Mr. Beck

SUNY College at Oneonta

Review Questions from Previous Exam 1's Solutions

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1.    Adam Smith indicated that for voluntary exchange to take place both parties to the transaction, the seller (business) and buyer (consumer) must expect to gain something. Mutually beneficial exchanges will occur because self interested behavior by consumers and businesses provides the incentives necessary for both parties to engage in these transactions. Essentially, the stronger the self-interest, the greater the motivation both parties have to ensure that these desirable market transactions take place. The correct choice is b.
Return to Question 1




2.    Money, choice b, is not an economic resource because money alone cannot produce goods and services. Money may be used to hire resources, such as labor, but money itself is not a resource.
    Note that choice d, capital, is a resource because this refers to the capital goods, machinery, buildings, and equipment used in the production process.
Return to Question 2


3.    Market failure occurs when voluntary exchange does not yield desirable results for society. This often occurs when third parties, individuals not directly involved in the transaction, are negatively affected by the transaction. However, since these third parties are not engaged in making the transaction, their wishes are not taken into consideration and are ignored despite the adverse effects they may be forced to suffer. The most common example of these third-party effects (also referred to as neighborhood or spillover effects) is pollution. Pollution (a negative externality) affects others who may have no part in the production or consumption of the polluting item. Unless the government interferes with the free market and forces the parties involved in the transaction to consider and pay for these negative externalities they create, excessive pollution (which is harmful to all members of society) will be generated.
    Thus, choice c, negative externalities are generated by business production polluting the environment, is a prime example of market failure requiring government interference.
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4.    When Adam Smith, in his 1776 Wealth of Nations, expressed his belief that profit-motivated business firms would , as if guided by some "invisible hand," produce the very goods most desired by consumers, he was describing how the free market forces of supply and demand could be relied upon to best allocate society's scarce resources. In theory, this system would yield the maximum satisfaction or utility for consumers.
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5.    The opportunity cost of an additional unit of good X is the reduction in good Y which occurs as a result of the increase in good X.
    The opportunity cost of the 6th unit of good X (moving down along the production possibilities frontier from point C to D and increasing X from 5 units to 6 units) is 400 units of good Y (the reduction in Y from 900 units at point C to 500 units at point D).
     The opportunity cost of the 4th unit of good X (moving down along the production possibilities frontier from point A to B and increasing X from 3 units to 4 units) is 100 units of good Y (the reduction in Y from 1,200 units at point A to 1,100 units at point B).
    The correct answer is 4 times because 400 is exactly 4 times as great as 100.
Return to Question 5


6.    Movements along a production possibilities frontier illustrate that a trade off exists between goods X and Y. Producing more units of X involves reducing the production of Y and vice versa.
    To the economist, the real cost of producing more of  good X is the opportunity cost, specifically the amount of  the other good (Y) which is given up because resources must be transferred from producing good Y to producing good X.
    The correct choice is b.
Return to Question 6


7.    An improvement in the technology of producing CD players results in an increase in supply. The entire supply curve shifts to the right. More CD players can be supplied profitably at the same price of CD players.
    The shift in supply results in choice d, a decrease in equilibrium price, but an increase in quantity.
    The equilibrium point changes from E to N as illustrated below:
Graph Q7 solution
Return to Question 7


8.    In 1996 the economy is operating on its production possibilities frontier. This means that little or no unemployment currently exists. The only way that, a year later, it can be operating beyond (outside) 1996's production possibilities frontier is if the entire frontier has shifted outward, an indicator that economic growth has occurred from 1996 to 1997.
    If, in 1997, the economy is operating inside (within) its expanded production possibilities frontier, then this indicates that unemployment exists in 1997 representing idle, wasted resources.
    Given the above information, it can be concluded that between 1996 and 1997 both economic growth and an increase in unemployment occurred, choice a.
Return to Question 8


9.    Glass and automobiles are complementary goods. If there are fewer automobiles produced, there will be less demand for glass. This decrease in demand is shown by a shift in the entire demand curve for glass to the left. The leftward shift indicates that some factor other than an increase in the price of glass has decreased the demand for glass.
    Note that there is no shift in the supply curve for glass because the costs of producing glass have not changed and glass manufacturers would be willing to supply the same amount of glass at existing prices. The correct choice is a, only the demand curve for glass shifts to the left.
    The equilibrium point changes from E to N as illustrated below:
Graph Q9 solution
Return to Question 9


10.    Aluminum and airplanes are complementary goods because aluminum is used in the production of airplanes. Increased production of airplanes involves an increase in demand for aluminum by airplane manufacturers. This will shift the entire demand curve for aluminum to the right.
    An increase in the price of steel will decrease the quantity demanded of steel. Since aluminum and steel are substitute goods, this will cause an increase in demand for aluminum as some buyers change from steel to aluminum. Consumers' additional demand for aluminum will shift the entire demand curve for aluminum to the right, reinforcing the shift caused by the increased production of airplanes.
    An increase in demand will result in an increase in both the equilibrium price and quantity of aluminum. The correct choice is a.
    The equilibrium point changes from E to N as illustrated below:
Graph Q10 solution
Return to Question 10


11.    A shift outward in the production possibilities frontier is caused by economic growth which increases the potential productive capacity of the economy. Economic growth occurs when there is an increase in the quantity and/or quality of society's resources. Since money is not a resource, the printing of money does not increase productive capacity and does not by itself generate economic growth. The correct answer is c.
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12.    The fundamental economic problem from which all economic decisions derive is the problem of scarcity, specifically the fact that society's resources are limited and unable to satisfy unlimited wants. Because of scarcity all economies must choose what to produce and decide how to best allocate society's limited resources.
    The correct choice is e.
Return to Question 12


13.    A decrease in the costs of producing Apple Macintosh computers  will cause an increase in supply. Apple is able profitably to supply more Macintoshes at the same price. The entire supply curve will shift down and to the right. This would result in a decrease in price and an increase in quantity.
    The university requirement is a non-price factor which will decrease the demand for Apple Macintosh computers. Potential students will be less likely to purchase Macintoshes and the entire demand curve will shift to the left. This decrease in demand would result in a decrease in both price and quantity.
    Combining the 2 effects results in a reinforcing decrease in price but the effect on quantity is indeterminate The first event would cause quantity to increase and the second event would cause quantity to decrease. No information is provided on which event has a stronger effect. Thus, equilibrium quantity may increase, decrease, or remain constant.
    The correct answer is choice d, the equilibrium price will decrease, but the effect on quantity is indeterminate.
    The equilibrium point changes from E to N as illustrated below:
Graph Q13 solution
Return to Question 13


