

Ceteris paribus, an increase in price will increase total revenue if the price elasticity of demand is 1.3.

FALSE

With a price elasticity of demand of 1.3, a one percent price increase will cause quantity to decrease 1.3%. The negative effect on quantity will reduce total revenue more than the benefits of the per-unit price increase and so total revenue will fall.

Ceteris paribus, the price elasticity of demand for a good with many substitutes is likely to be inelastic.

FALSE

If a good has many close substitutes, then its quantity demanded will be quite sensitive to changes in price.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 04-04 Recite the factors that influence the degree of price elasticity.
Topic: Price Elasticity

Ceteris paribus, a successful advertising campaign causes the demand curve for a good to become steeper.

TRUE

One of the goals of advertising is to give the impression that the product is unique without close substitutes which will cause the product to be inelastic.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Discuss how advertising affects consumer demand.
Topic: Price Elasticity

What determinant of demand would be impacted with each of the following when analyzing the demand for hybrid automobiles? a) The price of gasoline goes up. b)The price of large automobiles rises. c) Hybrid autos become more fashionable. d) Consumers anticipate that the price of hybrids will come down in the future. e) Consumers’ incomes decline and hybrids are less expensive to buy and maintain than other cars. f) A news report claims that hybrid automobiles are unsafe.

a) Other goods; the desire for more fuel-efficient automobiles increases and so hybrid automobile demand increases.
b) Other goods; the cost a substitute good (large automobiles) rises and so hybrid automobile demand increases.
c) Preferences; the desire for hybrid automobiles becomes greater as they are more fashionable and so their demand increases.
d) Expectations; consumers anticipate that the cost will be less in the future and demand less hybrid automobiles today.
e) Income; consumers switch to the relatively cheaper good as their income falls and so they buy more hybrid automobiles.
f) Tastes; consumers believe that hybrid automobiles are unsafe and so they demand less.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

A bar patron complains that he can no longer visit his neighborhood tavern as often because the price of his favorite beer went up one dollar per glass to $4. He used to purchase 20 beers per week but now he only purchases 16 beers per week. Determine if demand for beer is elastic or inelastic. If the patron only had 12 beers per week after the price increase would the elasticity of demand for the beer be different?

The price elasticity for the beer would be inelastic because the price increase leads to an increase in total revenue (i.e. percentage change in quantity demanded would be less than the percentage increase in price). If the patron only consumed 12 beers per week after the price increase the demand for beer would be elastic. In this case, the percentage change in quantity demanded is much more responsive to the $1 price increase.

Using the determinants of demand and your own reasoning, classify each of the following products as elastic or inelastic: a) Alaska summer cruise; b) gasoline; c) ketchup.
a) Elastic—many substitutes and a luxury good b) Inelastic—no close substitutes and a necessity c) Inelastic—no close substitutes and a small price relative to income

Diminishing marginal utility begins when total utility decreases.

FALSE

Diminishing marginal utility begins when total utility increases at a slower rate. When total utility declines, then marginal utility will become negative.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

If the price elasticity of demand is 3.7 for soft drinks, then the demand for soft drinks is elastic.

TRUE

If the price elasticity of demand is greater than 1.0, the response is considered to be elastic.

The price of energy drinks increases by twenty percent and the demand for energy drink falls by fifteen percent. Based on this information, the price elasticity of demand is:

Elastic.
Inelastic.
Perfectly inelastic.
Unit elastic.

The percentage change in price is greater than the percentage change in quantity demanded. When that occurs, the demand is inelastic.

Which of the following is the least likely to be inelastic?

Gasoline.
Bread.
Shell-brand gasoline.
Chewing gum.

All of the other products are necessities and/or are inexpensive and have no substitutes. There are many other substitutes available when consumers are making choices between the brands of gasoline.

The price elasticity of salt is less than 1.

TRUE

Salt is inexpensive, has no substitutes and is a necessity; all which are characteristics of a product that has an inelastic demand.

Adult smokers are not as responsive as teenagers are to increases in the price of cigarettes.

TRUE

If the price of cigarettes increases due to higher taxes, teenagers are most likely to smoke fewer cigarettes.

If the demand for concerts is inelastic, then raising the price of the concert tickets will increase the total revenue for the concert promotions.

TRUE

If concert tickets are inelastic and prices for the tickets were increased, most concert attendees will purchase the tickets at the higher prices.

Explain why it is so important for a business owner to understand the concept of price elasticity of demand when pricing their goods and services.

If a business owner understands price elasticity of demand, then she will know what items should be priced at lower prices and what items should be priced at higher prices. Goods and services that have inelastic demands can be priced higher than goods and services that have elastic demands. If the prices for her items are not correctly priced, based on the elasticity of demand, her total revenue will be less than optimal.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 04-04 Recite the factors that influence the degree of price elasticity.
Topic: Price Elasticity

In economics, elasticity means ______.

Responsiveness.
Satisfaction.
Output.
Pleasure.

The word elasticity is synonymous with responsiveness or sensitivity.

As the marginal utility of a good diminishes, so does the

Quantity supplied of the product.
Price consumers are willing to pay.
Availability of the product.
Elasticity of demand for the product.

