Microeconomics. Exam 1 ch1-4

Shortage

not enough product too much demand

Competitive Markets

Buying and selling the same thing

In his book The Wealth of Nations, Adam Smith used the example of pin-making to illustrate the advantages of: a. equity. b. specialization. c. marginal analysis. d. interaction of choices.

b. specialization.

The upward slope of the supply curve indicates that: a. consumers seek to buy goods that are relatively less expensive. b. consumers do not take price into consideration when deciding whether to purchase a good. c. producers supply more of a good when its price increases. d. firms do not take price into consideration when deciding how much of a good to produce.

c. producers supply more of a good when its price increases.

Changes in demand

caused by anything but the products own price

Consumer surplus

difference between the price paid and the benefit received

Producer surplus

difference between the price received and the cost of the good

Opportunity cost

What you give up to make more product

Mario is willing to mow one lawn for $18; he will mow a second for $22, and a third for $28. Assume that the market rate for lawn mowing is $24. How many lawns will Mario mow? What will be his total revenue? What will be his producer surplus? a. Mario will mow two lawns for a total revenue of $48, and his producer surplus will be $8. b. Mario will mow two lawns for a total revenue of $48, and his producer surplus will be $2. c. Mario will mow three lawns for a total revenue of $72, and his producer surplus will be $4. d. Mario will mow three lawns for a total revenue of $72, and his producer surplus will be $2.

a. Mario will mow two lawns for a total revenue of $48, and his producer surplus will be $8.

Suppose that in Australia, it takes 2 hours of labor to harvest 10 bushels of apples and 4 hours of labor to harvest 10 bushels of tomatoes. Further, suppose that a worker in Brazil can harvest 10 bushels of apples in 4 hours or 10 bushels of tomatoes in 5 hours. Which of the following statements is true? a. Of these two countries, Brazil has a comparative advantage in producing tomatoes. b. Of these two countries, Brazil has a comparative advantage in producing apples. c. Brazil has an absolute advantage in producing both goods. d. In trade between these two countries, Australia would gain and Brazil would lose.

a. Of these two countries, Brazil has a comparative advantage in producing tomatoes.

Graciela is willing to sell 1 dozen roses for $50, while Giuseppe is willing to sell 1 dozen roses for $60. Carlos is willing to buy 1 dozen roses for $60, while Yuriko is willing to pay $50. If the market price is $52, how many roses are sold and what is the sum total of consumer and producer surplus after the transaction(s)? a. One dozen roses will be sold, and the total consumer and producer surplus will be $10. b. One dozen roses will be sold, and the total consumer and producer surplus will be $16. c. Two dozen roses will be sold, and the total consumer and producer surplus will be $16. d. No roses will be sold, and consequently the total consumer and producer surplus will be $0.

a. One dozen roses will be sold, and the total consumer and producer surplus will be $10.

Suppose that over time, you have observed an increase in the number of people owning digital cameras and a decrease in the price of these cameras. Which of the following would account for this? a. The supply curve has shifted to the right and the demand curve has remained constant. b. The supply curve has shifted to the left and the demand curve has remained constant. c. The demand curve has shifted to the right and the supply curve has remained constant. d. The demand curve has shifted to the left and the supply curve has remained constant.

a. The supply curve has shifted to the right and the demand curve has remained constant.

Which of the following could account for the fact that ice cream prices have recently increased and that consumption of ice cream has declined? a. The supply of ice cream has decreased. b. The supply of ice cream has increased. c. The demand for ice cream has increased. d. The demand for ice cream has decreased.

a. The supply of ice cream has decreased.

Market failure arises when the market fails to: a. achieve an efficient outcome. b. provide the good for all consumers who desire it. c. provide a profit for all firms who produce the good. d. prevent the price of a good from rising in response to an increase in demand.

a. achieve an efficient outcome.