14.    Points inside (within) the production possibilities frontier indicate the existence of idle, wasted resources. This prevents the economy from achieving its productive potential and is represented by unemployment. If the economy were to reduce its unemployment (choice b), it would come closer to reaching its existing productive capacity. The economy would thus be operating closer to its given production possibilities frontier.
    Note that the other 3 choices all involve a shift out in the entire frontier due to economic growth. They would cause the creation of a new, higher expanded production possibilities frontier, rather than moving the economy closer to the given frontier.
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15.    From 1996 to 1997 the economy increases its production of butter but decreases its production of guns. The numbers  are irrelevant because no information is provided on the amount of resources needed to produce guns versus the amount of resources necessary to produce butter.
    Because of insufficient information provided, the correct answer is e, None of the answers can be concluded.
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16.    A decrease in both equilibrium price and quantity would be caused by a decrease in demand. The correct answer is c, the entire demand curve has shifted to the left.
    The equilibrium point changes from E to N as illustrated below:
Graph Q16 solution
Return to Question 16


17.    An improvement in the technology of producing good X results in an increase in supply. The entire supply curve shifts to the right. More of good X can be supplied profitably at the same price of good X. This increase in supply would result in a decrease in price and an increase in quantity.
    An increase in income would cause an increase in demand. The entire demand curve will shift up and to the right. This would result in an increase in both price and quantity.
    Combining the 2 effects results in a reinforcing increase in quantity, but the effect on price is indeterminate The first event would cause price to decrease and the second event would cause price to increase. No information is provided on which event has a stronger effect. Thus, equilibrium price may increase, decrease, or remain constant.
    The correct answer is choice d, the equilibrium quantity will increase, but the effect on price is indeterminate.
    The equilibrium point changes from E to N as illustrated below:
Graph Q17 solution
Return to Question 17


18.    Consumers will buy more video tapes because technology has decreased the price of VCRs. Video tapes and VCRs are complementary goods. People will demand more video tapes because more VCRs are being sold. The entire demand curve for video tapes will shift up and to the right, choice b. This is illustrated by an increase in demand as show below.
    Note that there is no shift in the supply curve for video tapes because the costs of producing tapes have not changed and tape manufacturers would only be willing to supply the same amount of tapes at existing prices. The equilibrium point changes from E to N:
Graph Q18 solution
Return to Question 18


19.    A shift in the entire demand curve to the right represents an increase in demand. An increase in demand refers to a situation in which consumers would demand more units of U.S. produced automobiles at the same price of automobiles; that is, a change in some factor other than price makes consumers demand a greater quantity of U.S. produced autos.
    Choices a and b both represent an increase in supply which would shift the entire supply curve to the right.
    Choice c would represent a decrease in demand for U.S. produced autos because of increased foreign competition. This would shift the entire demand curve for U.S. produced autos to the left.
    The correct answer is choice d; an increase in consumers' incomes would increase demand because more consumers would be able to afford to purchase automobiles at the existing price.
Return to Question 19


20.    An increase in wages will increase the cost of producing Dell computers. This will result in a decrease in supply. The entire supply curve will shift up and to the left. Supply will shift up because it will not be profitable to supply the same number of computers unless Dell can raise the price to recover the increased production costs. Supply will shift to the left because if Dell cannot raise the price of its computers, it will not be willing to employ as many of the higher cost workers and its production will be reduced. The decrease in supply would cause price to increase and quantity to decrease.
    An improvement in the technology of producing Dell computers results in an increase in supply. The entire supply curve shifts to the right. More Dell computers can be supplied profitably at the same price. This increase in supply would result in a decrease in price and an increase in quantity.
    The 2 events conflict. The first causes a decrease in supply and the second causes an opposite increase in supply. No information is provided on which event has a stronger effect. The correct answer is f, the effect on both equilibrium price and quantity is indeterminate.
Return to Question 20


21.    Increasing production from 4 units to 5 units of X involves transferring resources away from producing Y. It is shown by a movement from point C to point D along the production possibilities frontier (PPF). This involves a reduction in units of Y produced from 220 units (at point C) to 180 units (at point D). This reduction of 40 units of Y (220 - 180) represents the opportunity cost of this 5th unit of X.
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22.    The increase in production of X from 5 to 6 units is shown by a movement from point D to point E along the production possibilities frontier. This results in an opportunity cost of 80 units of good Y (the reduction from 180 to 100).
    The increase in production of X from 2 to 3 units is shown by a movement from point A to point B along the production possibilities frontier. This results in an opportunity cost of 10 units of good Y (the reduction from 250 to 240).
    The reduction of 80 units is 8 times greater than the opportunity cost of 10 units of good Y. (80/10 = 8).
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23.    If, in 1991, the economy is operating at a point beyond (outside) 1990's production possibilities frontier, then economic growth must have occurred from 1990 to 1991, shifting the entire production possibilities frontier outward. However, since the economy was operating within (inside) its production possibilities frontier in 1990 and it is also operating within its production possibilities frontier in 1991, unemployment existed in 1990 and continues to exist in 1991. Therefore, it can only be concluded that economic growth occurred, choice d, since there is no conclusive evidence of a change in the rate of unemployment.
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24.    If, in 1999, the economy is operating at a point beyond (outside) 1998's production possibilities frontier, then economic growth must have occurred from 1998 to 1999, shifting the entire production possibilities frontier outward. Since there was no unemployment in 1998 (as evidenced by the economy operating on its production possibilities frontier for 1998) and there is still no unemployment in 1999 (since the economy is operating on 1999's frontier), there has been no change in unemployment between 1998 and 1999. The correct choice is b , only economic growth occurred .
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25.    Choice c, a reduction in unemployment simply involves the economy operating closer to its existing production possibilities frontier. It would involve a fuller utilization of the economy's current productive capacity. All of the other choices involve an increase in the economy's potential level of output (creating an increased productive capacity) which would be illustrated by a shift outward in the entire production possibilities frontier.
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26.    Production in 1999 is greater than in 1998 because more guns are being produced along with the same butter production. Since the economy was operating on its production possibilities frontier for 1998, an increase in production must involve a shift outward in the entire production possibilities frontier. This shift would indicate the occurrence of economic growth from 1998 to 1999.
    However, since the economy was operating on its production possibilities frontier in 1998 (indicating no unemployment), there could not have been any reduction in unemployment from 1998 to 1999.
    The correct answer is economic growth occurred, but there was no reduction in unemployment, choice d.
Return to Question 26



27.    An improvement in the technology of producing DVD players results in an increase in supply. The entire supply curve shifts to the right. More DVD players can be supplied profitably at the same price of DVD players.
    The shift in supply results in choice b, only the supply curve for DVD players shifts to the right.
    The equilibrium point changes from E to N as illustrated below:
Graph Q27 solution
Note that although consumers will buy more DVD players, there was not a shift in demand. There is a movement down along the given demand curve for DVD players. The increased quantity demanded results from the decrease in the price caused by the shift in the supply curve.
Return to Question 27



