Micro test 2 (Practice test)

Trade deficit

$ value of exports < $ value of inputs ( ex. I buy from publix, but don't trade w/them )

Trade surplus

$ value of exports > $ value of inputs

Price elasticity of demand

% change in Q.D. __________________________ % change in price

Cross elasticity of demand (CPED)

% change in Q.D. (x) If # is positive; substitutes ______________________ = % change in Price (y) If # is negative; complements

Price elasticity of income

% change in Q.D. + = normal good ______________________ (increase income; inc. Q.D.) % change in income - = inferior good (increase income ; decrease Q.D.)

Unit elastic

( decrease in price = money spent stays the same ) x=1

Reasons for elasticity

-Availability of close Substitutes ***demand*** -Definition of market -Luxury vs. necessity -The goods' share of the budget -Passage of time***supply***

An increase in the price of a good

Decreases the quantity demanded of the good

Which of the following statements about the price elasticity of demand is correct?

Demand is more elastic in the long run than it is in the short run.

quasi-public goods

Excludable but not rival. Ex.) watching game of thrones at a friends house

A solution to the "tragedy of the commons" problem, such as overfishing, deforestation, and hunting of endangered animals, is to

Have government assign property rights to these resources so individuals have an incentive to conserve them

an increase in the supply of a good

decreases the quantity demanded of the good

The more substitutes there are for the good the more ____ it becomes

elastic

The observation that people tend to value something more highly when they own it than when they don't is called the

endowment effect

The rule of equal marginal utility per dollar spent suggests that consumers maximize utility by...

equalizing the marginal utility per dollar spent across goods and services.

An item has utility for a consumer if it

generates enjoyment or satisfaction

when an individual acts...

he ranks his choice higher than his opportunity cost ( MB > MC ) but cannot say by how much

Price elasticity of demand measures

how responsive quantity demanded is to a change in price.

suppose that a demand curve is inelastic, which would be true?

if sellers decrease the supply of a good, total money spent by consumers will increase

excludability

if you do not pay for it, you cannot consume it ( playing golf .. unless your with cito)

A tariff is a tax imposed by a government on

imports.

Which of the following is a source of a negative externality?

incomplete property rights or inability to enforce property rights

Law of diminishing marginal utility

increase supply of good = decrease the marginal utility

market failure

is when the market fails to produce the efficient level of output

economic efficiency

is where consumer surplus and producer surplus are maximized.

International trade remains

less important to the United States than it is to most other countries

advertising

provides useful services by furnishing information to the customers

Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption?

public goods

Elasticity of supply

responsiveness of quantity supplied to a change in price % change in Q.S. _____________________ % change in price

Ordinal

something can be ranked or compared, but we can't quantify it

Utility is

subjective and difficult to measure.

Utility

usefulness or satisfaction a person gets from using a good ( utility = ordinal )

elasticity

very sensitive to a change in price ( Decrease price = Increase Revenue ) x>1

Cardinal

we can quantify the rankings between two things. ( height, weight, temperature)

people care about fairness..

we get satisfaction from being ultralistic

The law of diminishing marginal utility suggests that

when consumers buy more of a product, they tend to like it less and less.

rivalry

when one person consumes a unit of good, no one else can consume that same good. ( If you buy a big mac, no one else can buy that same one )

analogy

when some firms go out of business from technological innovation

What are property rights?

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

When the price of summer tank tops falls and you buy more of them because they are relatively less expensive, this is called

the substitution effect

sunk costs

A cost that has already been paid and cannot be recovered. (should be ignored in consumer-decision making) Ex.) Buying a Yankee ticket, but realizing the game is at Fenway!

__________ is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Comparative advantage

Passage of time

Consumers spend time looking for substitutes and its less costly to switch as time goes on MOST IMPORTANT DETERMINANT FOR SUPPLY*** ( increase in price = decrease Q.D. initially but later the decrease gets lower)

Suppose that a demand curve is elastic. Which of the following is true?

If sellers increase the supply of a good total money spent will increase

The demand for all beer is likely to be ____ the demand for Budweiser beer

More elastic than

Availability of close Substitutes

More ways of satisfying your ends so you will be more sensitive to price.... MOST IMPORTANT DETERMINANT FOR DEMAND** ( more substitutes = more elasticity )

Economists believe the most persuasive argument for protectionism is to protect infant industries. But the argument has crucial drawbacks. What is one of these drawback?

Protection lessens the need for firms to become productive enough to compete with foreign firms; this often results in infant industries never "growing up."

Many economists do not believe that switching costs lock consumers into the use of products that have technology inferior to other, similar products. These economists believe that

The gains from using a superior technology exceed the losses consumers incur from switching costs

when discussing consumer theory, we said that with an increase in the supply of a good

The marginal utility of the good decreases

externality

a benefit or cost experienced by someone who is not a producer or consumer of a good or service

Which of the following is not a source of comparative advantage?

a strong foreign currency exchange rate

Firms pay famous individuals to endorse their products because

apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product.

Whenever a buyer and a seller agree to trade,

both must believe they will be made better off.

Private good

both rival and excludable ex.) haircuts, food, clothing, and many other services

A country will always be an exporter of a good where it has a...

comparative advantage in production

Consumer theory

consumers act in a way that will make them as well off as possible ; in a way that will maximize their satisfaction or happiness given a constraint. (ex. Giving money to the poor makes you feel better about yourself) MB>MC

autarky

country does not trade with other countries

budget constraint

limited amount of money you spend on goods Ex.) "oh, nice shirt!" ... "$80!? no deal!"

Imposing trade barriers does all of the following except

lowers domestic prices.

Economists assume that the goal of consumers is to

make themselves as well off as possible.

A tariff on a consumer good

makes domestic consumers worse off.

Definition of market

more narrow the market is ; the more elastic the demand will be ( More substitutes )

The larger the share of a good in a consumer's budget, holding everything else constant, the

more price elastic is a consumer's demand.

equalmarginal principle

most bang for your buck

Luxury vs. Necessity

necessity = more inelastic (water) luxury = more elastic

free trade

no restriction on what a nation can import and export (mainly benefits consumers due to lower prices)

Public goods

not rival and not excludable. ex.) bathrooms, public pools, national defense

inelastic

not sensitive to a change in price x<1

If you expect the economy to boom and rise in the future, the firm that would increase sales are

one that sells a luxury good

The "tragedy of the commons" refers to the phenomenon where

people overuse a common resource.

Share of the good in the consumers budget

the bigger the share = more elastic time demand smaller the share = less elastic

Marginal utility

the change in total utility a person receives from consuming an additional unit

The law of diminishing marginal utility states that

the extra satisfaction from consuming a good decreases as more of a good is consumed, other things constant.

When the price of audio books, a normal good, falls, causing your purchasing power to rise, you buy more of them due to

the income effect.

Conceptually, the efficient level of pollution is the level for which

the marginal benefit of reducing pollution is equal to the marginal cost of reducing pollution.

A negative externality exists if

the marginal social cost of producing a good or service exceeds the private cost.

when discussing consumer theory we said that consumers optimize when

the marginal utility per dollar spent on all goods will be equal

The price elasticity of demand is equal to

the percentage change in quantity demanded divided by the percentage change in price.