MS. RAGAZZO'S CLASSROOM



Unit 2 - MicroeconomicsTest Review1) The statement "the quantity demanded of a product varies inversely with its price" is a definition ofA) laissez-faire.C) the invisible hand.B) the law of demand.D) the law of supply.Explanation: According to the law of demand, as price increases, the quantity demanded decreases and as price decreases, the quantity demanded increases.2)Assuming that the graph follows the normal laws of economics, the line representsA) demand.C) equilibrium price.B) supply.D) production possibilities.Explanation: According to the law of supply, as price increases, supply increases. 3) In a market economy, a high price will usually causeA) producers to offer less and consumers to buy less.C) producers to supply more and consumers to buy less B) producers to offer less and consumers to buy more.D) producers to supply more and consumers to buy moreExplanation: High prices signal greater profits for producers so they are likely to increase production. On the other hand, consumers are likely to reduce consumption.4) Which factor might cause an increase in the supply of a product?A) a decrease in productivityC) the introduction of new technologyB) fewer sellers in the marketplaceD) an increase in the cost of raw materialsExplanation: The introduction of new technology often increases efficiency and reduces production costs. 5) If the supply of computer engineers increases at the same time that the demand for these workers decreases, what would be the MOST LIKELY effect on wages for these workers?A) Wages would stay the same as job opportunities increase.C) Wages would decline as the competition for jobs increases.B) Wages would increase as the number of workers increases.D) Wages would increase as competition for these workers increases.Explanation: Wages would decline as the competition for jobs increases. Workers and their wages follow the same laws of supply and demand as other products in the market.6) The Law of Supply states thatA) the supply of a product is not affected by its price.C) when the supply of a product increases, the price of the product rises.B) when the supply of a product decreases, the price of the product falls.D) the quantity supplied of a product will increase when the price of that product increases.Explanation: The Law of Supply has a direct relationshipUse the graph above to answer questions 7and 87) The purpose of this production possibilities graph is to showA) how supply and demand determine price.C) the number of workers required for a specific task.B) whether the supply of goods is elastic or not.D) how limited resources can be used to produce a combination of items.Explanation: A production possibilities graph shows how many of each item could be produced with the resources available.8) The graph is a production possibilities chart. Which of these might cause the line to move to the right?A) higher labor costsC) shortage of required resourcesB) an increase in pricesD) improved technology in whoopee cushion productionExplanation: If the production possibilities line "expands" (moves to the right), production in increased. 9)The graph shows a demand curve. What can be said about the demand line moving to the right?A) Demand has decreased.C) This indicates a reduced supply.B) Demand has increased.D) An equilibrium price has been determined.Explanation: Look at the quantity demanded.10) A decrease in the price of a particular product will result inA) a decrease in the demand for that product.C) an increase in the quantity demanded of that product.B) a shift in the production possibilities frontier.D) an increase in the quantity supplied of that product.Explanation: Demand has an inverse (opposite) relationship.11)The diagram shows the circular flow of goods and resources in a market economy. According to this diagram, where do individuals sell their labor?A) in householdsC) in the product marketB) in the factor marketD) in the revenue marketExplanation: Individuals (households) sell their labor (one of the factors of production). Businesses exchange money (income) for this labor.12)If a product is sold at the price indicated and supplied in the quantity indicated by the intersection of the supply and demand curves in the graph, there should beA) an increase in price.C) a shortage until the price is raised.B) no shortage and no surplus.D) a change in the expected future price.Explanation: The equilibrium is where suppliers produce an item in the quantity and at the price where consumers will buy the product in the same quantity and at the same price.13) If the government decided to subsidize the production of bobble-head dollsA) the supply curve will shift to the left.C) the demand for bobble-heads will decrease.B) the supply curve will shift to the right.D) the demand for bobble-heads will equal the supply.Explanation: A government subsidy will reduce production costs. Because of this, suppliers would be willing to produce more items. 14) Consumers are told that the consumption of cauliflower will significantly reduce the risk of cancer. Which of these scenarios is likely to happen in the cauliflower market?A) The demand curve will shift to the left and the price of cauliflower will fall.C) The supply curve will shift to the right and the price of cauliflower will fall.B) The supply curve will shift to the right and the price of cauliflower will rise.D) The demand curve will shift to the right and the price of cauliflower will rise.Explanation: With such news, the demand for cauliflower will increase and the price will rise.15) Which market structure has the largest number of suppliers?A) monopolyC) perfect competitionB) oligopolyD) monopolistic competitionExplanation: Perfect competition is characterized by suppliers who have open access to the market.16) Which situation is the MOST LIKELY result of a price ceiling being set below the equilibrium price?A) decreased demandC) a shortage in the marketB) a surplus in the marketD) a higher equilibrium priceExplanation: A price ceiling is a set maximum price at which something can be sold. 17) Mr. Simpson is liable for all the debts of his company. Mr. Simpson has which type of business organization?A) monopolyC) conglomerateB) corporationD) sole proprietorshipExplanation: In a sole proprietorship, the owner has unlimited liability. 