28.    An increase in income would cause an increase in demand because consumers can afford to buy more units at the same price. The entire demand curve will shift up and to the right. This would result in an increase in both equilibrium price and quantity. The correct choice is a.
    The equilibrium point changes from E to N:
Graph Q28 solution
Return to Question 28


29.    An increase in income would cause an increase in demand because more consumers can afford to buy computers at the same price. The entire demand curve will shift up and to the right.
    An improvement in the technology of producing computers results in an increase in supply. The entire supply curve shifts to the right. More computers can be supplied profitably at the same price of computers.
    The correct choice is d, an increase in equilibrium quantity, but the effect on price is indeterminate.
    The equilibrium point changes from E to N as illustrated below:
Graph Q29 solution
Return to Question 29



30.    For equilibrium quantity to remain constant despite an increase in price, there must be a dual shift in both the supply and demand curves. A shift in only one of the two curves would always result in a change in equilibrium quantity.
    An increase in price results from both a decrease in supply (a shift in the supply curve up and to the left) and an increase in demand (a shift in the demand curve up and to the right). The correct answer is f.
    The equilibrium point changes from E to N as illustrated below:
Graph Q30 solution
Return to Question 30



31.    The notion of scarcity is fundamental to economics. All societies must address the problem of how to allocate scarce resources among competing societal demands. The correct choice is c, scarce resources are unable to satisfy unlimited wants.
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32.    1.    The automobile industry uses steel. More automobiles produced results in an increase in demand for steel. Automobile manufacturers demand more steel at the existing price of steel. This will shift the entire demand curve for steel up and to the right.
    2.    The decrease in the price of aluminum will encourage some current users of steel to switch to aluminum. This will decrease the demand for steel and shift the entire demand curve for steel down and to the left.
    Since the 2 events have exactly opposite effects on the demand curve for steel, and there is no information on which event is stronger (or whether the 2 events have the exact same effect on steel), there is no way to know if the overall net effect is a shift in the demand curve to the right or to the left (or no net shift at all). Therefore, no conclusions can be drawn and the effect on both equilibrium price and quantity of steel is indeterminate, choice e.
Return to Question 32



33.     A tax will increase the cost of selling cigarettes. This will result in a decrease in supply. The entire supply curve will shift up and to the left. Supply will shift up because it will not be profitable to supply the same amount of cigarettes unless cigarette companies can raise the price to recover the increased costs. The higher price will discourage consumption of cigarettes and result in a decrease in quantity demanded, a movement along the given demand curve from E to N as illustrated below.
    The correct choice is c, the equilibrium price of cigarettes will increase, but the quantity will decrease.
Graph Q33 solution
Return to Question 33



34.    An increase in wages will increase the cost of producing Gateway computers. This will result in a decrease in supply. The entire supply curve will shift up and to the left. Supply will shift up because it will not be profitable to supply the same number of computers unless Gateway can raise the price to recover the increased production costs. Supply will shift to the left because if Gateway cannot raise the price of its computers, it will not be willing to employ as many of the higher cost workers and its production will be reduced. The decrease in supply would cause price to increase and quantity to decrease.
    An increase in income would cause an increase in demand because more consumers can afford to buy computers at the same price. The entire demand curve will shift up and to the right. This increase in demand will cause both the price and quantity to increase.
    Since both shifts result in an increase in price, the combined effect will definitely be an increase in price. However, since the supply shift would cause a decrease in quantity and the demand shift would cause an increase in quantity, these contradictory results mean that the overall effect on quantity is indeterminate (it depends on which effect is stronger).
    The correct choice is b, the equilibrium price would increase, but the effect on quantity is indeterminate.
    The equilibrium point changes from E to N as illustrated below:
Graph Q34 solution
Return to Question 34


35.    An externality, also referred to as a third-party effect, occurs when people not directly involved in an economic transaction are affected by the transaction. Pollution is a negative externality. Since it affects others, the self-interested business has no profit incentive to spend money to reduce it. This requires government interference to "internalize" the external effect, to force businesses to consider the cost (in terms of environmental damage) that pollution imposes on society. Therefore, choice d, excessive pollution generated by business production is damaging the environment, represents a market shortcoming which requires government interference.
Return to Question 35


36.    A decrease in demand for labor would be shown by a shift in the entire demand curve for labor to the left. At the current wage of $5.15, this will generate a surplus of labor as supply will now exceed the lower demand for labor. If the wage were permitted to decrease, the lower wage would result in an adjustment to a new lower equilibrium wage where supply once again equals demand for labor. However, a minimum wage is a price floor. It prevents the wage from decreasing. The result is that supply remains greater than the decreased demand for labor at the $5.15 level and a surplus of unemployed labor would result, choice b.
Return to Question 36


37.    Since exchange is voluntary, it will not occur unless both parties to the transaction agree to it. To agree to the exchange, each party must stand to gain something from it. The correct answer is d, both parties must gain.
Return to Question 37


38.    DY/DX  =  slope.     Y is the variable measured on the vertical axis.  X is the variable measured on the horizontal axis.
For a supply curve, price (measured in $ per unit) is measured on the Y axis and quantity (measured in units per time) is measured on the X axis. Therefore, the slope of a supply curve = DP/DQ in which P is price and Q is quantity.
    Since the slope is 4 and the DP is $20 (price increases from $100 to $120), we can calculate the DQ.
    4 = 20/DQ.
    Cross-multiplying yields: 4DQ = 20.
    Dividing by 4 yields: DQ = 5.
    Since 10 units of quantity were supplied at a price of $100, adding the DQ of 5 units results in 15 (=10 + 5) units of quantity being supplied at a price of $120 per unit.
Return to Question 38


39.    As noted in question 38 above, the slope of a supply curve = DP/DQ.
DP = $8,128 - $8,000 = $128
DQ = 96 - 80 = 16
Slope = DP/DQ = 128/16 = 8.
Return to Question 39


40.    The principle of increasing (opportunity) cost shows that as you increase the production of 1 good the opportunity cost (in terms of the number of units of the other good which must be sacrificed) continually increases. Of the 5 combinations of X and Y, only combination a would illustrate this. In combination a, as you move down the table, increasing X from 1 unit to 2 units, you sacrifice 7 units of Y (decreasing Y from 20 to 13 units). However, as you further increase X (from 2 units to 3 units), you must sacrifice an increasing amount of Y, in this case 8 units (as Y decreases from 13 to 5 units). Since 8 units of Y sacrificed is greater than the previous 7 units of Y sacrificed (for the same 1 unit increase in X), this illustrates the principle of increasing (opportunity) cost.
Return to Question 40


