Final Exam

Ceteris paribus means: a. everything changes b. nothing changes c. everything else remains constant d. everything else changes

c. everything else remains constant

What has caused the rise in income inequality?

-Skilled-based technological change: The middle class has be "hollowed out" as machines have replaced medium-skilled labor. -Increase of globalization: As medium-skilled jobs move off-shore, the replaced workers must face a decision of increasing their education to obtain higher-paying jobs or to move to lower-paying jobs -Decline of unions & the decline of real minimum wage structure: Historically, unions have affected the wage structure by boosting the wages of lower middle class workers. In the US, the percent of private sector workers covered by unions has decreased from more than 2-% in the mid-1970s to less than 10% in 2010. At the same time, since nominal minimum wage has not increased in step with inflation, the real minimum wage has decreased in many countries; this contributes to the decline of real wages of the lowest income quintile. Also, the increase of immigration and the use of illegal immigrant labor have weakened unions and the application of the minimum wage. -Emergence of a powerful financial sector: An increase in the share of income accruing to the top 1 percent of the income distribution is partially due to a dramatic increase in salaries in the financial sector which, in turn, can be attributed to the structure of the financial system and its associated incentives.

Douglass North states that there are four factors that comprise transaction costs. Please list such factors and explain how opportunism, bounded rational can influence firm's decisions.

1. Measurement refers to the calculation of the value of all aspects of the good or service involved in the transaction. (Appears in the concept of ideological attitudes and perceptions) 2. Enforcement refers to the need for an unbiased third party to ensure that neither party involved in the transaction reneges on their part of the deal (Appears in the concept of ideological attitudes and perceptions) 3. Ideological attitudes and perceptions encapsulates each individual's set of values, which influences their interpretation of the world 4. The size of the market affects the partiality or impartiality of transactions

Consider the market for pizza using Supply & Demand. Show the effect of each of the following on equilibrium price and quantity and draw two separate graphs of each of the following (explain what shifts and why): 1. Opening new pizza parlors 2. A decrease in the price of hamburgers

1. Must have filly labeled supply and demand graph showing beginning and ending equilibria. In this case, the Supply of pizza shifts to the right (increases) due to the new firms (increased market size) resulting in lower prices and quantity. 2. Assuming hamburgers are a substitute, as the price of a substitute decreases, the demand for pizza will also decrease. This results in a shift to the left (decrease) of demand, resulting in lower prices and quantity

comparative advantage

A comparative advantage between two or more producers indicates that the producer with the comparative advantage has lower relative opportunity costs.

Absolute advantage

Absolute advantage refers to a producer having higher efficiency, or the ability to produce more output with the same resources, of production.

The slope of the PPF is: a. Marginal utility b. the same as the demand curve c. Marginal opportunity costs d. Always linear

c. Marginal opportunity costs

Consider the tradeoff between Fuel Efficiency and Automobile Safety. Draw a graph and then show the effect of a new material that is as strong as steel, but lighter.

Graph: -PPC with axes for Fuel Efficiency and Automobile Safety (curved) -End attached to fuel efficiency moving outward (reflecting lighter material) while other end stays constant

Why is the Production possibilities curve curved instead of a straight line?

Specialized resources imply different productivity and hence different opportunity costs. Assuming that a person hires or fires according to ability (rather than randomly), as more people are hired, the productivity decreases, resulting in increasing marginal opportunity costs since the slope of the PPC is opportunity cost.

A student says "an increase in price causes a decrease in demand." Why is that wrong?

That statement is wrong because an increase in price only causes a movement along the demand curve. "Decrease in demand" means that the demand curve shifts; however, the demand curve NEVER shifts because of a price change.

The PPF is drawn as a curve because: a. There are increasing opportunity costs b. The production is efficient c. resources are unspecialized d. opportunity costs are constant

a. There are increasing opportunity costs

Why would a country import an item from another country that was less efficient at producing that item?

Trade is guided by comparative advantage rather than absolute advantage or efficiency. Therefore, a country would import an item from another country that was less efficient at producing that item if the other country has lower relative opportunity costs.

Why is trade beneficial to both countries?

Trades allows a country to move outside its own production possibilities curve. Depending on the relative prices of its imports and exports, a country may become much better off than if it was self-sufficient.

What does it mean to say that market equilibrium is stable?

When the market reaches equilibria, the natural price and market price are equal. At equilibrium, the quantity supplied equals the quantity demanded meaning the market clears.. The market will remain in equilibrium unless some outside force causes it to move away. If the market is not in equilibrium (surplus or shortage), the invisible hand will guide it towards equilibrium.