18) Columbia Tires and Pacific Tires together control 75% of the tire market in the country. This is an example of what type of market structure?A) monopolyC) perfect competitionB) oligopolyD) monopolistic competitionExplanation: Few firms dominate an entire industry.19) Corporate stockholders are not responsible for the debts of the corporation. This is MOST LIKELY an example ofA) dividends.C) limited liability.B) partnerships.D) unlimited liability.Explanation: They are not financially responsible for the losses of the company.20) If a drug company is granted a patent on a new medication, which result is possible?A) a price ceilingC) a monopoly in the production of that medicationB) government control of that drugD) perfect competition in the market for that drugExplanation: A patent gives a company the exclusive right to produce a particular product. 21) Which of these is MOST LIKELY a result of apartment rent controls?A) a shortage of apartmentsC) decreased demand for apartmentsB) increased mobility of workersD) a dramatic increase in rental ratesExplanation: Rent controls usually result in rents below the equilibrium price. 22) A price set below the current market price is a characteristic of aA) price floor.C) price ceiling.B) regular price.D) equilibrium price.Explanation: A price ceiling (a maximum price which may be charged) means that since the price is set a little too low there will be a greater demand than the amount initially supplied.23) Jorge and Fred have a product they would like to sell. They decide to share the risks and profits by forming an unincorporated business. The business organization Jorge and Fred have MOST LIKELY formed is a(n)A) partnership.C) entrepreneurship.B) corporation.D) sole proprietorship.Explanation: A partnership shares the risks and profits, which is MOST LIKELY the business organization Jorge and Fred have formed. If they were to for a corporation, they would have to consult many attorneys and get licenses from the government.24) The Law of Demand is one of the most famous laws in economics. It states that when the price of a good rises, the amount demanded ______________, and when the price of a good falls, the amount demanded _____________.A) rises, risesC) rises, fallsB) falls, fallsD) falls, risesExplanation: The Law of Demand has an inverse (opposite) relationship25) Which relationship is the BEST example of the Law of Supply?A) The quantity of a good supplied rises as the price rises.C) The quantity of a good supplied falls as the price rises.B) The quantity of a good supplied rises as the price falls.D) The quantity of a good supplied is not impacted by price.Explanation: The Law of Supply has a direct relationship. The goal of the supplier is to maximize profits. 26) Which of these is the best economic definition of "pure competition"?A) the market is dominated by one sellerC) the market is dominated by two or more sellersB) the market is dominated by a few buyersD) the market is not dominated by either buyers or sellersExplanation: There are very few examples of pure competition, but sometimes agricultural products- such as sugar, rice, or vegetables- are good examples of this.27) Sally and Wally have a great business idea. They have some money to invest and hope to find more people interested in investing. They are worried about the legal aspects and the liability. The BEST business form for them is MOST LIKELY aA) corporation.C) partnership.B) monopoly.D) proprietorship.Explanation: Although there are just two partners, they want investors and want to form a business with the least amount of liability.28) One of the BEST measures of success for businesses and their entrepreneurs isA) loss.C) marginal cash.B) profit.D) marginal revenue.Explanation: The main reason people start a business on their own in the first place.29) The "market clearing price" is most closely associated withA) the price index.C) the price ceiling.B) the price level.D) the equilibrium price.Explanation: The market clearing price means that there is neither a shortage nor a surplus of goods at a specific price.30) In a market economy, a high price is a signal forA) producers to supply less and consumers to buy less.C) producers to supply more and consumers to buy less.B) producers to supply less and consumers to buy more.D) producers to supply more and consumers to buy more.Explanation: In a market economy, if a price is set TOO high, consumers will buy less.31) On the first day of school, the school store had 100 pencils for sale at $1 each. At the end of the week, there were 90 pencils left. The second week, the price of pencils dropped to $.75 each. At the end of the week, there were 75 pencils left. The store dropped the price $.25 each week, and at the end of the fourth week, there were no pencils left. Which price was the market clearing price?A)$.25C)$.75B)$.50D)$1Explanation: The market clearing price is when quantity demanded is equal to quantity supplied.32) Percentage of Type of Business Organization: 1997According to the 1997 Census, which business organization form is the MOST common in the United States, even through it is relatively insignificant in total sales?A) C corporationsC) subchapter S corporationsB) dual partnershipsD) individual proprietorshipsExplanation: They account for about 5% of all sales in the country.33) Which scenario BEST represents monopolistic competition?A) Two new restaurants open to compete with a national food chain.C) A college student chooses cellular service based on the availability of a specific type of phone.B) Two firms compete against each other to sell pearls in an urban market.D) A company wins a contract to be the