41.    Since a year later the economy is operating at a point beyond (outside) 1998's production possibilities frontier, the entire frontier must have shifted outward. This represents economic growth.
    However, in 1998, the economy is operating on its frontier, whereas in 1999 it is operating inside (within) its new frontier. An economy operates inside its frontier when it is not utilizing all its resources as evidenced by the existence of unemployment. If, in 1998 it was operating on its frontier, this would represent no unemployment in 1998.
    Therefore, between 1998 and 1999, both economic growth and an increase in unemployment occurred, choice b.
Return to Question 41


42.    The economy is initially producing 15 units of X combined with 15 units of Y. If it wants to increase production of X by 3 units (from 15 to 18) it must sacrifice some units of Y. Since the opportunity cost of each additional unit of X is exactly 2 units of Y, to obtain 3 more units of X requires a sacrifice of 3 x 2 = 6 units of Y. The increase in X would thus require reducing the production of Y by 6 units from 15 to 9. (15 - 6 = 9).
Return to Question 42


43.    Raising the minimum wage above the equilibrium wage simply increases the price of labor and forces it to remain at the higher level.. Since price if on the vertical axis, an increase in price is shown on a supply-demand curve by a movement up along both the given supply and demand curves for labor, choice e.
Return to Question 43


44.    For equilibrium price to remain constant despite a decrease in quantity, there must be a dual shift in both the supply and demand curves. A shift in only one of the two curves would always result in a change in equilibrium price.
    A decrease in quantity results from both a decrease in supply (a shift in the supply curve up and to the left) which would increase price and a decrease in demand (a shift in the demand curve down and to the left) which would decrease price. The correct answer is c.
Return to Question 44


45.    A shift in the entire demand curve for beef to the right represents an increase in demand. This results from some event, other than a change in the price of beef, which causes people to buy more beef. Choice c, the price of beef is reduced, will not shift the demand curve for beef. It will cause a movement down along a given demand curve for beef. The given negatively sloped demand curve indicates that people will consume more beef when the price of beef is reduced.
Return to Question 45


46.    A decrease in income will result in a decrease in demand. It will shift the entire demand curve to the left resulting in a decrease in both price and quantity.
    An increase in the costs of producing new homes will result in a decrease in supply. It will shift the entire supply curve up and to the left resulting in an increase in price but a decrease in quantity.
    Combining the 2 results yields a definite decrease in quantity. However, the effect on price is indeterminate since the decrease in demand will decrease price but the decrease in supply will increase price.
    The correct choice is d, quantity will decrease, but the effect on price is indeterminate.
Return to Question 46


47.    An improvement in technology will result in an increase in supply. This will shift the entire supply curve down and to the right.
    A decrease in the price of a substitute good, steel, will cause a decrease in demand for aluminum. There will be less demand for aluminum at the existing price of aluminum, because more consumers than previously will prefer to purchase steel at the lower price of steel. This represents some event other than a change in the price of aluminum which decreases the demand for aluminum.
    The correct choice is d, the demand curve for aluminum shifts to the left and the supply curve of aluminum shifts to the right.
Return to Question 47


48.    An increase in the price of a substitute good, Tylenol, will increase the demand for aspirin. This will shift the demand curve for aspirin to the right, resulting in an increase in both the price and quantity of aspirin.
    The government study represents some event, other than a change in price, which will make people buy more aspirin. It will increase the demand for aspirin, further shifting the demand curve for aspirin to the right. This will also result in an increase in both the price and quantity of aspirin.
    Since both events reinforce each other, the correct choice is a, the equilibrium price and quantity would both increase.
Return to Question 48


49.   The decrease in the price of steel, a material used in the construction of automobiles, will decrease the cost of producing autos. A decrease in cost will cause an increase in the supply of autos, shifting the entire supply curve for automobiles down and to the right, choice b.
    Note that there is no shift in the demand curve for automobiles. If the lower cost of producing autos is translated into lower automobile prices, consumers will purchase more automobiles. However, this would be shown by a movement down and to the right along a given demand curve for automobiles, not by the formation of an entire new demand curve for automobiles.
Return to Question 49


50.    If the current minimum wage were above the equilibrium wage, then there would be a surplus of labor as the supply of labor would exceed the demand for labor. If the minimum wage were eliminated and the wage (the price of labor) could adjust to its lower equilibrium level, this would cause both an increase in the quantity demanded of labor (a movement down and to the right along the existing demand curve for labor) and a decrease in the quantity supplied of labor (a movement down and to the left along the existing supply curve of labor). The correct choice is b.
Return to Question 50


51.    From 1998 to 1999 less guns are produced (from 10 million to 9 million), but more butter is produced (from 50 billion pounds to 60 billion pounds). Since guns and butter are different goods you cannot add them up together. There is insufficient information provided to know whether total production has increased or decreased. Therefore, f is the correct answer, None of the choices can be concluded.
Return to Question 51


52.    An improvement in technology will result in an increase in supply. The entire supply curve will shift down and to the right.
This will cause a decrease in equilibrium price, but an increase in quantity, choice a.
    The equilibrium point changes from E to N as illustrated below:
Graph question 52 solution
Return to Question 52


53.
Graph question 53 solution
Point C represents a combination of  5 units of X and 875 units of Y. To increase X from 5 units to 6 units involves moving down and to the right along the production possibilities frontier from point C to point D. At point D, only 500 units of Y are produced. Thus, to increase X by 1 unit (from 5 to 6) entails an opportunity cost of 375 units of Y (Y is reduced by 375 units from 875 to 500).
Return to Question 53


54.    Tires and automobiles are complementary goods. If there is an increase in the production of automobiles, more tires will be demanded. The increase in the production of autos is some factor, other than a change in the price of tires, which will increase the number of  tires sold. As such, it is an increase in demand for tires, shown by a shift in the entire demand curve for tires to the right. The correct choice is c, only the demand curve for tires shifts to the right.
Return to Question 54


55.    The Consumer Reports recommendation will increase the demand for Macintosh computers. It is an event, other than a decrease in the price of Macintosh computers, which will make consumers buy more Macintosh computers. As such, it is an increase in demand, shown by a shift in the entire demand curve for Macintosh computers to the right.
    The university requirement not to buy Macintosh computers will have the exact opposite effect. It will decrease demand, shifting the entire demand curve for Macintosh computers to the left.
    Since we have no information on which effect is stronger, there is insufficient information provided on whether there will be a net increase in demand (with the resultant increase in price and quantity) or a net decrease in demand (in which case both the price and quantity of Macintosh computers would decrease).
    The correct answer is therefore f, the effect on both equilibrium price and quantity is indeterminate.
Return to Question 55


