Econ Exams

Producers _________blank factors of production in the _________blank market.

buy; factor Producers buy factors, such as labor, in the factor market.

Which of the following is most likely a private good?

cars Since cars can be withheld from the consumer, they would be a private good. Police protection, highways, and parks are all difficult to exclude from nonpayers.

Which of the following would represent an example of policy levers that determine macro performance?

changes to regulations Policy levers are tax policy, government spending, changes in interest rates that make money more or less available.

When the price level rises, firms may need to employ more expensive inputs in production. This implies that aggregate supply slopes upward due to which of the following effects?

cost effect Because many costs are relatively constant in the short run, higher prices for goods and services tend to widen profit margins and this causes firms to try to produce more.

In the short run, assume total costs are $20 and total fixed costs are $0 when quantity is 2. Then total Variable costs are

$20. TC = TFC+TVC and TC/Q = (TFC+TVC)/Q gives us ATC = AFC+AVC This can be manipulated to solve for ATC, AFC and AVC at any given Q.

In the short run, assume total fixed costs are $10 and total variable costs are $10 when quantity is 1. Then total costs are

$20. TC = TFC+TVC and TC/Q = (TFC+TVC)/Q gives us ATC = AFC+AVC This can be manipulated to solve for ATC, AFC and AVC at any given Q.

Calculate marginal physical product, total revenue, and marginal revenue product. The price of apples is $4 per basket. What is the marginal revenue product of the second apple picker?

$24 per worker Since the second picker adds 6 baskets to the total product and the price of an apple basket is $4 per basket, their marginal revenue product is $24 per worker.

If the MPC for an economy is 0.45, a $320.0 billion increase in taxes will ultimately cause consumption to decrease by

$261.8 billion. The initial change in consumption due to a tax increase is equal to the tax increase times the MPC. The ultimate decrease in consumption from the tax cut is the initial change in consumption times the multiplier.

To eliminate an AD shortfall of $180 billion when the economy has an MPC of 0.40, the government should decrease taxes by

$270.0 billion. The desired fiscal stimulus is equal to the AD shortfall divided by the multiplier. The general formula for computing the desired tax cut is the desired fiscal stimulus divided by the MPC.

The equilibrium price in the worldwide truck market is

$30,000. At $30,000, 120 million trucks are demanded and 120 million trucks are supplied, so the market is in equilibrium.

If a chair can be sold for $8 and it takes a worker two hours to make a chair, the marginal revenue product of this worker is

$4 per hour. Marginal physical product (MPP) is equal to the change in total output associated with one additional unit of input. Therefore if one output unit is produced in two hours, the MPP is 0.50. MRP is equal to price ($8) times MPP (0.5), so the MRP is $4.

According to the Yearbook Costs table, the marginal cost per yearbook between 100 and 200 yearbooks is equal to

$4 per yearbook. The change in costs is $400 and the change in quantity is 100 yearbooks so the marginal cost would be $4 per yearbook ($400 divided by 100 yearbooks).

If the social costs of an economic activity are $210 and the private costs are $170, then the external costs of the activity are _________, and market failure _________.

$40; occurs Social costs include both private and external costs; therefore the difference between social costs and private costs is equal to external costs. As long as external costs exist and the market fails to convey the full social costs, a market failure occurs.

Suppose a monopoly firm produces bicycles and can sell 10 bicycles per month at a price of $700 per bicycle. In order to increase sales by one bicycle per month, the monopolist must lower the price of its bicycles by $25 to $675 per bicycle. The marginal revenue of the 11th bicycle is

$425. Total revenue is equal to price times quantity. At a quantity of 10 bicycles, total revenue is $7,000 (10 × $700); and at a quantity of 11 bicycles, total revenue is $7,425 (11 × $675). Marginal revenue is the change in revenue divided by the change in quantity, which is $425.

Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600. What are the daily accounting costs for the firm described above?

$470 Accounting costs would be those costs for which the firm directly paid money. Only the revenue and implicit cost of money that could be earned by renting out the building are not counted as part of accounting costs.

At the profit-maximizing rate of output, marginal cost is equal to _________blank and marginal revenue is equal to _________blank.

$50 million; $50 million At a rate of three submarines per year, marginal revenue is equal to marginal cost at $50 million per year, so this level of production maximizes profits.