sole provider of phone and cable television service for a city.Explanation: There are a few main characteristics of monopolistic competition, most importantly that there are many producers and many consumers in a given market, and those consumers believe that there are non-price differences among the competitors' products. Therefore, the relevant example is one in which A college student chooses cellular service based on the availability of a specific type of phone.34) In the product market,A) productive resources are bought and sold.C) a nation's total output of goods and services increases.B) producers sell goods and services to consumers.D) the amount of output produced by a given amount of inputs is measured.Explanation: As part of the circular flow of economic activity, productive resources are bought and sold in the resource market (or factor market). In the product market, producers sell goods and services to consumers. 34)Which market structure is BEST indicated by the photograph?A) monopolyC) pure competitionB) oligopolyD) modified competitionExplanation: A business organization in which the products in a market are supplied by only a few dominant producers. Though there are some minor soda producers in the United States, most colas are made by Pepsi and Coke, or by companies that are owned by Pepsi and Coke.36) The MOST LIKELY incentive for entrepreneurs to start a new business isA) to make a profit.C) to risk financial failure.B) to discover a new patent.D) to create a new social benefit.Explanation: Although they may create a new patent or social benefit, these are not the primary incentives for entrepreneurs.37) What is the relationship between quantity supplied and price?A) They are not related.C) They are inversely related.B) They are directly related.D) They are related through demand.Explanation: Think of "supply" from the producer's point of view. If people are willing to pay more for a product, the producer will be more likely to make more of that product. 38) Which statement about the circular flow model is CORRECT?A) Businesses earn income from both the factor and product markets.C) Households earn income from the product market, and businesses earn revenue from the factor market.B) Households earn income from both the factor and product markets.D) Households earn income from the factor market and businesses earn revenue from the product market.Explanation: In the circular flow model, households earn income from the factor market and businesses earn revenue from the product market. Additionally, households spend money in product markets, and businesses can supply product markets with goods and services.39) If a new machine was developed that picked coffee beans twice as fast as is currently possible, what would you expect to happen to the price of coffee?A) The price would increase to pay for the new machinery.C) The price would increase due to greater demand for coffee picked this way.B) The price would decrease because there would be more coffee available.D) The price would decrease because fewer would want coffee picked by machine.Explanation: The technology would allow more beans to picked, making the supply of coffee more plentiful to consumers.New technology that would help to increase the supply of coffee40) In which market type are firms considered "price takers" because they take the price in the market and have no control over setting a price?A) MonopolyC) Perfect CompetitionB) OligopolyD) Monopolistic CompetitionExplanation: There are so many firms that no one has a large enough market share to be able to influence price. 41)Which point on the Production Possibilities Curve represents a situation in which resources are not being used effectivelyA) AC) CB) BD) DExplanation: Resources are being used inefficiently.42) The PRIMARY reason that natural monopolies are allowed to exist in areas such as energy production is thatA) it would be too difficult to regulate these industries.C) it is not in the public interest to deregulate the providing of utilities.B) it is more efficient for society to allow one company to be in control.D) it would create inflationary pressures to allow more than one company to compete.Explanation: Because of the nature of the process of producing and delivering such goods as electricity, it would not be useful to allow for the usual kind of competition in these areas.43) Which determinant MIGHT increase supply in the market?A) an increase in the price of complementary goodsC) an increase in the number of consumers in the marketB) an increase in the number of sellers of a productD) an increase in the price of inputs to make the productExplanation: An increase in the price of inputs might decrease supply, while both number of consumers and price of complementary goods impact demand.44)Amy's Coffee has been a fixture in Brownsville for years. Two months ago it dropped the price on all its regular coffees by 15% and experienced a noticeable increase in sales.Which explanation BEST explains the situation that occurred at Amy's Coffee?A) Amy supplied more coffee to her customers.C) The shop was able to produce more coffee at the reduced prices.B) The price of cups, milk, and sugar all decreased, as well.D) Lower prices caused people to buy coffee at Amy's rather than at her competitors.Explanation: Price is- obviously- a huge incentive for people. 