56.    Increasing X from 5 to 6 units involves moving from D to E along the production possibilities frontier. This would result in a decrease in Y by 80 units (from 180 at point D to 100 at point E).
    Increasing X from 4 to 5 units involves moving from C to D. This would result in a decrease in Y by 40 units (from 220 at point C to 180 at point D).
    Since 80 is exactly 2 times 40, the opportunity cost of the 6th unit of good X is exactly 2 times the opportunity cost of the 5th unit of good X.
Return to Question 56


57.  Pollution is a negative externality which is a shortcoming of the market. Rational, self-interested producers and consumers have no incentive individually to reduce pollution which affects others. It is the responsibility of the government to provide incentives for everybody to reduce pollution together. This yields a desirable result which benefits society and which cannot be achieved without government interference. The correct choice is c.
Return to Question 57


58.    A shift in the entire demand curve for U.S. autos to the right represents an increase in demand, something which would cause consumers to purchase more U.S. autos at the existing price. The correct answer is something other than a decrease in price which would make consumers buy more U.S. autos. If the price of foreign cars were to increase, then the existing price of U.S. autos would become more attractive as it would now be cheaper relative to the now more expensive foreign cars. The correct choice is b.
Return to Question 58


59.    The following 2 points are on a linear supply curve:
 
Price/unit
 Units/Day
Point A
$400
80
Point B
$448
96
    DY/DX  =  slope. Since price (P) is on the y axis and quantity (Q) is on the supply curve's x-axis, the slope of a supply curve = DP/DQ.
    DP = $448 - $400 = $48.
    DQ = 96 - 80 = 16.
    The slope of this linear supply curve is $48/16 = 3. The value of 3 indicates that for every $3 change in price per unit, the quantity supplied will change by 1 unit per day in the same direction.
Return to Question 59


60.    An increase in demand will shift the entire demand curve out and to the right. This will cause both equilibrium price and quantity to increase.
An increase in supply will shift the entire supply curve out and to the right. This will cause equilibrium quantity to increase and equilibrium price to decrease.
Notice that both increases will cause the equilibrium quantity to increase. However, the only way for the equilibrium price to remain constant is for both shifts to occur with equal strength so that the resulting price effects (increase and decrease) exactly cancel each other out. The correct choice is b and it is shown on the graph below. The original equilibrium point is E and the final, resultant equilibrium point is N, directly across and to the right of point E.
Graph Q60 solution
Return to Question 60


61.    If the price of a substitute good for aspirin were to decrease, more consumers would purchase the substitute good. This would decrease the demand for aspirin at the existing price of aspirin. This is shown by a shift in the entire demand curve for aspirin to the left.
    The positive government study would have the exact opposite effect. It would cause more consumers to purchase aspirin. This would increase the demand for aspirin at the existing price of aspirin. This is shown by a shift in the entire demand curve for aspirin to the right.
    Since we do not know which effect is stronger, we do not know whether the resultant shift in the demand curve for aspirin is to the left, to the right, or no resultant shift at all (which would happen if the 2 effects are of equal strength and cancel each other out). The correct answer is therefore f, the effect on both equilibrium price and quantity is indeterminate.
Return to Question 61


62.    Glass and automobiles are complementary goods. If there are more automobiles produced, there will be greater demand for glass. This increase in demand is shown by a shift in the entire demand curve for glass to the right. The rightward shift indicates that some factor other than an decrease in the price of glass has increased the demand for glass.
    Note that there is no shift in the supply curve for glass because the costs of producing glass have not changed and glass manufacturers would be willing to supply the same amount of glass at existing prices. The correct choice is a, only the demand curve for glass shifts to the right.
    The equilibrium point changes from E to N as illustrated below:
Graph Q62 solution
Return to Question 62


63.    The slope of a supply curve = DP/DQ. If the price per unit were to change by +$8 (from $8 to $16), then the change in quantity which would result can be computed in the following manner:
DP/DQ = 1/4
8/DQ = 1/4.
Cross multiplying yield: DQ = 4 x 8 = 32.
Adding the change in quantity of 32 to the original quantity supplied of 25 yields the new quantity supplied of 57.
Return to Question 63


64.    Adam Smith's concept of the "invisible hand" was that businesses and consumers, looking out solely for themselves, would, in most instances, as if guided by some "invisible hand", produce the very products which would maximize consumer welfare (utility). An underlying assumption of the theory was that rational businesses and households are concerned about their own “self-interest,” choice c.
Return to Question 64


65.
Graph question 65 solution
The opportunity cost of another unit of good X is the amount of good Y which must be given up.
Increasing X from 4 to 5 units involves moving down along the PPF from point C to point D. At point C, 220 units of Y were produced whereas at point D only 180 units of Y can be produced. This represents a reduction of 40 units of Y.

Increasing X from 2 to 3 units involves moving down along the PPF from point A to point B. At point A, 250 units of Y were produced whereas at point B only 240 units of Y can be produced. This represents a reduction of 10 units of Y.

The opportunity cost of the 5th unit of good X (=40 units of Y which must be given up) is exactly 4 times greater than the opportunity cost of the 3rd unit of good X (in which only 10 units of Y must be given up).
Return to Question 65




66.    The principle of increasing (opportunity) costs is illustrated by a production possibilities frontier (PPF) which is bowed outward from the origin. The frontier is a curve which gets progressively steeper as you move down and to the right along the curve. This shape results from the fact that it gets increasingly more difficult to produce additional units of good X as the amount of X produced increases. This is because resources are specialized and as more units of X are produced some resources which are better at producing the alternative good Y must be transferred out of producing good Y into producing good X. This transfer results in ever-increasing amounts of good Y being sacrificed (decreased) to produce each additional unit of good X.
    Note: D in the table below refers to the change in units of Y resulting from moving down each row of the table and increasing X by 1 unit
a) X Y D b) X Y D c) X Y D d) X Y D e) X Y D
1 20 1 20 1 20 1 20 1 20
2 15 -5 2 19 -1 2 18 -2 2 16 -4 2 15 -5
3  5 -10 3 18 -1 3 16 -2 3 13 -3 3 10 -5
    The correct answer is a. Only for choice a is the opportunity cost of X increasing. The sacrifice of Y increases from 5 units (Y decreases from 20 to 15 when X increases from 1 to 2 units) to 10 units (Y decreases from 15 to 5 when X increases from 2 to 3 units).
Return to Question 66


