ECON 101 UMBC MIDTERM #1 [SPRING 2026]

According to Adam Smith, the success of decentralized market economies is primarily due to:

a. individuals' pursuit of self-interest.

b. society's legal system.

c. partnerships that are forged between business and government.

d. the basic benevolence of society.

a. individuals' pursuit of self-interest.

Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth:

a. is less equal and less efficient for society.

b. is more efficient but less equal for society.

c. is more efficient and more equal for society.

d. is more equal but less efficient for society.

d. is more equal but less efficient for society.

Which of the following is an example of a normative, as opposed to positive, statement?

a. The growth rate of the economy last year was higher than any other year in the last decade.

b. The federal government should decrease unemployment benefits to stimulate the economy out of the recession.

c. The Federal Reserve Bank adjusted interest rates in response to the lower-than-expected growth rate of the economy.

d. The federal government reduced spending in the last quarter of the fiscal year

b. The federal government should decrease unemployment benefits to stimulate the economy out of the recession.

Which of the following statements about economic models is correct?

a. Economic models seldom incorporate equations or diagrams.

b. Economic models are built to mirror reality exactly.

c. Economic models are useful, but they should not be used for the purpose of improving public policies.

d. Because economic models omit many details, they allow us to see what is truly important.

d. Because economic models omit many details, they allow us to see what is truly important.

Which of these statements best represents the law of supply?

a. When sellers' supplies of a good increase, the price of the good increases.

b. When input prices increase, sellers produce less of the good.

c. When production technology improves, sellers produce less of the good.

d. When the price of a good decreases, sellers produce less of the good.

d. When the price of a good decreases, sellers produce less of the good.

If consumers often purchase muffins to eat while they drink their lattes at local coffee shops, what would happen to the equilibrium price and quantity of lattes if the price of muffins falls?

a. The equilibrium price would increase, and the equilibrium quantity would decrease.

b. The equilibrium price would decrease, and the equilibrium quantity would increase.

c. Both the equilibrium price and quantity would decrease.

d. Both the equilibrium price and quantity would increase.

d. Both the equilibrium price and quantity would increase.

Lead is an important input in the production of crystal. If the price of lead decreases, then we would expect the supply of

a. lead to increase.

b. crystal to increase.

c. crystal to be unaffected.

d. crystal to decrease.

b. crystal to increase.

Inefficiency exists in a market when a good is

a. not being consumed by buyers who value it most highly.

b. distributed fairly among buyers.

c. not distributed fairly among buyers.

d. not produced because buyers do not value it very highly

a. not being consumed by buyers who value it most highly.

Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70. Using the midpoint method, the cross-price elasticity of demand is about

a. -0.1, and X and Y are complements.

b. 0.1, and X and Y are substitutes.

c. -1.2, and X and Y are complements.

d. 1.2, and X and Y are substitutes.

d. 1.2, and X and Y are substitutes.

In competitive markets, which of the following is not correct?

a. Some sellers can set prices.

b. No individual buyer can influence the market price.

c. Buyers are price takers.

d. Firms produce identical products.

a. Some sellers can set prices.

Holding all other forces constant, if increasing the price of a good leads to an increase in total revenue, then the demand for the good must be

a. elastic.

b. unit elastic.

c. inelastic.

d. None of the above is correct because a price increase always leads to an increase in total revenue.

c. inelastic.

According to the circular-flow diagram, if Suzy is a worker who delivers flowers for Happy Day Flower Company, she participates.

a. in the markets for factors of production exchanging labor for income.

b. in the markets for goods and services, exchanging flowers for wages, rent, and profit.

c. in the markets for goods and services exchanging labor for income.

d. in the markets for factors of production exchanging flowers for revenue.

a. in the markets for factors of production exchanging labor for income.

1. A competitive market is a market in which

a. An auctioneer helps set prices and arrange sales.

b. There are only a few sellers.

c. the forces of supply and demand do not apply.

d. no individual buyer or seller has any significant impact on the market price.

d. no individual buyer or seller has any significant impact on the market price.

The price elasticity of demand measures how much

a. Quantity demanded responds to a change in price.

b. Quantity demanded responds to a change in income.

c. Price responds to a change in demand.

d. Demand responds to a change in supply.

a. Quantity demanded responds to a change in price.

A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society faces a tradeoff between

a. guns and butter.

b. efficiency and equality.

c. inflation and unemployment.

d. work and leisure.

b. efficiency and equality.

