Exam I (Ch. 1, 2, 3, 4, & 5)

Which one of the following expressions best states the idea of opportunity cost?

"There is no such thing as a free lunch."

The market system's answer to the fundamental question "Who will get the goods and services?" is essentially

"Those most willing and able to pay for them."

The market system's answer to the fundamental question "How will the system accommodate change?" is essentially

"Through the guiding function of prices and the incentive function of profits."

The market system's answer to the fundamental question "How will the system promote progress?" is essentially

"Through the profit potential that encourages development of new technology."

Refer to the table. If demand is represented by columns (3) and (1) and supply is represented by columns (3) and (4), equilibrium price and quantity will be

$9 and 60 units.

Which of the following statements concerning a public good is false?

All benefits associated with the production and use of a public good are received by the government.

Which of the following best illustrates the circular flow model in action?

All of these answers illustrate the workings of the circular flow model.

Which of the following statements is correct?

An increase in the price of C will decrease the demand for complementary product D.

Examples of command economies are

Cuba and North Korea.

What two conditions must hold for a competitive market to produce efficient outcomes?

Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.

If the demand curve reflects consumers' full willingness to pay, and the supply curve reflects all costs of production, then which of the following is true?

The benefit surpluses shared between consumers and producers will be maximized.

Which of the following best describes the invisible-hand concept?

The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.

Which of the following represents a normative economic statement?

The government ought to lower taxes so people have more money.

Which of the following represents a positive economic statement?

The unemployment rate is 4.8 percent.

Which of the following is one of the Five Fundamental Questions?

What goods and services will be produced?

Which of the following is not one of the five fundamental questions?

What prices will be charged for goods and services?

Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas

a + b.

In the past few years, the demand for donuts has greatly increased. This increase in demand might best be explained by

a change in buyer tastes.

The economic perspective entails

a comparison of marginal benefits and marginal costs in decision making.

Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences a

a consumer surplus of $9, and Nathan experiences a producer surplus of $3.

Assume the demand curve for product X shifts to the right. This might be caused by

a decline in income if X is an inferior good.

Which of the following would not shift the demand curve for beef?

a reduction in the price of cattle feed

Refer to the table. Suppose that demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5). If the price were artificially set at $6,

a shortage of 40 units would occur.

Let's put dollar amounts on the flows in the circular flow diagram below. a. Suppose that businesses buy a total of $130 billion of the four resources (labor, land, capital, and entrepreneurial ability) from households. If households receive $72 billion in wages, $16 billion in rent, and $26 billion in interest, how much are households paid for providing entrepreneurial ability? b. If households spend $70 billion on goods and $60 billion on services, how much in revenues do businesses receive in the product market?

a. $16 billion (130-72-16-26=16) b. 130 billion (70+60=130)

Indicate whether each of the following statements applies to microeconomics or macroeconomics: a. The unemployment rate in the United States was 3.7 percent in December 2018: b. A U.S. software firm laid off 15 workers last month and transferred the work to India: c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise: d. U.S. output, adjusted for inflation, increased by 2.3 percent in 2017: e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1 percentage point: f. The consumer price index rose by 2.2 percent from November 2017 to November 2018:

a. Macroeconomics b. Microeconomics c. Microeconomics d. Macroeconomics e. Microeconomics f. Macroeconomics

Match each term with the correct definition. a. The next-best thing that must be forgone in order to produce one more unit of a given product: b. The pleasure, happiness, or satisfaction obtained from consuming a good or service: c. The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity: d. Making choices based on comparing marginal benefits with marginal costs:

a. Opportunity cost b. Utility c. Economics d. Marginal analysis

For each item, decide if it describes a moral hazard problem or an adverse selection problem. a. A person with a terminal illness buys several life insurance policies through the mail. b. A person drives carelessly because she has automobile insurance. c. A person who intends to torch his warehouse takes out a large fire insurance policy. d. A professional athlete who has a guaranteed contract fails to stay in shape during the off season. e. A person who anticipates having a large family takes a job with a firm that offers exceptional child care benefits.

a. adverse selection b. moral hazard c. adverse selection d. moral hazard e. adverse selection

In 2001 an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact would you expect this event to have on the following? a. The supply of cattle hides: b. Hide prices: c. The supply of leather goods: d. The price of leather goods:

a. decrease b. increase c. decrease d. increase

What effect will each of the following have on the demand for small cars such as the Mini Cooper and Fiat 500? a. Small cars become more fashionable: b. The price of large cars rises (with the price of small cars remaining the same): c. Income declines and small cars are an inferior good: d. Consumers anticipate that the price of small cars will decrease substantially in the near future: e. The price of gasoline substantially drops:

a. demand increases b. demand increases c. demand increases d. demand decreases e. cannot be determined

Other things equal, an increase in a consumer's money income

shifts the individual's budget line rightward because she can now purchase more of both products.

