Ans: C
Difficulty: Hard
Heading: Three Key Analytical Tools
LO 2 Describe the concepts of constrained optimization, equilibrium analysis, and
comparative statics.
38. Suppose that we illustrate demand and supply with quantity on the horizontal
axis and price on the vertical axis. Which of the following statements is false ?
a) Changes in exogenous variables are represented by shifts in the
demand and/or supply curves.
b) Changes in endogenous variables are represented by movements along
the supply and/or demand curves.
c) Price and quantity are the exogenous variables in this representation.
d) The equilibrium is represented as the intersection of supply and
demand curves.
Ans: C
Difficulty: Medium
Heading: Three Key Analytical Tools
LO 2 Describe the concepts of constrained optimization, equilibrium analysis, and
comparative statics.
39. Suppose that we illustrate demand and supply with quantity on the horizontal
axis and price on the vertical axis. Which of the following statements is false ?
a) The equilibrium remains unchanged unless an exogenous variable
changes.
b) The equilibrium is represented as the intersection of supply and
demand curves.
c) When a shift in demand or supply occurs, a comparative statics
analysis compares the old and the new equilibrium points.
d) A change in price will cause a shift in the demand curve.
Ans: D
Difficulty: Medium
Heading: Three Key Analytical Tools
LO 2 Describe the concepts of constrained optimization, equilibrium analysis, and
13
comparative statics.
40. Suppose that we illustrate demand and supply with quantity on the horizontal
axis and price on the vertical axis. Let demand be a function of price and
income, Q d (P, I) . Which of the following statements is true ?
a) A change in income will cause a shift in the supply curve.
b) A change in income level is represented by a movement along the
demand curve.
c) Income is not represented on one of the axes, and so is treated as an
exogenous variable in the graphical analysis.
d) Price and income together must change in order to create a shift in the
demand curve.
Ans: C
Difficulty: Hard
Heading: Three Key Analytical Tools
LO 2 Describe the concepts of constrained optimization, equilibrium analysis, and
comparative statics.
41. Suppose that we illustrate demand and supply with quantity on the horizontal
axis and income on the vertical axis. Let demand be a function of price and
income, Q d (P, I) . Which of the following statements is true ?
a) A change in income will cause a shift in the demand curve.
b) A change in income level is represented by a movement along the
demand curve.
c) Income is treated as an exogenous variable in the graphical analysis.
d) Price and income together must change in order to create a shift in the
demand curve.
Ans: B
Difficulty: Hard
Heading: Three Key Analytical Tools
LO 2 Describe the concepts of constrained optimization, equilibrium analysis, and
comparative statics.
42. Which of the following statements about positive analysis is correct?
a) Positive analysis prescribes the best solution to an economic problem.
b) Positive analysis predicts how an economic system will change over
time.
c) While normative analysis can be wrong, since it is often based on
someone’s opinion, positive analysis is always accurate.
d) Since positive analysis is based on a model, and not the real world, it is
mostly irrelevant.
14
Ans: B
Difficulty: Easy
Heading: Positive and Normative Analysis
LO 3 Explain the difference between positive and normative analysis
43. Which of the following statements about normative analysis is correct?
a) Normative analysis, because it is based on opinion, rarely employs any
positive analysis when prescribing a solution to a given problem.
b) Normative analysis typically cannot be trusted because it is only
someone’s opinion.
c) Normative analysis ignores exogenous variables when making
predictions.
d) Normative analysis typically focuses on issues of social welfare.
Ans: D
Difficulty: Easy
Heading: Positive and Normative Analysis
LO 3 Explain the difference between positive and normative analysis
44. Which of the following statements represents normative analysis?
a) Eliminating rent controls in New York City will likely lead to greater
supply of housing in the future.
b) Eliminating the minimum wage will likely lead to lower
unemployment.
c) Subsidies to farmers to produce corn for ethanol will lead to a
(desirable) reduced dependence on foreign oil.
d) Raising taxes on gasoline will reduce automobile traffic on our