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a. 100. b. 150. c. 200. d. 250.

7. Assume for the United States that the opportunity cost of each airplane is 100 cars. Then which of these pairs of points could be on the United States' production possibilities frontier? (c)

a. (200 airplanes, 5,000 cars) and (150 airplanes, 4,000 cars) b. (200 airplanes, 10,000 cars) and (150 airplanes, 20,000 cars) c. (300 airplanes, 15,000 cars) and (200 airplanes, 25,000 cars) d. (300 airplanes, 25,000 cars) and (200 airplanes, 40,000 cars) 8. What must be given up to obtain an item is called (c)

a. out-of-pocket cost. b. comparative worth. c. opportunity cost. d. absolute value.

9. A farmer has the ability to grow either corn or cotton or some combination of the two. Given no other information, it follows that the farmer’s opportunity cost of a bushel of corn multiplied by his opportunity cost of a bushel of cotton (c)

a. is equal to 0.

b. is between 0 and 1. c. is equal to 1. d. is greater than 1.

10. If Korea is capable of producing either shoes or soccer balls or some combination of the two, then (d)

a. Korea should specialize in the product in which it has an absolute advantage.

b. it would be impossible for Korea to have an absolute advantage over another country in

both products.

c. it would be difficult for Korea to benefit from trade with another country if Korea is

efficient in the production of both goods.

d. Korea’s opportunity cost of shoes is the inverse of its opportunity cost of soccer balls.

11. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 chair is (a)

a. 1/5 table for Mike and 1/3 table for Sandy. b. 1/5 table for Mike and 3 tables for Sandy. c. 5 tables for Mike and 1/3 table for Sandy. d. 5 tables for Mike and 3 tables for Sandy.

12. If Shawn can produce more donuts in one day than Sue can produce in one day, then (c)

a. Shawn has a comparative advantage in the production of donuts. b. Sue has a comparative advantage in the production of donuts. c. Shawn has an absolute advantage in the production of donuts. d. Sue has an absolute advantage in the production of donuts.

13. Kelly and David are both capable of repairing cars and cooking meals. Which of the following scenarios is not possible? (c)

a. Kelly has a comparative advantage in repairing cars and David has a comparative

advantage in cooking meals.

b. Kelly has an absolute advantage in repairing cars and David has an absolute advantage

in cooking meals.

c. Kelly has a comparative advantage in repairing cars and in cooking meals. d. David has an absolute advantage in repairing cars and in cooking meals. 14. Comparative advantage is related most closely to which of the following? (b)

a. output per hour b. opportunity cost

c. efficiency

d. bargaining strength in international trade

15. Two individuals engage in the same two productive activities. In which of the following circumstances would neither individual have a comparative advantage in either activity? (c)

a. One individual’s production possibilities frontier is steeper than the other individual’s

production possibilities frontier.

b. One individual is faster at both activities than the other individual.

c. One individual’s opportunity costs are the same as the other individual’s opportunity

costs.

d. None of the above is correct; one of the two individuals always will have a comparative

advantage in at least one of the two activities.

16. Total output in an economy increases when each person specializes because

a. there is less competition for the same resources.

b. each person spends more time producing that product in which he or she has a

comparative advantage.

c. a wider variety of products will be produced within each country due to specialization. d. government necessarily plays a larger role in the economy due to specialization. 17. Which of the following statements is not correct? (d)

a. Trade allows for specialization.

b. Trade has the potential to benefit all nations.

c. Trade allows nations to consume outside of their production possibilities curves. d. Absolute advantage is the driving force of specialization. 18. By definition, imports are (d)

a. people who work in foreign countries.

b. goods in which a country has an absolute advantage. c. limits placed on the quantity of goods leaving a country. d. goods produced abroad and sold domestically. 19. By definition, exports are (d)

a. limits placed on the quantity of goods brought into a country. b. goods in which a country has an absolute advantage. c. people who work in foreign countries.

d. goods produced domestically and sold abroad.