In the circular-flow diagram,

a. factors of production flow from government to firms.

b. Goods and services flow from households to firms.

c. Income paid to the factors of production flows from firms to households.

d. spending on goods and services flows from firms to households.

c. Income paid to the factors of production flows from firms to households.

The law of demand states that, other things equal, an increase in

a. Price causes quantity demanded to increase.

b. Price causes quantity demanded to decrease.

c. Quantity demanded causes price to increase.

d. Quantity demanded causes price to decrease.

b. Price causes quantity demanded to decrease.

What would happen to the equilibrium price and quantity of lattes if consumers' incomes rise and lattes are a normal good?

a. Both the equilibrium price and quantity would increase.

b. Both the equilibrium price and quantity would decrease.

c. The equilibrium price would increase, and the equilibrium quantity would decrease.

d. The equilibrium price would decrease, and the equilibrium quantity would increase.

a. Both the equilibrium price and quantity could increase

Suppose buyers of computers and printers regard the two goods as complements. Then an increase in the price of computers will cause a(n)

a. decrease in the demand for printers and a decrease in the quantity supplied of printers.

b. decrease in the supply of printers and a decrease in the quantity demanded of printers.

c. decrease in the equilibrium price of printers and an increase in the equilibrium quantity of printers.

d. increase in the equilibrium price of printers and a decrease in the equilibrium quantity of printers

a. decrease in the demand for printers and a decrease in the quantity supplied of printers.

In the broadest sense, economics is the study of

a. production methods.

b. how society manages its scarce resources.

c. how households decide who performs which tasks.

d. the interaction of business and government.

b. how society manages its scarce resources.

Economic models

a. are people who act out the behavior of firms and households so that economists can study this behavior.

b. are usually detailed replications of reality.

c. incorporate simplifying assumptions that often contradict reality but also help economists better understand reality.

d. are useful to researchers but not to teachers because economic models omit many details of the real-world economy.

c. incorporate simplifying assumptions that often contradict reality but also help economists better understand reality.

Which of the following would increase in response to a decrease in the price of ironing boards?

a. the quantity of irons demanded at each possible price of irons

b. the equilibrium quantity of irons

c. the equilibrium price of irons

d. All of the above are correct

d. All of the above are correct

For a good that is a necessity, demand

a. tends to be inelastic.

b. tends to be elastic.

c. has unit elasticity.

d. cannot be represented by a demand curve in the usual way.

a. tends to be inelastic.

Which of the following statements is correct?

a. The demand for natural gas is more elastic over a short period of time than over a long period of time.

b. The demand for smoke alarms is more elastic than the demand for Persian rugs.

c. The demand for bourbon whiskey is more elastic than the demand for alcoholic beverages in general.

d. All of the above are correct.

c. The demand for bourbon whiskey is more elastic than the demand for alcoholic beverages in general.

When the price of an eBook is $15.00, the quantity demanded is 400 eBooks per day. When the price falls to $10.00, the quantity demanded increases to 700. Given this information and using the midpoint method, we know that the demand for eBooks is

a. inelastic.

b. elastic.

c. unit elastic.

d. perfectly inelastic.

b. elastic.

Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers are to a change in price, the

a. The steeper the demand curve will be.

b. flatter the demand curve will be.

c. Further to the right the demand curve will sit.

d. The closer to the vertical axis the demand curve will sit.

a. The steeper the demand curve will be.

Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because

a. Buyers tend to be much less sensitive to a change in price when given more time to react.

b. Buyers tend to be much more sensitive to a change in price when given more time to react.

c. buyers will have substantially more real income over a ten-year period.

d. the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline

b. Buyers tend to be much more sensitive to a change in price when given more time to react.

Suppose that when the price of good X falls from $6 to $4, the quantity demanded of good Y rises from 30 units to 40 units. Using the midpoint method, the cross-price elasticity of demand is

a. -0.71, and X and Y are complements.

b. -1.40, and X and Y are complements.

c. -0.71, and X and Y are substitutes.

d. -1.40, and X and Y are substitutes

a. -0.71, and X and Y are complements.

The quantity supplied of a good is the amount that

a. buyers are willing and able to purchase.

b. sellers are able to produce.

c. buyers and sellers agree will be brought to market.

d. sellers are willing and able to sell

d. sellers are willing and able to sell

Which of the following is not correct?

a. The producer who requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

b. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X.

c. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

d. The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

d. The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

The overriding reason why households and societies face many decisions is that

a. resources are scarce.

b. Goods and services are not scarce.

c. incomes fluctuate with business cycles.

d. People, by nature, tend to disagree.

a. resources are scarce.

