Directions: There is one best answer for each question; read all answers, remembering that a multiple choice question is just a series of T-F questions in which one of the responses is true.

1.  The most fundamental assumption of economic theory of those below is that:
        a. There is no difference between rational and irrational behavior.
        b. Individuals chose those actions, from among the actions available, that they think will yield them the highest net advantage (CORRECT ANSWER).
        c. People are selfish in the last analysis (Self-interest is not equal to "Selfish").
        d. Everyone is more interested in money than in goods ("money" is of little interest apart from its use in getting goods).

2.  Which of the following will not change the demand for movie tickets?
        a. A change in the cost of babysitting services.
        b. A change in the price of movie tickets (CORRECT ANSWER--movement along the demand curve).
        c. A change in the quality of television programs.
        d. A change in the income of moviegoers.

3.  If people are willing this year to buy more bottled water at each and every price than they were willing to buy last year, the
        a. Demand for bottled water has increased (CORRECT ANSWER).
        b. Law of demand has been violated.
        c. Law of demand has been demonstrated.
        d. Cost of living must have risen.

4.  Consider the market for cotton in the U.S., and suppose that a new chemical is developed that can be added to cotton at an insignificant cost to make the ironing of cotton shirts unnecessary. We would expect this to
        a. Increase the quantity supplied of cotton.
        b. Increase the demand for cotton.
        c. Increase the quantity demanded of cotton.
        d. Both a) and b) (CORRECT ANSWER--any demand change results in a change in quantity supplied).
        e. Both a) and c).

5. People must make choices because of the existence of
        a. Poverty.
        b. Scarcity (CORRECT ANSWER--can't have everything we want).
        c. Inflation.
        d. Unemployment.

6. Compared to high-income families, the lower-income families consume more of:
        a. Complementary goods.
        b. Substitute goods.
        c. Normal goods.
        d. Inferior goods (CORRECT ANSWER).

7. The area underneath the demand curve, but above the price paid, is referred to as:
        a. The quantity supplied.
        b. The producer surplus.
        c. The shortage.
        d. The surplus.
        e. The consumer surplus (CORRECT ANSWER).

8. If the equilibrium rent for a two-bedroom apartment in Boulder is $1,200/month, and a price ceiling is imposed at $1,500/month, the result will be
        a. A shortage.
        b. A surplus.
        c. A deadweight loss.
        d. None of the above (CORRECT ANSWER--there is no impact on the market in this case).

9. If the equilibrium low-skilled wage rate in Boulder is $6.50/hour, and a minimum wage is imposed at $8.00/hour, the result will be:
        a. A shortage of low-skilled labor in that market.
        b. A surplus of low-skilled labor in that market.
        c. A deadweight loss.
        d. Both b) and c) would occur (CORRECT ANSWER).

10. A rise in the price of peanut butter, due to a mold attacking peanut plants, is likely to have which of the following effects on the market for jelly?
        a. A rightward shift of the demand curve.
        b. A leftward shift of the demand curve (CORRECT ANSWER--PB and jelly are complements).
        c. An upward movement along the demand curve.
        d. A downward movement along the demand curve.

11. A fall in the price of sugar (due, say, to the elimination of the tariffs on foreign sugar) is likely to have which of the following effects on the market for cookies?
        a. A rightward shift of the supply curve.
        b. A leftward shift of the supply curve.
        c. A downward movement along the demand curve.
        d. Both a) and c) (CORRECT ANSWER--a change in supply always leads to a change in quantity demanded).

12. In the preceding example, what would you expect to happen to the sum of producer and consumer surplus in the cookie market?
        a. It would increase (CORRECT ANSWER--draw graph and look at the areas).
        b. It would decrease.
        c. It would stay the same.
        d. It is impossible to say from the information given.

13. Suppose that a future President increases the marginal income tax rate to 60% on earnings in excess of $100,000 per year (current highest marginal income tax rates are about 40%). What would you expect to happen to total expenditure on large diamonds?
        a. Demand for diamonds will increase, causing price times quantity to decrease.
        b. Demand for diamonds will decrease, causing price times quantity to decrease (CORRECT ANSWER--graph).
        c. The quantity demanded for diamonds will decrease, hence the diamond price will fall, leaving the impact on total expenditure on diamonds ambiguous, since people will buy more diamonds at the lower price.
        d. The quantity demanded for diamonds will increase.

14. What will happen in the market for any inferior good, say rice or beans, when a recession causes a sharp decrease in income?
        a. Price will rise and quantity exchanged will rise (CORRECT ANSWER--income down implies demand up for inferior goods).
        b. Price will rise and quantity exchanged will fall.
        c. Price will fall and quantity exchanged will rise.
        d. Price will fall and quantity exchanged will fall.
        e. Impossible to say—we can only know what will happen for the case where income increases.

15. Which of the following is a true statement regarding demand?
        a. The fact that over time people consume more despite prices that are constantly rising due to inflation is a violation of the Law of Demand.
        b. An increase in the administered price of Coca-Cola would be expected to shift the demand curve for Pepsi to the left.
        c. An inferior good is a good that we demand less of when its price falls.
        d. Only a change in a good’s price causes movements along that good’s demand curve; all other factors relevant to demand shift the demand curve (CORRECT ANSWER).
        e. All of the above are true statements regarding demand.