20. Which of the following would not result from all countries specializing according to the principle of comparative advantage? (d)

a. The size of the economic pie would increase.

b. Worldwide production of goods and services would increase. c. The well-being of citizens in each country would be enhanced.

d. Each country’s production possibilities frontier would shift outward.

Chapter 4 The Market Forces of Supply and Demand

TRUE OR FALSE

1. In a market economy, supply and demand determine both the quantity of each good produced and 2. the price at which it is sold. (T)

3. Prices allocate a market economy’s scarce resources. (T)

4. Sellers as a group determine the demand for a product, and buyers as a group determine the supply of a product. (F)

5. In a competitive market, the quantity of each good produced and the price at which it is sold are not determined by any single buyer or seller. (T)

6. In a perfectly competitive market, the goods offered for sale are all exactly the same. (T)

7. The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the good rises, and when the price falls, the quantity demanded falls. (F)

8. The market demand curve shows how the total quantity demanded of a good varies as the income of

buyers varies, while all the other factors that affect how much consumers want to buy are held constant. (F)

9. If something happens to alter the quantity demanded at any given price, then the demand curve shifts. (T)

10. If the demand for a good falls when income falls, then the good is called an inferior good. (F) 11. A decrease in income will shift the demand curve for an inferior good to the right. (T)

12. An increase in the price of a substitute good will shift the demand curve for a good to the right. (T) 13. A decrease in the price of a complement will shift the demand curve for a good to the left. (F)

14. If a person expects the price of socks to increase next month, then that person’s current demand for socks will increase. (T)

15. A decrease in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way. (F)

16. Whenever a determinant of demand other than price changes, the demand curve shifts. (T)

17. The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a particular price. (T)

18. When the price of a good is high, selling the good is profitable, and so the quantity supplied is large. (T)

19. If something happens to alter the quantity supplied at any given price, then we move along the fixed supply curve to a new quantity supplied. (F)

20. A decrease in supply shifts the supply curve to the left. (T)

21. A reduction in an input price will cause a change in quantity supplied, but not a change in supply. (F)

22. If there is an improvement in the technology used to produce a good, then the supply curve for that good will shift to the left. (F)

23. When a seller expects the price of its product to decrease in the future, the seller's supply curve shifts left now. (F)

24. When the market price is above the equilibrium price, the quantity of the good demanded exceeds the quantity supplied. (F)

25. Price will rise to eliminate a surplus. (F)

26. Sellers respond to a shortage by cutting their prices. (F)

27. A shortage will occur at any price below equilibrium price and a surplus will occur at any price above equilibrium price. (T)

28. In a market, the price of any good adjusts until quantity demanded equals quantity supplied. (T) 29. A decrease in demand will cause a decrease in price, which will cause a decrease in supply. (F)

SHORT ANSWER 1.

a. What is the difference between a \ Graph your answer.

b. For each of the following changes, determine whether there will be a change in quantity demanded or a change in demand. i. a change in the price of a related good ii. a change in tastes iii. a change in the number of buyers iv. a change in price v. a change in consumer expectations vi. a change in income a. A change in demand refers to a shift of the demand curve. A change in quantity

demanded refers to a movement along a fixed demand curve. b. A change in price causes a change in quantity demanded. All of the other changes listed

shift the demand curve.

A

change in quantity supplied A change in supply

2.

Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change.

a. Winter starts and the weather turns sharply colder. b. The price of tea, a substitute for hot chocolate, falls. c. The price of cocoa beans decreases. d. The price of whipped cream falls.

e. A better method of harvesting cocoa beans is introduced.

f. The Surgeon General of the U.S. announces that hot chocolate cures acne.

g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise. h. Consumer income falls because of a recession, and hot chocolate is considered a normal

good.

i. Producers expect the price of hot chocolate to increase next month. j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium. (a) (b)

(c) (e)

(d)

(f)