If the satisfaction with a product decreases, consumers will not be as willing to purchase the product. In other words, the price the consumer is willing to pay for additional units of the produce will decrease.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The demand for lunch at a local restaurant is currently price elastic for college students but price inelastic for businesspeople. In order to increase total revenue, the restaurant should

Lower the price to both businesspeople and students.
Increase the price to students and decrease the price to businesspeople.
Increase the price to both businesspeople and students.
Decrease the price to students but increase the price to businesspeople.

To increase total revenue, price should be decreased when demand is elastic and increased when demand is inelastic.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 04-03 Depict the relationship of price elasticity, price, and total revenue.
Topic: Price Elasticity

The following table shows the utility (enjoyment) that Joyce receives from eating ice cream cones on a hot summer day.

Ice Cream Cone	Enjoyment (number of “utils”)
1st cone	10 out of 10
2nd cone	8 out of 10
3rd cone	5 out of 10
4th cone	1 out of 10

This chart illustrates the law of

demand.
supply.
diminishing returns.
diminishing marginal utility.

Because Joyce receives less and less satisfaction/enjoyment (utils) from each subsequent ice cream cone, this example illustrates the laws of diminishing marginal utility.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

The goal of an advertising campaign is to:

Shift a product’s demand curve to the right.
Increase product sales.
Change consumer tastes and preferences.
All of these choices are correct.

Answers A, B, and C are all correct because each relates to increasing the demand for a product.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Discuss how advertising affects consumer demand.
Topic: Price Elasticity

A good whose demand is not very responsive to a change in price is:

Elastic.
Inelastic.
Unitary elastic.
Income elastic.

Inelastic means insensitive or not very responsive to changing market conditions.

If the demand for a good is elastic, when price increases, total revenue will:

Increase.
Decrease.
Not change.
The change in total revenue is uncertain.

When the demand is elastic and the price increases, consumers who are sensitive to the price increase will greatly decrease their purchase of the good, thus reducing the total revenue for the seller.

Which of the following are determinants of price elasticity?

The availability of substitutes.
The price of the good relative to income.
Whether the good is a necessity or luxury.
All of these choices are correct.

These are all determinants of price elasticity.

The increase in federal taxes on cigarettes from $0.39 to $1.01 in 2009 had only a modest effect on quantity demanded, indicating:

Demand for cigarettes is relatively elastic.
Demand for cigarettes is relatively inelastic.
Demand for cigarettes is unitary elastic.
More information is needed to determine the elasticity of demand for cigarettes.

A 10% increase in cigarette prices is expected to decrease quantity demanded by 4%, meaning that demand for this good is inelastic.

When marginal utility is negative, total utility is:

Increasing.
Decreasing.
Constant.
More information is needed to describe total utility.

If marginal utility is negative, additional units of a good provide negative utility, which means that total utility must be going down.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: Determinants of Demand

A good with relatively elastic demand is more likely to be a _____, or a good with _____ substitutes.

necessity; many
necessity; few
luxury; many
luxury; few

Buyers tend to be more price responsive with respect to luxury goods and goods with many substitutes.

The 2009 tax increase of 20 cents per pack of cigarettes in San Francisco will most likely generate only modest revenues because:

Cigarettes in San Francisco have close substitutes available in other nearby cities or online.
The tax is too low to generate large revenues.
The tax will cause a shift in demand.
Many smokers will quit smoking because of the higher price, so few will actually pay the tax.

Demand for cigarettes bought in San Francisco is relatively elastic because substitutes can easily be purchased in nearby cities or online.

Gasoline and SUVs are _____; as gasoline prices have increased, SUV sales have _____.

complementary goods; decreased
complementary goods; increased
substitute goods; decreased
substitute goods; increased

Gasoline and SUVs “go together”; as the price of the first good (gasoline) increases, the quantity demanded of the second good (SUVs) decreases.

When income changes, there is a _____ the _____ curve.

movement along; demand
shift of; demand
movement along; supply
shift of; supply

Income is one of the determinants of demand and therefore will shift the demand curve.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why demand curves slope downward.
Topic: The Demand Curve

Recent prices increases for Starbucks coffee will cause an increase in revenue for the company if:

There are not many close substitutes for Starbucks coffee.
Money spent on Starbucks coffee makes up a small share of total income.
Starbucks coffee is more of a necessity than a luxury.
All of these choices are correct.

All of these factors will lead to an inelastic demand for Starbucks, which means an increase in price causes an increase in total revenue.

Chapter 04 Test Bank Summary

Category	# of Questions
AACSB: Analytical Thinking	4
AACSB: Knowledge Application	20
AACSB: Reflective Thinking	136
Accessibility: Keyboard Navigation	160
Blooms: Analyze	4
Blooms: Apply	19
Blooms: Knowledge Application	1
Blooms: Remember	40
Blooms: Understand	96
Difficulty: 1 Easy	43
Difficulty: 2 Medium	90
Difficulty: 3 Hard	27
Learning Objective: 04-01 Explain why demand curves slope downward.	72
Learning Objective: 04-02 Describe what the price elasticity of demand measures.	41
Learning Objective: 04-03 Depict the relationship of price elasticity, price, and total revenue.	22
Learning Objective: 04-04 Recite the factors that influence the degree of price elasticity.	18
Learning Objective: 04-05 Discuss how advertising affects consumer demand.	7
Topic: Determinants of Demand	18
Topic: Patterns of Consumption	7
Topic: Price Elasticity	87
Topic: The Demand Curve	48

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