When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes:
A. an inferior good.
B. the rationing function of prices.
C. the substitution effect.
D. the income effect.
Answer: D
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The marginal benefit of an activity is the:
A. total benefit of an activity divided by the level of the activity. B. same as the total benefit of an activity. C. extra benefit associated with an extra unit of the activity. D. total benefit associated with an extra unit of the activity.
Use the following graph for a monopolistically competitive firm to answer the next question. 
Excess capacity for this firm would be illustrated by the quantity
A. E - D. B. D - 0. C. D - C. D. E - C.
A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks
a. has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. b. almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. c. is spending his or her time wisely if the efficient markets hypothesis is correct. d. is interested in the likely ability of a corporation to pay dividends in the future.
The law of increasing opportunity cost explains why the shape of the production possibilities curve is:
A. a straight line parallel to the horizontal axis. B. bowed inward (convex) to the origin of the graph. C. a straight line from one axis to the other. D. bowed out (concave) from the origin of the graph.