econ 1014 exam 1

Suppose that when good J is free, buyers will demand 100 units of it, but the quantity demanded falls by 5 units for every $2 increase in the price. If the quantity supplied is fixed at 60 units, the equilibrium price will be:

$16

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

What is thinking on the margin?

Making choices by comparing the additional benefits and additional costs from doing a little bit more of some activity.

Nobel laureate ______________ once wrote: "Inflation is always and everywhere a monetary phenomenon."

Milton Friedman

Why did farm revenues decrease and computer chip revenue increase when both industries experienced productivity growth?

The elasticity of demand for food was smaller than the elasticity of demand for computer chips.

Why are gun buyback programs likely to be unsuccessful?

The supply of old guns is very elastic. -->So, an increase in demand just increases the quantity supplied.

Which economist began testing the supply and demand model by running experiments with his undergraduate students in 1956?

Vernon Smith -->For his pioneering work in experimental economics, he was awarded the Nobel Memorial Prize in Economic Sciences in 2002.

Total producer surplus is measured by the area _____ and below the price.

above the supply curve -->The height of the supply curve is the minimum price that a seller would be willing to accept. When the market price is higher than that, producers earn surplus.

one benefit of trade is that it:

allows for increased specialization and mass-production techniques that lower per unit costs of production.

Which will cause a decrease in demand?

an increase in the price of complements -->If the price of peanut butter rises, your demand for jelly will fall, for example.

Specialization and trade can ______ the per unit cost of production because ________.

decrease; it created economies of scale associated with large-scale productions

Wealth comes from:

economic growth

booms and busts refer to the:

fluctuations in economic activity over time.

A firm that doesn't pay for the pollution it emits has an incentive to emit too much pollution. In this case:

market incentives are too strong. -->Sometimes the invisible hand is absent, not just invisible.

If a student studies hard simply to avoid feeling like a failure, this demonstrates that incentives:

matter because feeling like a failure would be a penalty of not studying hard enough. -->Incentives are the rewards or penalties that motivate behavior and are not always financial in nature.

monetary and fiscal policy

monetary and fiscal policy can affect the length and severity of recessions, the Federal Reserve is responsible for monetary policy, and the Great Depression could have been less severe given different monetary and fiscal policy

Division of knowledge refers to:

people learning different tasks in which they specialize.

A horizontal supply curve represents a(n) ______ supply.

perfectly elastic

A vertical demand curve represents a(n) __________ demand.

perfectly inelastic -->This is because a vertical demand curve represents the same quantity at different prices.

The _____ is the producer's gain from exchange.

producer surplus -->It is equal to the market price minus the minimum price that sellers would have been willing to accept.

The main incentive for business activity is:

profit

Institutions that support economic growth are the ones that:

provide incentives for entrepreneurs to take risks and innovate

The elasticity of supply measures:

responsiveness of the quantity supplied to a change in price. -->When the price rises, quantity supplied will rise too, but the elasticity of supply helps us answer the question, "by how much?"

Workers in sectors with falling wages resulting from trade will move to sectors with _____ wages.

rising

According to the text, the best estimate for the elasticity of demand for oil is ______ and for supply in the long run it is _______.

-0.5; 0.3

Suppose that in Mexico, it takes three labor hours to produce one shirt and nine labor hours to produce one computer. Suppose that in the United States, it takes two labor hours to produce one shirt and five labor hours to produce one computer. In terms of shirts, what is the opportunity cost of a computer produced in Mexico?

3.00 -->This means the opportunity cost of one shirt is 1 ÷ 3 = 0.33 computers.

an example of self-interest not being aligned with social interest?

A firm does not have to pay for its pollution emissions. -->If the firm does not bear the cost of the pollution, it may tend to over pollute.

Which of the following statements is (are) true? I. Economies grow at a changing pace. II. The Great Depression was a normal response to changing economic conditions. III. All recessions can be avoided.

