ECO 201 Exam 1
production possibilities frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
competitive market
a market in which there are enough buyers and sellers so that each has a negligible impact on the market
cross price elasticity of demand
a measure of how much the quantity demanded for one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good (complements vs. substitutes)
If the actual price in this market were above the equilibrium price, quantity supplied would be_____than quantity demanded, so there would be_____pressure on prices.
greater; downward
The circular-flow diagram illustrates that, in markets for the factors of production,
households are sellers, and firms are buyers.
which of the following statements is positive:
increasing the minimum wage would lead to job losses among the least educated.
PPF - what are efficient points? what are the inefficient points? how would a change in technology affect the PPF?
inefficient - points inside the PPF; economy is producing less than it could from the available resources efficient - if the economy is getting all it can from the scarce resources it has available (points on the PPF line) tech advance - can shift PPF outward (computers vs. cars)
A linear, downward-sloping demand curve is
inelastic at some points, and elastic at others.
shifts in supply curve
input prices technology expectations number of sellers
Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold?
an increase in the price of grapes, an input to jelly
Judy spent 8 hours studying for this exam. Normally, she would have spent that time watching TV instead of studying. She figures that she could have made a "B" after only studying 4 hours, but she really wanted an "A." What is Judy's marginal cost in terms of TV viewing to improve her grade from a "B" to an "A?"
b) 4 hours
A marginal change is one that: a) is not important for public policy. b) incrementally alters an existing plan. c) makes an outcome inefficient. d) does not influence incentives.
b) incrementally alters an existing plan.
Adam Smith's "invisible hand" refers to:
b) the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
If the actual price in this market were below the equilibrium price, suppliers could raise the price without losing sales.
true
complement
two good for which an increase in the price of one leads to a decrease in demand for the other
substitute
two goods for which an increase in the price of one leads to an increase in the demand for the other
opportunity cost
whatever must be given up to obtain some item
If a Scottish worker could produce only 1 sweater per hour, Scotland______gain from trade, and England_______gain from trade.
would still; would still
which has more elastic demand? ~Required textbooks or mystery novels ~Beethoven recordings or classical music recordings in general ~Subway rides during the next 6 months or subway rides during the next 5 years ~Root beer or water
mystery novels Beethoven recordings subway rides during the next 5 yrs root beer
Two drivers—Walt and Jessie—each drive up to a gas station. Before looking at the price, each places an order. Walt says, "I'd like 10 gallons of gas." Jessie says, "I'd like $10 worth of gas.
price elasticity of demand walt: 0 jessie: 1
unit elastic
quantity demanded changed by the same percentage as the price
perfectly elastic
quantity demanded changes indefinitely with any change in price
perfectly inelastic
quantity demanded doesnt respond to price changes
Certain very talented people have a comparative advantage in everything they do.
False
If a certain trade is good for one person, it can't be good for the other one.
False
Which of the following is a positive, rather than a normative, statement? a)Law X will reduce national income. b)Law X is a good piece of legislation. c)Congress ought to pass law X. d)The President should veto law X.
a)Law X will reduce national income.
The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, you _____go ahead and do so. The most you should pay to complete development is _____million
should; $3
efficiency
society gets the most that it an from its scarce resources
The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price.
supply, lower
If England and Scotland decide to trade, Scotland will trade______to England.
sweaters
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer
producer surplus
the amt that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for
equity
the benefits of those resources are distributed fairly among the members of society
In most societies, resources are allocated by
the combined actions of millions of households and firms.
Scarcity occurs when
the desire for goods and services exceeds our ability to produce them with the limited resources available.
consumer surplus
the difference b/w the total amt that consumers are willing & able to pay for a good/service (indicated by the demand curve) and the total amt that they actually pay (ie the market price)
if supply for a good increases and demand remains unchanged then:
the equilibrium price decreases and the equilibrium quantity increases
price elasticity of demand is measured as:
the percentage change in quantity demanded / the percentage change in price
As the price of tickets rises from $200 to $250, the price elasticity of demand for business travelers is___, and the price elasticity of demand for vacationers is_____using the midpoint method. Therefore, the demand for airline tickets at this price range is____elastic for vacationers because business travelers are____sensitive to changes in price.
0.23; 1.29; more; less
Using the midpoint method, your price elasticity of demand as the price of DVDs increases from $8 to $10 is____ if your income is $10,000 and____ if your income is $12,000.
1 ; 0.5
If the price of a DVD is $12, your income elasticity of demand is ____ as your income increases from $10,000 to $12,000. However, if the price of a DVD is $16, your income elasticity is____.
1.22; 2.2
The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the elasticity is
1/2
The Kentucky state legislature is considering an increase in the state gasoline tax. Representative Campbell argues that an increase in the gasoline tax would harm low-income drivers disproportionately. Representative Richards responds by saying that low-income drivers own smaller cars that use less gasoline, and that low-income drivers therefore would not be harmed disproportionately.
Both representatives' arguments are based primarily on equality.
Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor, while producing a shirt takes 4 hours of labor. What will these nations trade?
China will export shirts, while the United States will export aircraft.
If a certain trade is good for one person, it is always good for the other one.
False
If trade is good for a country, it must be good for everyone in the country.
False
You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue.When should you raise the admission price in order to increase revenue?
Only when demand is inelastic
Once again, in an hour, David can wash 2 cars or mow 1 lawn, while Ron can wash 3 cars or mow 1 lawn. Who has the comparative advantage in car washing, and who has the comparative advantage in lawn mowing?
Ron in washing, David in mowing.