If this monopolist were forced to behave as if it operated in perfect competition, the profit-maximizing price would be

$8 per unit. In a perfectly competitive industry, firms operate at the rate of output where price is equal to their marginal cost. If this sole firm were to behave the same way, the price it charged would be given by the demand curve because this tells the firm what consumers would be willing to pay at a given quantity. The intersection of demand and marginal cost occurs at a price of $8 per unit.

According to the Production Costs table, the variable cost of the first unit is

$9 Since the fixed cost is $10 and the total cost at the first unit is $19, the variable cost is $9. This is because variable cost is equal to the difference between total cost and fixed cost at any level of production ($19 − $10).

At the profit-maximizing rate of output for a monopolist, marginal cost is

$9 per unit. Marginal revenue and marginal cost are equal at an output rate of 3 units per hour. This would represent the profit-maximizing rate of output. At this rate of output, both marginal revenue and marginal cost are equal.

If the multiplier equals 9.5 and the AD shortfall is $91.5 million, the desired fiscal stimulus is

$9.6 million. The desired stimulus (increase in government spending) is calculated as the AD shortfall divided by the multiplier.

Suppose a university raises its tuition by 20 percent and as a result the enrollment of students decreases by 4 percent. The absolute value of the price elasticity of demand is

0.2. The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore, the price elasticity of demand is equal to 4/20 or 0.2.

A minimum wage of W2 dollars per hour will result in a surplus of

1,050 workers. At a wage of W2 dollars per hour, 1,950 workers will want to work but only 900 workers would be hired.

If a market basket of goods cost $100 in the base year and $110 in a later year, then average prices have increased by

10 percent. On the basis of the two shopping trips, consumer prices rose 10 percent. To calculate this, find the difference in basket costs ($110 − $100 = $10) and then divide by the initial cost of the basket ($10/$100 = 10%).

In the table, the highest opportunity cost of missiles in terms of houses is

10,000 houses per missile. The creation of 1 missile creates the highest cost at 10,000 houses. This is the opportunity cost of producing the fourth missile given an economy is already producing three (moving from combination K to combination J).

According to the Labor Force Data table, what is the number of unemployed in Year 10?

30 million The number of unemployed workers is the difference between the labor force and the number employed, or 190 million minus 160 million.

Calculate marginal physical product, total revenue, and marginal revenue product. The price of apples is $4 per basket.

4 pickers The firm will continue to hire the next worker as long as that worker's marginal revenue product exceeds the wage. Marginal revenue product is $16 per picker at 4 pickers hired. The firm would not hire the fifth worker as marginal revenue product falls to $12 per picker.

In the utility schedule table, the total utility when two units are consumed is

44 utils.

Assume the CPI increases from 128 to 139, The rate of inflation for that year is

8.6%. The percentage change in the price level from one year to the next is the difference in the CPI divided by the value in the first year: (139 − 128)/128 = 8.6%.

What is the consumer surplus at a price of $7?

9

What is the producer surplus at a price of $7?

9

Assume that baseballs and baseball mitts are complements for each other. In the market for baseballs, what would we expect to happen if the price of baseball mitts rises?

A decrease in the demand for baseballs. When two goods are substitutes, an increase in the price of one good will increase the demand for the second good. Conversely, a decrease in the price of one good will decrease the demand for the second good. When two goods are complements, an increase in the price of one good will decrease the demand for the second good. Conversely, a decrease in the price of one good will increase the demand for the second good.

In the market for bluetooth headphones, what would we expect to happen if a new technology is developed that is more reliable than bluetooth technology?

A decrease in the demand for bluetooth headphones. Quantity demanded changes are reflected by a movement along the demand curve. A shift of demand occurs when there is a change in a determinant of demand outside of the price to own the good or service.

Assume that trees are an input into the production of city greenspaces. In the market for city greenspaces, what would we expect to happen if the price of trees rises?

A decrease in the supply for city greenspaces.

If the price of internet service falls from $95 per month to $80 over a period of one year and your income falls from $1,600 per month to $1,300 per month, then your nominal income has

decreased, and your real income has decreased. Your nominal income has decreased 18.8% while prices have decreased 15.8%.