45) How might a minimum wage law impact the supply and demand of workers?A) It might result in a surplus of supply.C) It might result in lower wages for workers.B) It might result in a shortage of supply.D) It might result in a lower unemployment rate.Explanation: A minimum wage law might result in a surplus of supply of workers. At the higher wage, the demand for workers is less than the supply.46) If consumers are willing to pay more for a product, the makers of that product will likely make more of it. This is known asA) a Price Floor.C) the Law of Demand.B) the Law of Supply.D) Equilibrium Price.Explanation: The more consumers are willing to pay for something, the greater the motivation there is (by the producer) make more: more sales means more money. This is the a fundamental part of a free-market economy.Use the graph above to answer questions 47) and 48).47) What would be the situation if the price was moved from p2 to p1?A) the price would be too lowC) there would be a surplus of widgetsB) the price would be droppedD) there would be a shortage of widgetsExplanation: At $4, approximately 12 widgets would be demanded, but nearly 45 would be supplied. In this case, buyers would be sending a clue to the producers that perhaps the price should be dropped.48) What would be the situation if the price was moved from p2 to p3?A) the price would be raisedC) there would be a surplus of widgetsB) the price would be too highD) there would be a shortage of widgetsExplanation: At a price of about $0.80, approximately 46 widgets would be demanded, but about 25 would be supplied. In this case, sellers would be getting a clue that maybe they could be charging more for their product.49) What is an economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service?A) DemandC) Law of DemandB) SupplyD) Law of SupplyExplanation: Demand is an economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. This is the basic definition. The Law of Demand is about how price will affect demand for the consumer.50)Input costs (Rising costs and technology)SubsidiesTaxes and RegulationsFuture expectation of pricesThese would change WHAT part of the market?A) SupplyC) Law of SupplyB) DemandD) Law of DemandExplanation: These things could be the number of suppliers, government actions, input costs, and global events.51)IncomeConsumer ExpectationsPopulationConsumer TastesComplements and SubstitutesThese would change what part of the market?A) SupplyC) Law of SupplyB) DemandD) Law of DemandExplanation: These things could be a change income, consumer expectations, population, consumer tastes, and complements & substitutes.52) _______ have inelastic demand since a change in price would not change the quantity demanded.A) LuxuriesC) Large supply of substitutesB) Life necessities or needsD) Large supply of complementsExplanation: Things such as medicine will be purchased no matter the change in price.53) Which type of business organization has the advantage of specialization, but the disadvantage of unlimited liability?A) oligopolyC) S-CorporationB) corporationD) partnershipExplanation: Like sole proprietorships, they have "unlimited liability " when it comes to being responsible ("liable") for their debts. But unlike a sole proprietorship, they do have the benefit of allowing for greater specialization since there is more than one owner.54) A volcano erupts in Hawaii that destroys or severely damages many of the pineapple orchards located there. What will be the effect on price and quantity of pineapples sold?A) price will fall and quantity will fallC) price will rise and quantity will fallB) price will fall and quantity will riseD) price will rise and quantity will also riseExplanation: The eruption of the volcano significantly reduces the number of pineapples. 55) How does price serve as an incentive in a market economy?A) Buyers demand more at higher prices.C) Buyers purchase more at lower prices.B) Buyers purchase less at lower prices.D) Buyers purchase more at higher prices.Explanation: This is a basic principle of the Law of Demand in that the lower price is the incentive to buy at that low price.56) What is the name of the point at which supply and demand intersect?A) plateauC) equilibriumB) scarcityD) profit marginExplanation: Supply and Demand are balanced at the same price and quantity.57) What economic concept does this graph BEST illustrate?A) ScarcityC) Law of DemandB) ProductivityD) Law of SupplyExplanation: The graph shows that the price of a product affects how many people are willing to purchase it.58) While supply is based on the willingness of producers to supply a good or service, demand is MOST LIKELY based onA) the needs of governments.C) the price of a good or service.B) the ease of a product's use.D) the availability of complementary goods.Explanation: In economics, the definition of demand is the willingness of a consumer to purchase a product at a given price.59)James works at an automobile factory. Every day he goes to work and inspects the machines at the factory to make sure they are running smoothly. At the end of the every week, James is paid by his boss, Bill, for his good work. James takes his paycheck to the bank every Friday and deposits most of it, but keeps a little bit of spending money. He then takes his wife, Julie, out for dinner, using the leftover money from his paycheck.According to the circular flow of economics, which market is James participating in with his boss, Bill?A) Supply MarketC) Product MarketB) Factor MarketD) Demand MarketExplanation: James goes to work and is paid by Bill. James is providing labor, one of the Factors of Production, to Bill in exchange for money.60)Most teenagers desire the newest and most up-to-date smartphone on the market. When the new phone comes onto the market, the new phone's price is significantly higher and the price of the older version of the same phone will drop noticeably.What is the incentive to produce newer versions of smartphones for cell phone companies?A) the risk of losing money in creating the newest versionB) the chance at high profits in selling the newest versionC) the risk of competition from both versions of the smartphoneD) there is no incentive from the production side of the economyExplanation: The chance at high profits in selling the newest version is the incentive for all innovation. The rising price of the newest version, with newer technology and faster service, will create a demand of its own. That quest for profit will keep innovation and will be the incentive for more and better phones in the future. ................
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