1. Which of the following best defines opportunity cost?
(A) It is the cost of producing those goods most desired by a given economy.
(B) It is the cost of the input mix that will lead to the greatest rate of growth for a given company.
(C) It is the amount of one product that must be given up in order to produce an additional unit of another product.
(D) It is the use of the least-cost method of production.
(E) It is the cost of labor used in the production process.
2. Which of the following explains why a production possibilities curve is often represented as concave (bowed out) from the origin?
(A) The law of demand
(B) The law of supply
(C) Constant returns to scale
(D) Decreasing opportunity cost
(E) Increasing opportunity cost
3. Assume that consumers consider popcorn and pretzels to be substitutes. A significant decrease in the supply of popcorn will affect the pretzel market by
(A) increasing the demand for pretzels and therefore the supply of pretzels
(B) increasing the demand for pretzels and therefore the price of pretzels
(C) decreasing the demand for pretzels and therefore the price of pretzels
(D) increasing the supply of pretzels and therefore the price of pretzels
(E) decreasing the supply of pretzels and therefore the price of pretzels
4. In the market depicted in the diagram above, if the government imposes a price ceiling of $1.00 per gallon on gasoline, which of the following will result?
(A) A surplus of 6 billion gallons
(B) A shortage of 6 billion gallons
(C) A surplus of 12 billion gallons
(D) A shortage of 12 billion gallons
(E) Neither a surplus nor a shortage, because the price ceiling would not be effective
5. Assume that Clark spends his entire income on the purchase of two goods, X and Y. If his income and the prices of good X and Y all double, Clark will
(A) double the purchase of goods X and Y
(B) buy more of good X and less of good Y
(C) buy less of good X and more of good Y
(D) buy less of both goods X and Y
(E) buy the same amounts of goods X and Y
6. Suppose that a firm begins to hire workers for a newly completed plant with a fixed amount of machinery. As the firm hires additional workers, one would expect the marginal product to
(A) fall initially, but eventually rise
(B) rise initially, but eventually fall
(C) rise consistently due to diminishing return
(D) rise consistently due to the advantages of specialization
(E) rise consistently due to economies of scale
7. In the short run, which of the following costs must continuously decrease as output produced increases?
(A) Total variable cost
(B) Total fixed cost
(C) Average variable cost
(D) Average fixed cost
(E) Average total cost
1. Steverail, the only provider of train service operating between two cities, is currently incurring economic losses.
(a) Using a correctly labeled graph, show each of the following.
(i) Steverail’s loss-minimizing price and quantity, labeled Pm and Qm , respectively
(ii) The area of economic losses, shaded completely
(iii) The allocatively efficient quantity, labeled Qe
(b) If Steverail raised the price above Pm identified in part (a)(i), would total revenue increase, decrease, or not change? Explain.
(c) Assume a per-unit subsidy is provided to Steverail.
(i) Will Steverail’s quantity increase, decrease, or not change? Explain.
(ii) Will consumer surplus increase, decrease, or not change?
(d) Assume instead that a lump-sum subsidy is provided to Steverail. For the short run, answer the following.
(i) Will the deadweight loss increase, decrease, or not change? Explain.
(ii) Will Steverail’s economic losses increase, decrease, or not change?
2. Theresa consumes both bagels and toy cars.
(a) The table above shows Theresa’s marginal utility from bagels and toy cars.
(i) What is her total utility from purchasing three toy cars?
(ii) Theresa’s weekly income is $11, the price of a bagel is $2, and the price of a toy car is $1. What quantity of bagels and toy cars will maximize Theresa’s utility if she spends her entire weekly income on bagels and toy cars? Explain your answer using marginal analysis.
(b) Assume that the price of wheat, an input for the production of bagels, increases. Will Theresa’s demand for bagels increase, decrease, or not change? Explain.
(c) Suppose that Theresa’s income elasticity for bagels is –0.2. Does the value of Theresa’s income elasticity indicate that bagels are normal goods, inferior goods, substitutes, or complements?
(d) Suppose that when the price of toy cars increases by 10 percent, Theresa buys 5 percent fewer toy cars and 4 percent less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks and indicate if it is positive or negative.