67.    If, in 1999, the economy is operating at a point beyond (outside) 1998's production possibilities frontier, then the entire frontier must have shifted out from 1998 to 1999. Thus, economics growth must have occurred.
    The economy was operating within (inside) its frontier in 1998. This indicates that unemployment existed.
    In 1999, the economy is operating on the new production possibilities frontier. This indicates that little or no unemployment now exists in 1999.
    Thus, from 1998 to 1999, a reduction in unemployment also occurred.
    The correct choice is a, both economic growth and a reduction in unemployment occurred.
Return to Question 67


68.    Guns and butter are different products and cannot be added together. From 1997 to 1998 the economy increased its gun production (from 100 million to 150 million) but decreased its butter production (from 50 billion pounds to 40 billion pounds). We are unable to measure whether this is an increase or decrease in overall production. The correct answer is e, none of the above can be concluded.
Return to Question 68


69.    The opportunity cost of another unit of good X is the amount of good Y which must be given up.
Increasing X by 7 units (from 18 to 25) would entail a reduction of 7 x 3 = 21 units of good Y since the opportunity cost of each additional unit of X is exactly 3 units of Y.
Existing resources are being used to produce 30 units of Y. Reducing Y by 21 units (as X is increased) will result in the production of only 9 units of Y (=30 - 21).
Return to Question 69


70.    An improvement in the technology of producing VCRs results in an increase in supply. The entire supply curve shifts to the right. More VCRs can be supplied profitably at the same price of VCRs.
    A decrease in the price of a substitute good, DVD players, will cause some consumers to buy the substitute good instead of VCRs. Fewer VCRs can be sold at the existing price of VCRs. This results in a decrease in demand for VCRs. The entire demand curve for VCRs shifts to the left.
    The correct choice is d.
Return to Question 70


71.    A decrease in income would cause a decrease in demand. The entire demand curve will shift down and to the left. This would result in a decrease in both equilibrium price and equilibrium quantity.
    A decrease in the cost of producing large screen televisions would cause an increase in supply. The entire supply curve will shift down and to the right. This would result in a decrease in equilibrium price but an increase in equilibrium quantity.
    Combining the 2 effects yields a definite decrease in equilibrium price. However, the effect on equilibrium quantity is indeterminate since 1 effect yields a decrease in quantity and the other yields an increase in quantity. There is no way to know which effect is stronger.
    The correct choice is e, equilibrium price would decrease, but the effect on quantity is indeterminate.
    The equilibrium point changes from E to N as illustrated below:
Graph Q71 solution
Return to Question 71


72.    A shortage exists when demand exceeds supply at the existing price for a product. The excess demand will cause the price of the product to be bid up until an equilibrium price is reached where supply = demand and the shortage is eliminated.
    The correct choice is e. This is illustrated below by the increase in price from P1 to Pe and a movement to the equilibrium point, E.
Graph Q72 solution
Return to Question 72


73.    An increase in the minimum wage above the equilibrium wage would cause more workers to want to work (a movement up and to the right along a given supply curve for labor). However, the higher wage would reduce the incentives for employers to hire the now more expensive labor and would result in a movement back up and to the left along a given demand curve for labor.
    The correct choice is e, there will be a movement up along both the existing supply and demand curves for labor. The result will be a surplus of labor (supply greater than demand) at the new, higher, above equilibrium, minimum wage.
    The effect is illustrated on the graph below by movements up along the demand curve from E to A and along the supply curve from E to B. The original minimum wage is Pe and the new, higher minimum wage is Ph:
Graph Q73 solution
Return to Question 73


74.    Apple's iMac computers are a substitute consumption good for Dell computers. If the price of iMacs were to decrease, some of Dell's customers would buy the cheaper iMacs. There would thus be less demand for Dell computers at the existing price of Dell computers. This would represent a decrease in demand for Dell computers and would be shown by a shift in the entire demand curve for Dell computers to the left. The correct choice is a.
Return to Question 74



75.    DY/DX  =  slope.     Y is the variable measured on the vertical axis.  X is the variable measured on the horizontal axis.
For a supply curve, price (measured in $ per unit) is measured on the Y axis and quantity (measured in units per time) is measured on the X axis. Therefore, the slope of a supply curve = DP/DQ in which P is price and Q is quantity.
    Since the slope is 8 and the DP is $200 (price increases from $200 to $400), we can calculate the DQ.
    8 = 200/DQ.
    Cross-multiplying yields: 8DQ = 200.
    Dividing by 8 yields: DQ = 25.
    Since 20 units of quantity were supplied at a price of $200, adding the DQ of 25 units results in 45 (=20 + 25) units of quantity being supplied at a price of $400 per unit.
Return to Question 75


76.    The fundamental economic problem from which all economic decisions derive is the problem of scarcity, specifically the fact that society's resources are limited and unable to satisfy unlimited wants. Because of scarcity all economies must choose what to produce and decide how to best allocate society's limited resources.
    The correct choice is d.
Note: See questions 12 and 31. This is the same question with some different choices.
Return to Question 76


77.
Graph question 77
From 1999 to 2000, the entire production possibilities frontier (PPF) shifted outward. This represents economic growth.
In 1999 the economy was operating within (inside) its PPF at point A. This represents the existence of unemployment. However, in 2000, the economy is operating on its new PPF at point B. The unemployment has thus been eliminated.
The correct choice is d, both economic growth and a reduction in unemployment occurred.
Return to Question 77


78.    Graphically, we need a result which would cause the following changes:
Graph Q78 solution
The result requires a combination of an increase in supply (shift in the entire supply curve down and to the right) with a decrease in demand (a shift in the entire demand curve down and to the left).
Choice b will yield the desired result: A decrease in wages represents a decrease in the cost of production. This will increase supply. A decrease in the price of a substitute good Y will cause consumers to purchase more of good Y, thereby decreasing the demand for good X.
Return to Question 78


79.
a)
X
Y
b)
X
Y
c)
X
Y
d)
X
Y
e)
X
Y
1
4
 
1
15
 
1
10
 
1
10
 
1
10
 
2
3
 
2
10
 
2
9
 
2
7
 
2
4
 
3
2
 
3
5
 
3
5
 
3
1
 
3
1
The opportunity cost of another unit of X is the amount of Y which must be given up to obtain the extra unit of X. The difference in the amount of Y when X is 1 and when X is 2 represents the reduction in Y as X increases from 1 to 2 units. Similarly, the difference in the amount of Y when X is 2 and when X is 3 represents the reduction in Y as X increases from 2 to 3 units. This change in the amount of Y can be represented by adding a column (DY) for each of the 5 choices, a-e:
a)
X
Y
D
b)
X
Y
D
c)
X
Y
D
d)
X
Y
D
e)
X
Y
D
1
4
 