Which of the following is a capital resource?

software used by a firm

a. Explain the typical shapes of the marginal-benefit and marginal-cost curves. The marginal-benefit curve is ________ sloping. The marginal-cost curve is _________sloping. b. With these curves, the optimal allocation of resources to a particular product will occur when _________ c. If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product?

a. downward;upward b. MB=MC c. Fewer

a. When negative externalities exist in a market, b. The government could correct these divergences between equilibrium output and efficient output by c. An example of an external benefit is

a. equilibrium output will be greater than the efficient output. b. imposing regulations that force firms to internalize the external costs. c. the safety provided by motion-detector lights.

Suppose that you initially have $100 to spend on books or movie tickets. The books start off costing $25 each and the movie tickets start off costing $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease? a. Your budget increases from $100 to $150 while the prices stay the same: Increase Correct. b. Your budget remains $100, and the price of books remains $25, but the price of movie tickets rises to $20: Decrease Correct. c. Your budget remains $100, and the price of movie tickets remains $10, but the price of a book falls to $15:

a. increase b. decrease c. increase

Assume that candle wax is traded in a perfectly competitive market in which the demand curve captures buyers' full willingness to pay while the supply curve reflects all production costs. For each of the following situations, indicate whether the total output should be increased, decreased, or kept the same in order to achieve allocative and productive efficiency. a. Maximum willingness to pay exceeds minimum acceptable price: b. Marginal Cost > Marginal Benefit: c. Total surplus is at a maximum: d. The current quantity produced exceeds the market equilibrium quantity:

a. increased b. decreased c. kept the same d. decreased

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. a. 3,000 units at which MC = $10 and MB = $13: b. 11 units at which MC = $4 and MB = $3: c. 43,277 units at which MC = $99 and MB = $99: d. 82 units at which MC < MB: e. 5 units at which MB < MC:

a. more b. fewer c. current number d. more e. fewer

Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality. a. Resources are overallocated: b. Tammy installs a very nice front garden, raising the property values of all the other houses on her block: c. Market demand curves are too far to the left (too low): d. Resources are underallocated: e. Water pollution from a factory forces neighbors to buy water purifiers:

a. negative externality b. positive externality c. positive externality d. positive externality e. negative externality

a. A public good is b. Public goods are not privately provided because c. The free-rider problem occurs when

a. nonrival and nonexcludable. b. when goods are nonexcludable, those purchasing the good could allow others the use without requiring compensation. c. people benefit from the public good without contributing to the cost. d. U.S. border patrol is a public good, but satellite TV is a private good.

What effect will each of the following have on the supply of auto tires? a. A technological advance in the methods of producing tires: b. A decline in the number of firms in the tire industry: c. An increase in the price of rubber used in the production of tires: d. The expectation that the equilibrium price of auto tires will be lower in the future than it is now: e. A decline in the price of large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires): f. The levying of a per-unit tax on each auto tire sold: Supply decreases Correct. g. The granting of a 50-cent-per-unit subsidy for each auto tire produced:

a. supply increases b. supply decreases c. supply decreases d. supply increases e. supply increases f. supply decreases g. supply increases

How will an increase in state subsidies to public colleges affect the market for public and private colleges? a. In the market for public colleges: b. In the market for private colleges:

a. supply will shift to the right b. demand will shift to the left

Which of the following is the best synonym for "marginal" in economics?

additional

Upon learning that his auto transmission is about to fail, Ray sells his car to an unsuspecting buyer. This circumstance illustrates the

adverse selection problem.

Specialization—the division of labor—enhances productivity and efficiency by

all of the means identified in the other answers.

The budget line shows

all possible combinations of two goods that can be purchased, given money income and the prices of the goods.

The assertion that "there is no free lunch" means that

all production involves the use of scarce resources and thus the sacrifice of alternative goods.

The basic purpose of the other-things-equal assumption is to

allow one to reason about the relationship between variables X and Y without the intrusion of variable Z.

Which of the following will cause the demand curve for product A to shift to the left?

an increase in money income if A is an inferior good

The socially optimal amount of pollution abatement occurs where society's marginal

benefit of abatement equals its marginal cost of abatement.

An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that

bicycles are normal goods.

Among the following examples, the one that best illustrates a public good is the

bike paths around a city or town.

Refer to the diagram. Assuming equilibrium price P1, producer surplus is represented by areas

c + d.

The main mechanism that regulates the market system is

competition

Market failure is said to occur whenever

competitive markets do not allocate resources in the most economically desirable way.