When the government redistributes income from the wealthy to the poor,

a. Efficiency is improved, but equality is not.

b. equality is improved, but efficiency is not.

c. Both efficiency and equality are improved.

d. Neither efficiency nor equality are improved.

b. equality is improved, but efficiency is not.

In the simple circular-flow diagram,

a. Households own the factors of production.

b. households buy all the goods and services that firms produce.

c. land, labor, and capital flow from households to firms.

d. All of the above are correct.

d. All of the above are correct.

Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the prices of all toothpastes increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of

a. changes in total revenue in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

c. the definition of a market in determining the price elasticity of demand.

Suppose that when income rises, the demand curve for doctors' visits shifts to the right. In this case, we know the doctor's visit are

a. inferior goods.

b. normal goods.

c. perfectly competitive goods.

d. durable goods.

b. normal goods.

An increase in the price of blueberries would lead to a(n)

a. increased supply of blueberries.

b. a movement up and to the right along the supply curve for blueberries.

c. a movement down and to the left along the supply curve for blueberries.

d. Both a and b are correct.

b. a movement up and to the right along the supply curve for blueberries.

Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method, the cross-price elasticity of demand is

a. -1.0, and X and Y are complements.

b. -1.0, and X and Y are substitutes.

c. 1.0, and X and Y are complements.

d. 1.0, and X and Y are substitutes.

a. -1.0, and X and Y are complements.

If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the

a. The supply for marijuana is elastic.

b. Demand for marijuana is elastic.

c. Supply for marijuana is inelastic.

d. The demand for marijuana is inelastic.

d. The demand for marijuana is inelastic.

What will happen in the gasoline market now if buyers expect higher gasoline prices in the near future?

a. The demand for gasoline will increase.

b. The demand for gasoline will decrease.

c. The demand for gasoline will be unaffected.

d. The supply of gasoline will increase.

a. The demand for gasoline will increase.

When a surplus exists in a market, sellers

a. raise price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated.

b. raise price, which decreases quantity demanded and increases quantity supplied, until the surplus is eliminated.

c. lower price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated.

d. lower price, which decreases quantity demanded and increases quantity supplied, until the surplus is eliminated.

c. lower price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated.

A key determinant of the price elasticity of supply is

a. the ability of sellers to change the price of the good they produce.

b. the ability of sellers to change the amount of the good they produce

c. how responsive buyers are to changes in sellers' prices.

d. the slope of the demand curve.

b. the ability of sellers to change the amount of the good they produce

A decrease in input costs to firms in a market will result in a(n)

a. decrease in equilibrium price and an increase in equilibrium quantity.

b. a decrease in equilibrium price and a decrease in equilibrium quantity.

c. an increase in equilibrium price and a decrease in equilibrium quantity.

d. increase in equilibrium price and an increase in equilibrium quantity

a. decrease in equilibrium price and an increase in equilibrium quantity.

If mayonnaise and Miracle Whip are substitutes, then which of the following would increase the demand for Miracle Whip?

a. a decrease in the price of Miracle Whip

b. an increase in the price of mayonnaise

c. a decrease in the price of mayonnaise

d. Both a and b are correct.

b. an increase in the price of mayonnaise

If an increase in income results in a decrease in the quantity demanded of a good, then for that good, the

a. Cross-price elasticity of demand is negative.

b. Price elasticity of demand is elastic.

c. Income elasticity of demand is negative.

d. income elasticity of demand is positive

c. Income elasticity of demand is negative.

Suppose you are in charge of setting prices at a local ice cream shop. The business needs to increase its total revenue, and your job is on the line. You evaluate the data and determine that the price elasticity of demand for ice cream at your shop is 1.8. You should

a. increase the price of ice cream.

b. decrease the price of ice cream.

c. decrease the cost of operating the ice cream shop.

d. increase the price of bottled water also sold at the ice cream shop because its price elasticity of demand is 1.2.

b. decrease the price of ice cream.

Economists view positive statements as

a. affirmative, justifying existing economic policy.

b. optimistic, putting the best possible interpretation on things.

c. descriptive, making a claim about how the world is.

d. prescriptive, making a claim about how the world ought to be.

c. descriptive, making a claim about how the world is.