16. Which of the following is the reason short-run supply curves are upward-sloping?
        a.Increased marginal opportunity costs with the production of quantities larger than the production facility was designed to produce (CORRECT ANSWER).
        b. Inflation, which causes suppliers to be willing to supply more at higher prices.
        c. Technological progress, which increases productivity over time and thus allows for greater supply in any given time period.
        d. Input prices always increase with quantity produced, increasing marginal costs.

17. Suppose a tax is levied on producers of "Sugar Buff" chocolate soda, due to excessive tooth decay caused by the University of Colorado beverage. Which of the following is an expected short-run consequence?
        a. The producer will be no worse off since the tax will be passed entirely to consumers.
        b. Since the producer pays, the demand curve for "Sugar Buff" will shift down.
        c. The loss in consumer and producer surplus at the after-tax quantity consumed measures the efficiency loss.
        d. Quantity will actually increase, since the higher price due to the tax will cause producers to supply more.
        e. The deadweight loss (excess burden) resulting from the tax results in inefficiency (CORRECT ANSWER).

18.  Consider a production point that is inside the boundary of an economy’s production possibilities frontier or curve. This point:
        a. Is a case where more of the good on the horizontal axis can be produced only by reducing production of the good on the vertical axis.
        b. Is not feasible with current resources and technology.
        c. May only be attained by greater savings or population growth.
        d. Depicts an economy operating inefficiently (CORRECT ANSWER).
        e. Is efficient and has marginal benefits greater than costs, when compared to all other points on the production possibilities frontier.

19. What would you expect to happen to price and quantity of long-distance phone service in the short run if America On-Line (aol) offers discounts that result in half of U.S. residences "going on-line?"
        a. Price and quantity will both increase.
        b. Price and quantity will both decrease (CORRECT ANSWER--e-mail is a substitute for long distance phone calls; demand for long distance phone service will fall).
        c. Price will increase but quantity will decrease.
        d. Price will decrease, which will increase demand, hence quantity is ambiguous.
        e. There is insufficient information to select among the preceding choices.

20. You overhear a student saying, "I have started a food delivery business to compete with ‘Waiters on Wheels;’ since my car is already paid for, and they rent theirs, my lower costs should give me an advantage." This students reasoning
        a. Is correct in all essential respects.
        b. Is OK as far as it goes, but the competitor may respond by buying a car to compete.
        c. May be correct, but we would need more information to be sure.
        d. Is incorrect, showing no understanding of "opportunity costs" (the only appropriate definition of costs for decision-making) (CORRECT ANSWER--the car could have been rented out for others' use, hence has a cost, regardless of the fact that there is no nominal payment).
        e. Impossible to analyze with economic theory, since it deals with the "real world."

21. A heavy winter snowstorm, with continued cold weather, both destroys many campsites at various KOA (Campgrounds of America) campgrounds and discourages many potential campers. You expect:
        a. The impact on price is ambiguous, while quantity will decrease (CORRECT ANSWER--D and S are both lower; graph).
        b. The impact on quantity is ambiguous, which the price will decrease.
        c. Impacts on both price and quantity will be ambiguous.
        d. Both price and quantity will decrease.
        e. Both price and quantity will increase.

22. Select the normative statement among the following possibilities:
        a. The minimum wage will result in no additional unemployment among the low-skilled.
        b. The minimum wage causes unemployment increases for low-skilled workers.
        c. Minimum wage increases have caused real incomes of those above it to fall.
        d. The minimum wage should be increased to reduce wide wage disparities in the economy (CORRECT ANSWER).
        e. All of the above are positive statements.

23. If cigarettes, clearly as addictive and harmful as many other currently illegal drugs, were declared illegal by the FDA and the DEA began enforcing this new law as it does with existing illegal drugs, what would you expect to happen to the equilibrium price and quantity of cigarettes?
        a. Price and quantity will both increase.
        b. Price and quantity will both decrease.
        c. Price will decrease and quantity will increase.
        d. Price will increase and quantity will decrease (CORRECT ANSWER--enforcement efforts to reduce the supply imply this).
        e. Price will increase and this will lead to greater supply, hence quantity is ambiguous.

24. Considering international trade, the world price will be lower than the domestic price for ______, and the world price will be higher than the domestic price for _______.
        a. Exports, imports.
        b. Imports, exports (CORRECT ANSWER--graph).
        c. Rich countries, poor countries.
        d. Poor countries, rich countries.

25. You overhear a student saying that U.S. workers cannot produce any goods as cheaply as China, since the latter has much lower wages, hence trade with China cannot make either China or the U.S better off. This statement is
        a. Essentially true.
        b. Erroneous by failing to recognize that it is productivity that determines wages in a competitive world.
        c. Erroneous by failing to recognize that it is comparative advantage that matters, not absolute advantage.
        d. False, because we could trade any of our goods for any of their goods and make ourselves better off by having access to their less expensively-produced goods.
        e. Both b) and c) are correct (CORRECT ANSWER).