I only -->The existence of booms and busts implies that this statement is true.

inflation

Inflation occurs when a seller increases the price(s) of a good because of rising input prices. --> Inflation refers to an increase in the overall price level, not just in some prices.

What happened to the demand for oil from the early twentieth century to the 1970s?

It increased steadily. -->Growing energy requirements, increasing GDP and other factors lead to a steady increase in the demand for oil.

What are the institutions that help foster the appropriate incentives for economic growth?

a dependable legal system, property rights, and competitive and open markets

A decrease in demand along a fixed supply curve results in:

a lower equilibrium quantity. -->A decrease in demand is represented by a leftward shift of the demand curve.

Adam Smith coined the term "invisible hand" to mean:

a metaphorical hand that leads individuals to promote social interest by pursuing self-interest ex: A Vietnamese farmer grows rice, an exporter ships it to the United States, and a grocer in New York sells it to a customer.

what causes the supply curve to shift to the right

a rise in technology, a fall in the costs of production, a fall in taxes on output

The ability of one producer to produce one good or service using fewer inputs than another producer is:

absolute advantage

Total consumer surplus is measured by the area _____ and _____ the price.

below the demand curve; above -->It's the difference between what buyers are willing to pay (shown by the demand curve) and the market price.

Most of us can earn in one day of nonfarm work enough money to purchase more food than we could possibly grow ourselves in a year. One important reason for this is that farmers:

can afford to buy large-scale farming equipment because they sell large quantities of output. -->Economies of scale that go with specialization vastly increases productivity.

example of a normal good

clothes -->Clothes are a necessity, and necessities are normal goods.

Trade _____ by moving goods from people who value them less to people who value them more.

creates value -->The increase in value is the gain from trade.

Economies of scale are the _____ in cost that arise when goods are mass-produced.

decreases -->Economics of scale are defined as the reduction in costs by increasing the volume of goods produced.

The incidence of malaria is not just about geography; it's also about:

economic growth. -->Economic growth begets wealth, which pays for the resources needed to prevent malaria.

Economists understand that gun buyback programs and slave redemption efforts (wherein a charitable organization raises money and uses that money to buy and free slaves in places like the Sudan) are less effective than their proponents hope they will be because economists incorporate their understanding of the:

elasticity of supply. -->In both cases, supply is more elastic than program proponents' hope.

Equilibrium occurs when the quantity demanded is _____ the quantity supplied.

equal to -->When a market is in equilibrium, there is no pressure for price to rise or fall. Buyers want to buy the exact amount of a good that sellers have available.

Who responds to incentives?

everyone

"According to the supply and demand model, all else equal, if the price of one of its complements increases, the price of a good will increase." This statement is:

false, because if the price of one of its complements increases, the price of a good will decrease. -->This is because an increase in the price of a complement will decrease the demand for the good in question.

A grocery store is running a "buy-one-get-another-at-one-half-off" promotion on a dozen doughnuts. So the first dozen is $6 and the second would be $3. A person would buy the second dozen if their marginal benefit from the second dozen doughnuts is:

greater than $3

A producer has a comparative advantage in the production of a good if it:

has a lower opportunity cost than other producers. -->A producer should specialize in a good for which it has a comparative advantage.

A good with inelastic demand is likely to:

have its elasticity of demand increase in the long run. -->The demand for most goods becomes more elastic over time.

What is not a factor contributing to making a country wealthy?

high population growth

Overall, it's the wealthiest countries that have the _____ rates of infant survival.

highest

A change in _____ does not shift the demand curve.

input prices -->Input prices are a supply factor.

the quantity supplied

is the amount of a good that firms are willing and able to sell at a particular price during a given period of time

quantity demanded

is the amount that buyers are willing and able to buy at a particular price

The absolute value of the elasticity of demand for a "necessity" good with few close substitutes is:

less than 1. -->Necessities tend to have inelastic demand.