If Q3 represents full employment, then a shift from AD1 to

AD3 will result in a full employment equilibrium at point X. Full employment is reflected in the intersections of AD3 and the AS curve at point X.

In the market for ginger, which panel best describes what should happen if the health benefits associated with ginger are made public?

D

Pick the panel that would best model the following scenario: A significant number of immigrants enter the labor market.

D An increase in the market population would increase the labor-supply curve (shift to the right).

Consider the market for new houses. The level of income increases for all consumers.

D Income is a determinant of demand. If income increases more people will demand houses if we assume they are a normal good. This will cause a shift to the right in the demand curve.

Which of the following is not true about the demand for labor?

It typically increases during a recession. Demand for labor is derived from the demand for the final product and is impacted by the firm's expectations. The diminishing marginal physical product will impact the shape of the demand for labor curve.

Rosa is willing to pay $300 for the iPhone, but the actual price is $400. This means

Rosa will not buy an iPhone. Rosa will not purchase the iPhone because she is not willing to pay the market price.

If an economy has the capacity to produce represented by PP1, then point C represents

a combination of potato chips and doughnuts that is not attainable. Efficiency occurs along the production-possibilities curve. The slope of the line reflects opportunity costs.

If supply is constant, a decrease in the demand for potato chips will cause

a decrease in equilibrium price and a decrease in equilibrium quantity. If suppliers continue to supply the same amount of chips, but demand decreases, suppliers would have an incentive to reduce their prices rather than have an unexpected increase in inventories. Suppliers will also not be willing and able to supply the current amount at the lower equilibrium price and so equilibrium quantity will fall.

Which of the following could increase aggregate supply, ceteris paribus?

a decrease in input prices. A decrease in quality of labor, and a decrease in productivity will cause the Aggregate Supply to decrease. This will cause the curve to shift left, cetris paribus.

Which of the following would not shift the market demand for labor, ceteris paribus??

a decrease in the minimum wage Wage rates are the variable on the y-axis and the number of employees are on the x-axis, therefore changes in wage rates or changes in the number of workers cause movements along the labor demand curve, and not shifts in the curve.

If the current market price is $8, then there will be

a shortage of 10 units. Shortage = Quantity Demanded − Quantity Supplied; Surplus = Quantity Supplied − Quantity Demanded

Which of the following could decrease aggregate demand, ceteris paribus?

an increase in imports A decrease in spending, such as a drop in consumption or investment, would cause AD to decrease. Conversely, an increase in spending from foreign individuals, the government, consumers, and firms will cause AD to increase.

In the market for cosmetics, what would we expect to happen if the price of cosmetics rises?

an increase in the quantity supplied of cosmetics Quantity supplied changes are reflected by a movement along the supply curve. A shift of supply occurs when there is a change in a determinant of supply outside of the price to own the good or service.

Refer to the figure. If price is $10, this perfectly competitive firm is

earning an economic profit. At a market price of $10, the firm would optimally produce 48 units. At this level of output, price would be above average total cost and so the firm would earn positive economic profit.

If the worldwide price of trucks is $40,000, the truck market

experiences a surplus of 100 million trucks per year. At $40,000, the quantity demanded for trucks is 60 million; quantity supplied of trucks is 160 million. This creates a surplus of 100 million trucks.

A plumber quits his job in Dallas and moves to San Francisco where additional plumbers are needed, but it takes a couple of months for him to find a job. He is said to be

frictionally unemployed. Unemployment associated with a job search is frictional unemployment.

Which of the following is a market incentive to discourage pollution?

green taxes Market incentives to discourage pollution include emission charges and user charges, green taxes, expectations of fines, and tradable pollution permits.

Suppose the cost of milk rose 100 percent from 2010 to 2020 and average prices for the economy rose 133 percent. Relative to others, people who purchased milk received

higher real income, as a result of the price effect. Since the price of milk does not rise as much as other prices, those who drink milk will have higher real income because they are not spending as much on milk as other goods.

Which of the following is not an effective barrier to entry?

low capital requirements Low capital requirements make it easier for a firm to enter a market. The remaining options make it more difficult for a firm to enter and so they may operate as an effective barrier to entry.