Exchanges taking place in a market system: a. are voluntary. b. are inefficient. c. will benefit one party at the expense of another. d. are monitored by the government to ensure that scarce resources are being used wisely.

a. are voluntary.

What name is given to the form of exchange in which individuals trade goods and services directly, without money serving as a medium of exchange? a. barter b. comparative advantage c. circular exchange d. market exchange

a. barter

The downward slope of the demand curve indicates that, all else equal: a. consumers will buy more of a good when its price decreases. b. producers will supply more of a good when its price increases. c. producers will supply more of a good when its price decreases. d. a decrease in the equilibrium price of a good will cause a shortage.

a. consumers will buy more of a good when its price decreases.

An economy is ________ if it has exploited all opportunities to benefit someone without making anyone else worse off. a. efficient b. equitable c. wealthy d. failing

a. efficient

An equilibrium outcome is one in which: a. no one has as incentive to change his or her decisions or behavior. b. there is no scarcity. c. there is no opportunity cost. d. the distribution of wealth is fair.

a. no one has as incentive to change his or her decisions or behavior.

A price above the equilibrium price will: a. result in quantity supplied being greater than quantity demanded. b. result in a shortage. c. create pressure for price to rise further. d. result in quantity supplied being greater than quantity demanded and thus there being a shortage.

a. result in quantity supplied being greater than quantity demanded.

If market failures exist, it becomes more economically efficient for: a. the government to intervene to improve society's welfare. b. people just to ignore the problem. c. for the government to eliminate all market transactions. d. for all citizens to immigrate to a country where the market failure does not exist.

a. the government to intervene to improve society's welfare.

Economists typically depict the production possibilities frontier as a bowed out curve rather than as a straight line in order to show that: a. the opportunity cost of producing a good rises as more is produced. b. the opportunity cost of producing a good declines as more is produced. c. resources used in the production of one good cannot be used in the production of another. d. opportunity cost is always present.

a. the opportunity cost of producing a good rises as more is produced.

Market failure results when: a. the pursuit of individual self-interest leads to bad results for society as a whole. b. the market fails to create an equal distribution of wealth. c. the market fails to create an equal distribution of income. d. the market fails to eliminate scarcity.

a. the pursuit of individual self-interest leads to bad results for society as a whole.

What is one thing that economists generally agree on? a. the relative merits of rent controls and housing subsidies b. the desirability of a value-added tax c. the relative merits of different political candidates d. the desirability of Washington, DC, as a place to live

a. the relative merits of rent controls and housing subsidies

Most individuals choose careers in which they specialize in producing only one type of good or service, yet as consumers they have access to a wide variety of goods and services. What principle allows for this? a. trade b. equity c. scarcity d. opportunity cost

a. trade

Assume that we have a PPF. Point A lies inside (to the left) of the frontier. Point B and C are located along the frontier and Point D is located outside (to the right) the frontier. Which of the following points represent feasible (attainable) production points? a. All points (A, B, C and D) are feasible. b. Points A, B and C are feasible. c. Points B and C are feasible. d. None of the points are feasible.

b. Points A, B and C are feasible.

If air travel to Hawaii becomes less expensive, what is likely to happen in the market for hotel rooms in Hawaii? a. The demand curve for hotel rooms will shift to the left. b. The demand curve for hotel rooms will shift to the right. c. The supply curve for hotel rooms will shift to the left. d. The supply curve for hotel rooms will shift to the right.

b. The demand curve for hotel rooms will shift to the right.

What would be the dominant effect in the market for new homes of an increase in the wages of skilled tradesmen who work in housing construction? a. The supply of new homes would shift to the right. b. The supply of new homes would shift to the left. c. The demand for new homes would shift to the right. d. The demand for new homes would shift to the left.

b. The supply of new homes would shift to the left.

What best describes the competitive market? a. The government controls the allocation of inputs in production. b. There are many buyers and sellers of the same good. c. One firm controls production of all goods in an industry. d. Firms cooperate in setting the price of a good.

b. There are many buyers and sellers of the same good.