1
15
 
1
10
 
1
10
 
1
10
 
2
3
-1
 
2
10
-5
 
2
9
-1
 
2
7
-3
 
2
4
-6
 
3
2
-1
 
3
5
-5
 
3
5
-4
 
3
1
-6
 
3
1
-3
Only for choice d is the opportunity cost of the 3rd unit of X (a reduction of 6 units of Y) exactly double the opportunity cost of the 2nd unit of X (a reduction of 3 units of Y). Since 6 is exactly double 3, choice d is correct.
Return to Question 79


80. If the price of computers continues to decrease, this will cause an increase in the quantity demanded of computers. Because digital cameras is an optional computer accessory, the more computers being sold, the greater the demand for digital cameras. The increased sale of computers provides an explanation, other than a decrease in the price of digital cameras themselves, for an increase in demand for cameras. The entire demand curve for digital cameras shifts to the right, choice a.
Return to Question 80


81.
Point
Quantity of Good Y
Quantity of Good X
A
20
0
B
18
1
C
14
2
D
8
3
E
0
4
The price of good Y is $10 per unit and the price of good X is $30 per unit (3 times as much).
Moving down the table from A to B is profitable because the sacrifice of 2 units of Y (from 20 to 18) only reduces total revenue by $20 (=2 x $10) while the addition of a unit of X (from 0 to 1 units) increases total revenue by $30 (the price of an additional unit of X).
However, moving down the table from B to C reduces profits because the sacrifice of 4 units of Y (from 18 to 14) reduces total revenue by $40 (=4 x $10) while the addition of a unit of X (from 1 to 2 units) increases total revenue by only $30 (the price of an additional unit of X).
Moving down the table from C to D and from D to E further reduces profits because the reduction in Y is even greater than the 4 unit reduction from row B to row C while the increase in the quantity of X is the same.
The most profitable row is B.

Alternate Approach: From the formula sheet: Total Revenue (TR) = Price (P) x Quantity (Q). We can calculate the total revenue of each row and confirm that row B yields the highest total revenue:
Point
Quantity of Good Y
Revenue from Y = P x Q 
($10 x Quantity of Y)
Quantity of Good X
Revenue from X = P x Q 
($30 x Quantity of X)
Total Revenue
A
20
$200
0
$0
$200
B
18
$180
1
$30
$210
C
14
$140
2
$60
$200
D
8
$80
3
$90
$170
E
0
$0
4
$120
$120
Row B yields the highest total revenue of $210.
Return to Question 81




82.    A minimum wage is only relevant if it provides a wage level higher than the equilibrium wage which would exist. Therefore, a minimum wage set below the equilibrium wage has no effect and can be ignored. However, as the graph below illustrates, a minimum wage (the price of labor) set above the equilibrium wage will create a surplus of labor (the supply of labor is greater than the demand for labor at the artificially high wage Ph).
Graph Q82 solution
The correct choice is b, a minimum wage set above the equilibrium wage will create a surplus of labor and a minimum wage set below the equilibrium wage will have no effect on labor.
Return to Question 82


83. An increase in income will cause an increase in demand for oil; the entire demand curve for oil shifts up and to the right. This would cause both the equilibrium price and equilibrium quantity of oil to increase.
    The release of oil from the government's oil reserves would increase the supply of oil; the entire supply curve for oil shifts down and to the right. This would cause the equilibrium price of oil to decrease and the equilibrium quantity of oil to increase.
    Since both changes increase the equilibrium quantity of oil, the equilibrium quantity of oil definitely increases. However, the effect on price is indeterminate because the increase in demand would increase the price of oil and the increase in supply would decrease the price of oil.
    The correct choice is d, increase in equilibrium quantity, but the effect on price is indeterminate.
    The two changes are illustrated below with the equilibrium point changing from E to N:
Graph Q83 solution
Return to Question 83


84.
a)
X
Y
b)
X
Y
c)
X
Y
d)
X
Y
e)
X
Y
1
10
 
2
15
 
3
12
 
4
20
 
5
14
 
2
8
 
4
9
 
6
9
 
8
8
 
10
13
 
3
6
 
6
6
 
9
5
 
12
3
 
15
12
The principle of increasing (opportunity) costs indicates that to obtain the same increase in 1 good it requires progressively greater reductions in the other good. In each of the 5 choices, a-e, column X is linear, it increases at a constant rate (1,2,3; 2,4,6 etc.). However, only in choice c is there a progressively greater decrease in Y (9 - 12 = -3 followed by 5 - 9 = -4). Column c illustrates the principle of increasing (opportunity) costs. This change in the amount of Y can be represented by adding a column (DY) for each of the 5 choices, a-e:
a)
X
Y
D
b)
X
Y
D
c)
X
Y
D
d)
X
Y
D
e)
X
Y
D
1
10
 
2
15
 
3
12
 
4
20
 
5
14
 
2
8
-2
 
4
9
-6
 
6
9
-3
 
8
8
-12
 
10
13
-1
 
3
6
-2
 
6
6
-3
 
9
5
-4
 
12
3
-5
 
15
12
-1
Return to Question 84


85.    The opportunity cost of 1 good is the amount of the other good which must be sacrificed (reduced) to obtain additional units of the first good. The opportunity cost of each additional unit of X is exactly 3 units of Y. Therefore, to produce 4 additional units of X (from 25 units to 29 units) would require the reduction of 4 x 3 = 12 units of good Y. Since 25 units of Y could have been produced with 25 units of X, reducing Y by 12 units will result in the production of only 25 - 12 = 13 units of Y if the firm decides to increase the production of X to 29 units.
Return to Question 85


86.

Graph question 86
The opportunity cost of the 6th unit of good X (increasing X from 5 to 6 units) involves a reduction of Y of 400 units (from 900 to 500 as shown by a movement down and to the right along the production possibilities frontier from point C to point D.
The opportunity cost of the 5th unit of good X (increasing X from 4 to 5 units) involves a reduction of Y of only 200 units (from 1,100 to 900 as shown by a movement down and to the right along the production possibilities frontier from point B to point C.
400 is exactly 2 times greater than 200.
Return to Question 86




87.    An increase in the cost of production will decrease supply. This is shown by a shift in the entire supply curve up and to the left. This would result in an increase in the equilibrium price and a decrease in the equilibrium quantity.
    An increasing number of universities requiring their students to buy IBM compatible computers instead of Apple Macintoshes will decrease the demand for Apple Macintosh computers. It is an event other than an increase in the price of Macintoshes which will cause consumers to buy fewer Macintoshes. It is shown by a shift in the entire demand curve down and to the left. This would result in a decrease in both the equilibrium price and the equilibrium quantity for Macintoshes.
    Combining the 2 results yields a definite decrease in the equilibrium quantity for Macintoshes since both effects yield that result. However, the effect on the equilibrium price is indeterminate because the decrease in supply would increase price and the decrease in demand would decrease price.
    The correct choice is c, the equilibrium quantity would decrease, but the effect on equilibrium price is indeterminate.
    The two changes are illustrated below with the equilibrium point changing from E to N:
Graph Q87 solution
Return to Question 87