Which of the following would represent an example of external shocks that determine macro performance?

natural disasters External shocks include wars, natural disasters, terrorist attacks, trade disruptions, and so on that directly impact the productive ability of an economy.

Which of the following is not a barrier to entry?

price taking Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation.

Based on the information in the table, if the firm receives $7.00 for each pair of jeans, in the short run it should

produce 30 pairs of jeans. Since the marginal cost of producing at a rate of 30 pairs of jeans is $4.50, the firm would make a profit of $2.50 per pair of jeans, whereas at a rate of 40 pairs of jeans, the firm would lose $4 per pair of jeans at a price of $7

Ceteris paribus, according to the law of demand, if the price of a computer game increases from $25 to $30, the

quantity demanded of computer games will decrease. An increase in price will cause a decrease in quantity demanded.

In order to sell one additional unit of output, a profit-maximizing monopolist must

reduce the price of all units sold. Since the monopolist faces a downward-sloping demand curve it can only generate an increase in the quantity demanded if it reduces price.

Which of the following best represents an example of the government protecting the environment?

regulations to protect water quality Subsidizing law enforcement best represents an example of the government providing a legal framework for the economy to operate.

The market mechanism

relies on prices and sales to communicate consumer wants to producers. Prices and sales indicate to producers what they should continue to produce.

All of the following are negative externalities in production except

rent caps on apartments. The production of goods creates negative externalities when the social cost exceeds the private cost.

If the price elasticity of demand is 2 and a firm lowers its price by 10 percent, the total revenue will

rise by 10 percent. If price elasticity of demand is elastic, lower prices result in a gain in total revenue. A decrease in price of 10 percent will cause quantity demanded to increase by 20 percent. The impact will result in total revenue rising by 10 percent.

If the price elasticity of demand for cigarettes is 0.4

the demand is inelastic. The basic elasticity of demand formula is the percentage change in quantity divided by the percentage change in price. An absolute value of 0.4 indicates that demand is inelastic (less than 1) and that a 10 percent change in price will cause the quantity demanded to fall by just 4 percent. (0.4 × 0.10.)

Which of the following is the best example of capital?

the desks used in an office building. Capital refers to the final goods produced for use in the production of other goods such as equipment and structures.

Javier goes to an all-you-can-eat buffet and consumes three plates of food. Which of the following explains why the third plate of food does not provide as much satisfaction as the second plate?

the law of diminishing marginal utility When Javier orders at the buffet, each additional plate yields less and less additional satisfaction as he consumes the dinner, ceteris paribus. This describes the law of diminishing marginal utility.

If the price of sugar, an ingredient in ice cream, increases, then

the market supply curve for ice cream will shift to the left. If the cost of producing ice cream increases, the supply of ice cream will decrease.

If running apparel manufacturers expect running apparel prices to fall in the future, then right now

the market supply curve for running apparel will shift to the right. Expectations of lower prices in the future will entice producers to produce more now, at higher price levels that increase supply.

If a new sushi restaurant opens, then

the market supply curve for sushi will shift to the right. If the number of producers increases, the supply will increase.

If the elasticity of demand is 3, and the price rises by 15 percent, then

the quantity demanded will fall by 45 percent. The basic formula for price elasticity is the price elasticity of demand number = the percentage change in quantity demanded divided by the percentage change in price. 3 = x/0.15 = 0.45, so quantity demanded falls by 45 percent.

Which of the following would not shift the market demand for labor, ceteris paribus?

the wage paid to labor Wage rates are the variable on the y-axis and the number of employees are on the x-axis, therefore changes in wage rates or changes in the number of workers cause movements along the labor demand curve, and not shifts in the curve.

Competitive firms cannot individually affect market price because

their individual production is insignificant relative to the production of the industry. In a competitive market, a firm's relative output is so small that it will have no effect on the market price.

If a good generates an external cost, the market will produce

too much of the good. Social demand is less than market demand when there is a negative externality.

If marginal utility is negative, then

total utility will decrease with additional consumption. Since total utility is equal to the sum of marginal utility for all units consumed, an additional unit that adds negative marginal utility will actually decrease total utility.

Which of the following is not included in U.S. GDP?

toys produced by a U.S. firm located in China GDP measures only those products produced within a nation's borders.

