ECON 201, Exam 1

The adage, "there is no such thing as a free lunch," means

all product are costly when consumed

A Market Economy

allocates resources through the decentralized decisions of many households and firms as they interact in markets.

The most important determinant of living standards is

productivity, the amount of goods and services produced per unit of labor.

Causes for Market Failure

1. Externalities - when the production or consumption of a good affects bystanders ( like pollution ). 2. Market Power - a single buyer or seller has substantial influence on market price ( like monopoly ).

Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 chair is

1/5 table for Mike and 1/3 table for Sandy

Which of the following is true concerning market economies? Market economies . . .

address the problem of efficiency

Opportunity Cost

Direct Cost + Indirect Cost

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.

When can two countries gain from trading goods?

a. when the first country can only produce the first good and the second country can only produce the second good. b. when the first country can produce both goods, but can only produce the second good at great cost, and the second country can produce both goods, but can only produce the first good at a great cost. c. when the first country is better at producing both goods and the second country is worse at producing both goods.

Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes ceramic vases, but Regan is better at producing both goods. In this case, trade could

benefit both Jayson and Regan

Trade between US and Haiti

benefits both countries

In the long run, inflation is almost always cause by

excessive growth in the quantity of money, which causes the value of money to fall.

What is the largest component of GDP?

consumption

The marginal benefit derived from consuming an additional unit of a good or service

decreases as one consumes more of the good or service

One way to increase the size of the economy pie is to enforce

efficiency

One of the ways to deal with the problem of externalities and market power is

government intervention ( when the market fails to allocate resources efficiently, the government must intervene to improve market outcomes )

Economics is organized in a market economy by

households and firms

In the market for goods and services

households are buyers and firms are sellers

In markets for the factors of production

households are sellers and firms are buyers

Absolute advantage is found by comparing different producers'

input requirements per unit of output

In a simple circular flow diagram

inputs are the same as factors of production

Monopsonist

one who is a single buyer for a product or service of many sellers.

Comparative advantage is related most closely to

opportunity cost

In a simple circular flow diagram, goods and services are the same as

outputs

Which of the following statements about inflation and unemployment is correct?

the Federal Reserve reduces the rate of inflation from 10 percent to 3 percent, then the rate of unemployment will fall in the short-run

In a simple circular flow diagram, if firms want to purchase land, they will go to

the market for factors of production

Gross Domestic Product ( GDP )

the market value of all final goods and services produced within a country in a given period of time.

A production possibilities frontier is a straight line when

the rate of trade-off between the two goods being produced is constant

Which of the following will you classify as government purchases?

the state of Ohio just spent $2 billion on road repairs

Economics

the study of how society manages its scarce resources.

James decides to spend two hours watching a movie rather than attending history class. His opportunity cost of watching the movie is

the value of the knowledge he would have received had he attended class

Demand

the willingness and ability to buy a good.

Suppose there are only two people in the world. Each person's production possibilities frontier also represents his or her consumption possibilities when

they choose not to trade with one another

In the short run ( 1-2 years ), many economic policies push inflation and unemployment in opposite directions.

true

Market Failure

when the market fails to allocate society's resources efficiently.

Supposing your friend's landlord decides to increase his rent in his last semester in college. This increase . . .

will increase her opportunity cost of going to college if she would have to pay less for rent had she not come to college.

Which of the following will you classify as consumption expenditure?

your parents spent 50% more on tuition for you and your siblings