In an hour, David can wash 2 cars or mow 1 lawn, while Ron can wash 3 cars or mow 1 lawn. Who has the absolute advantage in car washing, and who has the absolute advantage in lawn mowing?
Ron in washing, neither in mowing.
Movie tickets and DVDs are substitutes. If the price of DVDs increases, what happens in the market for movie tickets?
The demand curve shifts to the right.
After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision?
The marginal cost of going to Ft. Lauderdale decreases.
Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.
True
Three basic decisions must be made by all economies. What are they?
What goods will be produced; how will goods be produced; for whom will goods be produced?
Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator Johnson argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that
a good decision requires that we recognize both viewpoints.
inferior good
a good for which, other things being equal, an increase in income leads to a decrease in demand
normal good
a good for which, other things being equal, an increase in income leads to an increase in demand
demand curve/supply curve
a graph of the relationship b/w the price of a good and the quantity demanded/supplied
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumer's income, computed as the percentage change in quantity demanded divided by the percentage change in income as income increases, increase normal goods and decrease inferior goods and vice versa
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of a good (elastic/inelastic)
elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a changed in one of its determinants
An economic model is
a simplified representation of some aspect of the economy.
shortage
a situation in which quantity demanded is greater than quantity supplied ex) sale; drought suppliers will raise price due to too many buyers chasing too few goods, thereby moving toward equilibrium
surplus
a situation in which quantity supplied is greater than quantity demanded ex) price too high suppliers will lower price to increase sales, thereby moving toward equilibrium
A life-saving medicine without any close substitutes will tend to have
a small elasticity of demand.
demand/suppy schedule
a table that shows the relationship b/w the price of the good/service and its quantity demanded/supplied
Economics is best defined as the study of:
a) how society manages its scarce resources.
If a nation has high and persistent inflation, the most likely explanation is: a) the central bank creating excessive amounts of money. b) unions bargaining for excessively high wages. c) the government imposing excessive levels of taxation. d) firms using their monopoly power to enforce excessive price hikes.
a) the central bank creating excessive amounts of money.
The marginal benefit of going to a 'Cats game during the week is currently $6 for you. Assume that the price of going to the game measures its marginal cost, and that price is currently $4. Assuming you are rational, you will: a) continue going to games until the marginal benefit of doing so falls to zero. b) choose not to go to any games during the week. c) continue going to games until the marginal benefit of doing so falls below $4. d) not be able to enjoy a net gain from going to games during the week.
c) continue going to games until the marginal benefit of doing so falls below $4.
Your opportunity cost of going to a movie is: a) the price of the ticket. b) the price of the ticket plus the cost of any soda and popcorn you buy at the theater. c) the total cash expenditure needed to go to the movie plus the value of your time. d) zero, as long as you enjoy the movie and consider it a worthwhile use of time and money.
c) the total cash expenditure needed to go to the movie plus the value of your time.
which of the following won't shift the demand curve for a good: a) changes in price of good b) changes in price of similar goods c)changes in consumer taste d) changes in individual income
changes in price of good
which of the following is most likely to have an inelastic demand function in the short run
cigarettes
positive statements
claims that attempt to describe the world as it is
normative statements
claims that attempt to prescribe how to world should be
shifts in the demand curve
consumer income price of related goods consumer tastes expectations number of buyers
Governments may intervene in a market economy in order to: a) protect property rights. b) correct a market failure due to externalities. c) achieve a more equal distribution of income. d) All of the above.
d) All of the above.
All of the following topics fall within the study of microeconomics EXCEPT: a) the impact of cigarette taxes on the smoking behavior of teenagers. b) the role of Microsoft's market power in the pricing of software. c) the effectiveness of antipoverty programs in reducing homelessness. d) the influence of the government budget deficit on economic growth.
d) the influence of the government budget deficit on economic growth.
England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. _____ workers have an absolute advantage in producing scones, and______ workers have an absolute advantage in producing sweaters.
english; scottish
_____workers have a comparative advantage in producing scones, and_____workers have a comparative advantage in producing sweaters.
english; scottish
The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that
equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.
A price change causes the quantity demanded of a good to decrease by 30%, while the total revenue of that good increases by 15%. The demand curve is elastic in this region.
false
A point inside the production possibilities frontier is
feasible, but not efficient.
The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by
government actions that distort prices.
The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he receives in Social Security benefits is typically reduced. The provision of Social Security gives people the incentive to save ____ while working. Moreover, the reduction in benefits associated with higher earnings gives people the incentive to ______ past age 65.
less; not work
the difference between microeconomics and macroeconomics is that:
microeconomics looks at individual consumers, macroeconomics looks at state and national totals
A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only 2 years of benefits. This change gives people the incentive to find a job _____ quickly than if welfare benefits lasted forever. The loss of benefits after 2 years will result in the distribution of income becoming ____ equal. In addition, the economy will be _____ efficient because of the change in working incentives.
more less;more
An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences, it would
move the economy along the production possibilities frontier.
inelastic demand
quantity demanded doesnt responded strongly to price changes (price elasticity of demand is less than 1)
elastic demand
quantity demanded responds strongly to changes in price (price elasticity of demand is greater than 1)
equilibrium
refers to a situation when quantity demanded equals quantity supplied
A change in which of the following will NOT shift the demand curve for hamburgers?
the price of hamburgers
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
microeconomics
the study of how households and firms make decisions and how they interact in markets
The ability of firms to enter and exit a market over time means that, in the long run,
the supply curve is more elastic.
When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage,
they both obtain consumption outside their production possibilities frontier.
Which goods will a nation typically import?
those goods in which other nations have a comparative advantage