Assume the MPC is 0.65. The change in total spending for the economy due to a $604.5 billion government spending increase is

$1,727.1 billion. Total aggregate spending change = Multiplier × Initial injection.

If a chair can be sold for $20 and it takes a worker two hours to make a chair, the marginal revenue product of this worker is

$10 per hour. Marginal physical product (MPP) is equal to the change in total output associated with one additional unit of input. Therefore if one output unit is produced in two hours, the MPP is 0.50. MRP is equal to price ($20) times MPP (0.5), so the MRP is $10.

What is the dollar value of total consumer and producer surplus at a market price of $6.00?

$16.00

Assume the following: cost = $44 when output = 0; cost = $50 when output = 10; cost = $58 when output = 20; cost = $60 when output = 30. Output is in units per day and cost is in total dollars per day. What is average fixed cost at 20 units of output?

$2.20 Average fixed cost is equal to fixed cost divided by quantity. Fixed cost of $44 (because total cost is $44 at 0 units of output) divided by 20 is equal to $2.20.

In the market for coffee, what would we expect to happen to equilibrium price and quantity if there is an increase in the price of tea?

Equilibrium price will rise and equilibrium quantity will rise. An increase in Demand causes increase in Price and Quantity while a decrease in Demand causes decrease in Price and Quantity. An increase in Supply causes decrease in Price and increase in Quantity while a decrease in Supply causes increase in Price and decrease in Quantity An increase in Demand causes increase in Price and Quantity while a decrease in Demand causes decrease in Price and Quantity. An increase in Supply

Country D and Country E both recorded an increase in real GDP of 4 percent per year from 1997 to 2012. During this time, the population for Country D grew at 3 percent per year and the population for Country E grew at 2 percent. Which of the following is true during this period?

Per capita GDP increased for both Country D and Country E. Since the percentage of growth in population is lower that the percentage of growth in real GDP, both countries experience per capita increases.

When the price level rises, the money consumers have saved is now worth less. This implies that aggregate demand slopes downward due to which of the following effects?

Real balances effect. The downward-sloping demand curve is explained by three separate phenomena: the real balances effect, the foreign trade effect, and the interest-rate effect. The cost effect impacts aggregate supply.

Assume a restaurant hires an additional chef who is as qualified as the current chefs. As a result, the level of output increases but by a smaller amount than when the previous additional chef was hired. Which of the following best explains this occurrence?

The chefs are working with a fixed amount of space and equipment and they get in each other's way. Since the other factors of production are fixed, they must be shared by more chefs, which means that, while the total output will increase, each chef will yield less output.

The production-possibilities curve shifts outward in response to

improved technology, more resources, or both. Outward shifts of the production-possibilities curve occur with growth. Growth is due to improved technologies which use fewer resources and/or an increase in resources.

Fiscal restraint

includes tax hikes and spending cuts. Fiscal restraint is defined as tax hikes or spending cuts intended to reduce aggregate demand (shift to the left).

Which of the following would represent an example of internal market forces that determine macro performance?

invention and innovation Population growth, spending behavior, invention and innovation represent internal market forces that determine macroeconomic outcomes while wars represent external shocks and tax and immigration policies represent policy levers.

Suppose a beach lifeguard cannot find a job because it is wintertime. This worker is most likely to be counted in which type of unemployment?

seasonal unemployment Seasonal unemployment arises when an industry needs less labor because the work is seasonal. Cyclical unemployment refers to the joblessness that occurs when there are simply not enough jobs for everyone that wants one, at the current level of output. Structural unemployment represents a mismatch between worker skills/location and the required skills/location of available jobs while frictionally unemployed workers do not usually stay unemployed because they have skills that are needed by employers, but it takes some time to find the best match for the worker and the employer.

When income changes, there is a _________blank the _________blank curve.

shift of; demand Income is one of the determinants of demand and therefore will shift the demand curve.

At price P1

society desires 1,000 packs of cigarettes At the market price of P1, the market demand for cigarettes is 1,400 more than the social demand. Social desire for quantity will be given by the intersection of price and social demand.

If external benefits occur when a good is consumed, then the government should

subsidize the consumption or production of the good. If external benefits of a good are large, then the government might be justified in encouraging production of the good.