The demand curve will shift right (increase) if: a. Price increases b. Technology decreases c. Income increases d. Price of substitute decreases

c. Income increases

If technology improves, that will be reflected on the supply curve as: a. An increase (shift right) b. No change c. A move along the supply curve, not a shift d. A decrease (shift left)

a. An increase (shift right)

Adam Smith's theory of the invisible hand can be used to explain: a. Why government is not needed to control the market b. why the market tends to move away from equilibrium c. why a shortage results from too high a price d. why natural price is always higher than market price

a. Why government is not needed to control the market

In a competitive market, no single producer can influence market price because: a. many other sellers are offering a product that is essentially identical b. consumers have more influence over the market price than producers do c. government intervention prevents firms from influencing price d. producers agree not to change the price

a. many other sellers are offering a product that is essentially identical

When the market is in equilibrium, a. natural price equals market price b. quantity supplied exceeds quantity demanded c. demand equals supply d. it will tend to move away from equilibrium

a. natural price equals market price

A price-taking firm produces rubber balls. When the price of the rubber balls is below the firm's minimum average total cost, but above the firm's minimum average variable cost, the firm: a. will experience losses but it will continue to produce rubber balls in the short run b. will shut down in the short run c. will be earning both economic and accounting profits d. should raise the price of its product

a. will experience losses but it will continue to produce rubber balls in the short run

Using class attendance example, why would more people be expected to attend class at least once per week compared to twice per week? a. Opportunity costs decrease b. Marginal benefit decreases c. Marginal costs decrease d. Because they have nothing better to do

b. Marginal benefit decreases

A student on the Millenium scholarship is trying to decide whether to take Economics Sociology. If they were both covered by the scholarship and if they had the same book costs, the opportunity cost of taking economics would be: a. Zero b. Not taking sociology c. The same as sociology d. Tuition and books

b. Not taking sociology

An effective (binding) price floor would cause: a. a price lower than equilibrium b. a surplus c. a shortage

b. a surplus

Consider the market for music file downloads and consider the effect of increased RIAA lawsuits against illegal downloads. This would cause: a. an increase in illegal downloading b. an increase in demand for legal downloads c. a decrease in demand for legal downloads d. a decrease in price of legal downloads

b. an increase in demand for legal downloads

A person is trying to decide whether to buy an additional bottle of wine. This is an example of: a. opportunity cost b. marginal decision c. irrational decision-making d. insatiability

b. marginal decision

Consider the market for gasoline, after hurricane Katrina knocked out oil producing/refining, we would expect: a. demand to decrease b. supply to decrease c. a decrease in quantity and price d. an increase in price and quantity

b. supply to decrease

Ticket scalping (selling tickets at a higher face value on the night of an event) is an example of: a. Inefficiency b. The opportunity cost of standing in line c. Diminishing marginal utility d. A price ceiling

b. the opportunity cost of standing in line

Refer to Figure 14-5. When market price is P5, the firm's maximum profit is the area: a. P5 x Q3 b. (P5-P3) x Q2 c. (P5 - P4) x Q3 d. When the market price is P5 there are no profits

c. (P5 - P4) x Q3

If the major economic effect of hurricane Katrina was causing people to lose jobs; in the market for gasoline, this would cause: a. An increase in demand b. A decrease in demand due to higher prices c. A decrease in demand due to lower income d. an increase in prices and quantity

c. A decrease in demand due to lower income

Which of the following is not one of the assumptions about economic psychology? a. Rational b. Maximizes c. Amoral d. Self-interested

c. Amoral

If a point was inside the PPF, that would represent: a. An impossible point b. An efficient point c. An inefficient point d. an increase in resources

c. An inefficient point

If costs increase, a PPF will be shown as: a. an increase (shift right) b. No change c. A move along the PPF, not a shift d. A decrease (shift left)

d. A decrease (shift left)

Which of the following will NOT cause supply to change? a. An increase in costs b. An increase in the number of firms c. An increase in the price of another product d. An increase in demand

d. An increase in demand

When falls from P3 to P1, the perfectly competitive firm finds that: a. fixed cost is higher at a production level of Q1 than it is at Q3 b. it should produce Q1 units of output c. it should produce Q3 units of output d. it is unwilling to produce any output

d. it is unwilling to produce any output

The short-run supply curve for a firm in a perfectly competitive market is: a. likely to be horizontal b. likely to slope downward c. determined by forces external to firm d. its marginal cost curve (above average variable cost)

d. its marginal cost curve (above average variable cost)

The normal reason given for a price floor is: a. to help low income consumers b. to help low cost producers c. to help imports d. to help high cost producers

d. to help high cost producers