When the market price falls, we can expect consumer surplus to:

rise. -->Since consumer surplus is equal to the maximum price a consumer is willing to pay minus the price actually paid, when the market price falls we can expect consumer surplus to rise.

the demand curve

shows how much buyers are willing and able to buy at different prices

A slave redemption effort (wherein a charitable organization raises money and uses that money to buy and free slaves in places like the Sudan) will cause an initial increase in the number of people captured into slavery if the:

supply curve for slaves is upward-sloping. -->In this case, the increase in demand increases the price, which increases the quantity supplied.

The productivity increase in computer chips shifted the ___________ curve to the ___________, thereby _________ the price and ___________ revenue.

supply; right; decreasing; increasing -->Productivity increases shifts the supply curve to the right, lowering the price along a constant demand curve. Since the demand for computer chips is elastic, this then raised computer chip revenue.

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

The total amount of knowledge in a society that has no trade or specialization is largely limited by:

the capacity of any one person's brain. -->Because every person knows the same set of facts necessary for survival.

The production possibilities frontier shows:

the combinations of outputs a country can produce given its resources and productivity.

Why can economic booms and busts not be avoided?

the economy is always being struck by unavoidable shocks

The Great Depression could have been shorter and less deep if only:

the government, especially the U.S. Federal Reserve, had acted more quickly and more appropriately. -->At the time, however, the tools at the government's disposal—monetary and fiscal policy—were not well understood.

The Arctic National Wildlife Refuge (ANWR) is

the largest of Alaska's 16 national wildlife refuges. -->It is the largest wildlife refuge in Alaska.

Adam is deciding which of two universities in Boston he should attend. One university is offering him a full-tuition scholarship. The other university is ranked higher but is offering him only a partial-tuition scholarship. What will increase Adam's opportunity cost of attending the higher-ranking university?

the lower-ranking university's increasing the offer to include fees and books -->The better the offer, the greater the opportunity cost of passing it up.

If the Washington, D.C., police department began to buy back pairs of shoes, no questions asked, for $10 each, economists would expect that:

the number of people wearing shoes in Washington, D.C., would not change at all as a result of the shoe buyback. -->Just as in a gun buyback, the elasticity of the supply of shoes is likely to be very high.

incentives

the rewards or penalties that motivate behavior and are not always financial in nature.

The historical rise in living standards of American workers is primarily a result of:

the rise in American productivity

The opportunity cost of a choice is:

the value of the opportunities lost

Suppose that when good X is free, buyers will demand 200 units of it, but the quantity demanded falls by 5 units for every $2 increase in the price. If the price is $30 and the quantity supplied is 125 units:

there is no pressure for the price to change. -->The quantity demanded is 200 − (5 × ($30 ÷ $2)) = 125. This is equal to the quantity supplied, 125. A market is in balance when quantity supplied and quantity demanded are equal. There is no reason for price to change when a market is in equilibrium.

The theory of comparative advantage says that if two people—one who is highly productive and another who is much less productive—trade:

they can trade to their mutual benefit. -->This reveals the power of trade.

The negative slope of the PPF demonstrates the concept of:

trade-offs -->And the bowed-outward shape shows the concept of increasing opportunity costs.

A producer has an absolute advantage in the production of a good if it:

uses fewer resources than other producers.

The opportunity cost of a choice is the _____ of the opportunities lost.

value -->The value of the next best forgone alternative is known as opportunity cost.

Suppose the 100 people in society X all know the same 10 facts, but the 10 people in society Z specialize, so that there are five facts that they all know, but each person also knows five unique facts. If the standard of living is roughly equivalent to the total number of societal facts known per person, which society has a better standard of living?

society Z -->There are 10 facts known in society X and 100 people, which results in an average of 0.1 facts per person. In society Z, there are five common facts and 50 specialized facts. That is 55 total facts, which results in an average of 5.5 per person.