88.    If, in 2000, the economy is operating at a point beyond (outside) 1999's production possibilities frontier then the entire frontier must have shifted outward from 1999 to 2000. Economic Growth must have occurred. However, both in 1999 and in 2000 the economy is operating within (inside) its production possibilities frontier. This indicates that unemployment exists in both 1999 and 2000.
    From the information provided, it can be concluded that between 1999 and 2000 economic growth occurred, choice c.
Return to Question 88


89.    A resource is a factor of production, an input used in the production of output. Therefore, when economists state that capital is a resource, they are referring to the machinery and equipment used by businesses in their production of goods and services. The correct choice is a.
Return to Question 89


90.    In 1998 the economy is operating on its production possibilities frontier. Therefore, no unemployment exists. As a result, unemployment will not be able to decrease. However, by 1999 more guns are produced (120 million instead of 100 million) along with the same amount of butter (200 billion pounds). The only way the increased total production could have occurred is that the entire production possibilities frontier must have shifted outward from 1998 to 1999. The correct choice is c, only economic growth occurred.
Return to Question 90


91.    A shift in the entire demand curve for a good is caused by a change in something other than the price of the good which causes a change in demand. Therefore, choice c, a change in the price of the Nintendo 64 video game console, will not result in a shift in the entire demand curve. Rather, the decrease in price is shown by a movement down and to the right along a given demand curve for Nintendo 64 video game consoles causing consumers to increase their quantity demanded.
Return to Question 91


92.
 
Price/unit
 Units/Day
Point A
$80
30
Point B
$92
50
The slope of a supply curve = DP/DQ.
The change in price is the difference in price. $92 - $80 = $12
The change in quantity is the difference is quantity: 50 - 30 = 20
DP/DQ = 12/20 = 3/5 or 0.60.
Return to Question 92


93.    An increase in incomes means that consumers can afford to purchase more of all goods. This represents an increase in demand, something other than a decrease in price which causes consumers to buy more automobiles.  It is shown by a shift in the entire demand curve for luxury automobiles up and to the right. As illustrated by the change from point E to point N on the graph below, the result is that there would be an increase in both equilibrium price and quantity, choice a.
Graph Q93 solution
Return to Question 93


94.    Adam Smith assumed that self-interested businesses attempt to maximize their profits. The reason that they produce the products consumers most desire is that these are the products consumers will pay the most for. The production of these products will thus enable businesses to achieve their goal of maximizing profits. The correct choice is c.
Return to Question 94


95.    If the price of Tylenol decreases, this would decrease the demand for aspirin because some consumers would now buy the cheaper Tylenol.
    The government study confirming that taking aspirin can help reduce the danger of heart attacks would increase the demand for aspirin. It is something other than a change in the price of aspirin which would change the demand for aspirin.
    The 2 events are opposites. The first will decrease the demand for aspirin and the second will increase the demand for aspirin. Without additional information about the relative strengths of these effects, we cannot conclude whether the net effect is an increase, decrease, or no net change in the demand for aspirin.
    The correct choice is f, the effect on both equilibrium price and quantity of aspirin is indeterminate.
Return to Question 95


96.    The slope of a supply curve = DP/DQ. If the quantity supplied were to change by +20 (from 10 to 30), then the change in price which would yield this result can be computed in the following manner:
DP/DQ = 5
DP/20 = 5.
Cross multiplying yield: DQ = 5 x 20 = 100.
Adding the change in price of 100 to the original price of $100 yields the new price of $200.
Return to Question 96


97.    The negative publicity would cause some consumers not to want to buy Ford Explorers at the current price. This represents a reason other than an increase in the price of Ford Explorers which would make consumers buy fewer Explorers. The result is a decrease in demand, a shift in the entire demand curve for Ford Explorers to the left. The correct choice is c.
Note that there is no change in the supply curve for Ford Explorers. Ford would still want to supply as many automobiles at the same price as before. The problem is that there will be a decrease in demand. This would cause a movement down and to the left along a given supply curve as shown by the movement from E to N on the graph below:
Graph Q97 solution
Return to Question 97


98. An increase in the minimum wage above the equilibrium wage would cause more workers to want to work (a movement up and to the right along a given supply curve for labor). However, the higher wage would reduce the incentives for employers to hire the now more expensive labor and would result in a movement back up and to the left along a given demand curve for labor.
    The correct choice is e, there will be a movement up along both the existing supply and demand curves for labor. The result will be a surplus of labor (supply greater than demand) at the new, higher, above equilibrium, minimum wage.
    The effect is illustrated on the graph below by movements up along the demand curve from E to A and along the supply curve from E to B. The original minimum wage is Pe and the new, higher minimum wage is Ph:
Graph Q98 solution
Return to Question 98



99. A minimum wage is only relevant if it provides a wage level higher than the equilibrium wage which would exist. Therefore, a minimum wage set below the equilibrium wage has no effect and can be ignored. However, as the graph below illustrates, a minimum wage (the price of labor) set above the equilibrium wage will create a surplus of labor (the supply of labor is greater than the demand for labor at the artificially high wage Ph).
Graph Q99 solution
The correct choice is b, a minimum wage set above the equilibrium wage will create a surplus of labor and a minimum wage set below the equilibrium wage will have no effect on labor.
Return to Question 99


100. A decrease in demand for labor would be shown by a shift in the entire demand curve for labor to the left. At the current wage of $5.15, this will generate a surplus of labor as supply will now exceed the lower demand for labor. If the wage were permitted to decrease, the lower wage would result in an adjustment to a new lower equilibrium wage where supply once again equals demand for labor. However, a minimum wage is a price floor. It prevents the wage from decreasing. The result is that supply remains greater than the decreased demand for labor at the $5.15 level and a surplus of unemployed labor would result, choice b.
Return to Question 100



101. Raising the minimum wage above the equilibrium wage simply increases the price of labor and forces it to remain at the higher level.. Since price if on the vertical axis, an increase in price is shown on a supply-demand curve by a movement up along both the given supply and demand curves for labor, choice e.
Return to Question 101



102. If the current minimum wage were above the equilibrium wage, then there would be a surplus of labor as the supply of labor would exceed the demand for labor. If the minimum wage were eliminated and the wage (the price of labor) could adjust to its lower equilibrium level, this would cause both an increase in the quantity demanded of labor (a movement down and to the right along the existing demand curve for labor) and a decrease in the quantity supplied of labor (a movement down and to the left along the existing supply curve of labor). The correct choice is b.
Return to Question 102

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