Which of the following is a labor resource?

computer programmer

The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. This statement best describes the concept of

consumer sovereignty

People enjoy outdoor holiday lighting displays and would be willing to pay to see them, but can't be made to pay. Because most people who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a

demand-side market failure.

The relationship between quantity supplied and price is _____, and the relationship between quantity demanded and price is _____.

direct; inverse

In a market economy, a significant change in consumers' desire for product X will

do all the things mentioned in the other answers.

Property rights are important because they

encourage cooperation by improving the chances of mutually agreeable transactions.

If competitive industry Z is making substantial economic profit, output will

expand in industry z, as more resources will move to that industry

Which of the following is an example of a negative externality?

falling property values in a neighborhood where a disreputable nightclub is operating

Answer the question based on the given supply and demand data for wheat. If the price in this market was $4,

farmers would not be able to sell all their wheat.

"Consumer sovereignty" refers to the

idea that the decisions of producers must ultimately conform to consumer demands.

Even though local newspapers are very inexpensive, people rarely buy more than one of them each day. This fact

implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost.

At the current price, there is a shortage of a product. We would expect price to

increase, quantity demanded to decrease, and quantity supplied to increase.

Sellers will opt out of markets in which

information about buyers is inadequate which allows some buyers to consequently impose high costs on the sellers.

Refer to the diagram. Flow 2 represents

land, labor, capital, and entrepreneurial ability

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem?

levy a Pigovian tax on the producers of paper products and use the tax revenues to clean up the river

In constructing models, economists

make simplifying assumptions

Which of the following would not be classified as an economic resource by economists?

money in a business checking account

Refer to the diagram. An increase in quantity supplied is depicted by a

move from point y to point x.

Which of the following is a land resource?

natural gas

The Latin term "ceteris paribus" means

other things equal

Refer to the budget line shown in the diagram. If the consumer's money income is $50, the

price of C is $10 and the price of D is $5.

What are the determinants of supply?

prices of other goods technology resource prices number of producers

Allocative efficiency is concerned with

producing the combination of goods most desired by society.

Copyrights and trademarks are examples of

property rights

Which of the following is a fundamental characteristic of the market system?

property rights

The Lojack car recovery system allows the police to track stolen cars. As a result, they not only recover 90 percent of Lojack-equipped cars that are stolen but also arrest many auto thieves and shut down many "chop shops" that rip apart stolen vehicles to get their parts. If the government subsidized LoJack purchases, it would:

provide both private and social benefits.

From society's point of view, the economic function of profits and losses is to

reallocate resources from less-desired to more-desired uses.

Suppose that tacos and pizza are substitutes, and that soda and pizza are complements. We would expect an increase in the price of pizza to

reduce the demand for soda and increase the demand for tacos

Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that

resources are currently underallocated to the provision of holiday lighting in Anytown.

Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread, and potatoes are a consumer substitute for bread, we would expect the price of wheat to

rise, the supply of bread to decrease, and the demand for potatoes to increase.

The emergence of self-driving cars is an example of "creative destruction" because

self-driving cars will likely replace most cars that require drivers.Correct

Refer to the diagram. A decrease in supply is depicted by a

shift from S2 to S1.

If the price of product L increases, the demand curve for close-substitute product J will

shift to the right.

Refer to the diagram, in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should

tax producers so that the market supply curve shifts leftward.

The distinction between microeconomics and macroeconomics is

that microeconomics studies the behavior of individual consumers, workers, and firms, while macroeconomics studies the economy as a whole.

Some large hardware stores, such as Home Depot, boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of

the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits.

Mia wants to buy a book. The economic perspective suggests that Mia will buy the book if

the marginal benefit of the book is greater than its marginal cost.

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates

the moral hazard problem.

Economics may best be defined as the

the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity

Productive efficiency refers to

the use of the least-cost method of production.

Buyers will opt out of markets in which

there is inadequate information about sellers and their products.

Consider the following statement: "The market system is a profit-and-loss system." This statement is

true, because producer decisions are motivated by the attempt to earn profits.

Consider the following statement: "Competition is the disciplinarian of the market economy." This statement is

true, because when producers face competition, they are driven to provide goods and services at the lowest possible cost.

Camille is at the candy store with Grandma Mary, who offers to buy her $6 worth of candy. If lollipops are $1 each and candy bars are $2 each, what combination of candy can Camille's Grandma Mary buy her?

two lollipops and two candy bars

Refer to the diagram. Flow 1 represents

wage, rent, interest, and profit income

Economists consider governments to be "wasteful"

whenever they over- or underallocate resources to a project.

Economic systems differ according to which two main characteristics?

who owns the factors of production and the methods used to coordinate economic activity