Suppose that one person working in Mexico can produce either 20 yards of cloth or 80 baskets, and that one person working in Turkey for the same length of time can produce either 15 yards of cloth or 30 baskets. Which of the following statements is then true? a. Between these two countries, Turkey has the absolute advantage in both goods. b. Turkey has a comparative advantage in cloth; Mexico has a comparative advantage in baskets. c. Turkey has a comparative advantage in baskets; Mexico has a comparative advantage in cloth. d. In both countries, the opportunity costs of producing cloth and baskets are the same.

b. Turkey has a comparative advantage in cloth; Mexico has a comparative advantage in baskets.

If the demand curve shifts to the left, and the supply curve does NOT change, then the equilibrium price: a. and quantity both will increase. b. and quantity both will decrease. c. will increase, and the quantity will decrease. d. price will decrease, and the quantity will increase.

b. and quantity both will decrease.

Economists generally agree that people are most likely to change their behavior when they: a. are asked to do so voluntarily. b. are given incentives to do so. c. live in a world without scarcity. d. live in a world without opportunity costs.

b. are given incentives to do so.

Economic theory asserts that: a. the equilibrium market price will maximize consumer surplus and minimize producer surplus. b. both producers and consumers gain from trade. c. all consumers have the same willingness to pay for a good. d. all producers have the same cost of providing a good.

b. both producers and consumers gain from trade.

The condition of scarcity means that: a. when the government produces something, there is no opportunity cost. b. choices must be made in the allocation of productive resources. c. you will not incur an opportunity cost if you make the right choice. d. only a command economy can make efficient use of resources.

b. choices must be made in the allocation of productive resources.

Which of the following changes would cause a decrease in the demand for DVD rentals? a. a decrease in the price of DVD players b. decrease in the price of movie admissions c. improved technology in the manufacture of DVD players d. an increase in the supply of DVD players

b. decrease in the price of movie admissions

What are the two sectors represented in a simple circular-flow diagram of the economy? a. unions and management b. households and firms c. business and government d. profit and not-for-profit

b. households and firms

If a country specializes according to its own comparative advantage and then trades with other nations: a. it will operate at a point inside its production possibilities frontier. b. it can consume at a higher level than the domestic production possibilities frontier. c. its production possibilities frontier will shift or rotate inward. d. it can consume at the same level as the domestic production possibilities frontier.

b. it can consume at a higher level than the domestic production possibilities frontier.

If both gasoline and jet fuel prices increase significantly due to a war in the Middle East. The impact on Federal Express will be a: a. rightward shift in the Federal Express supply curve. b. leftward shift in the Federal Express supply curve. c. rightward shift in the Federal Express demand curve. d. leftward shift in the Federal Express demand curve.

b. leftward shift in the Federal Express supply curve.

Which area on a graph showing a firm's supply curve represents producer surplus? a. the area under the demand curve down to a line indicating price b. the area above the supply curve up to a line indicating price c. the area between the supply and demand curves to the left of the equilibrium point d. the area between the supply and demand curves to the right of the equilibrium point

b. the area above the supply curve up to a line indicating price

Economic theory asserts that people will behave in ways that: a. will be unfair to others. b. will enhance their own overall well-being. c. will not take advantage of opportunities for self-improvement. d. do not follow generally predictable patterns.

b. will enhance their own overall well-being.

Javier and Pierre each want to buy an ice cream cone. Javier is willing to pay $2.50 and Pierre is willing to pay $4.00. If the ice cream cone costs $2.25, what is the total consumer surplus after Javier and Pierre make their purchases? a. $6.50 b. $4.50 c. $2.00 d. $0.25

c. $2.00

Which of the following is not an instance of market failure? a. Production of a good generates pollution. b. Consumption of a good generates pollution. c. A bad harvest increases the price of oranges. d. Precious gems are sold under monopoly conditions.

c. A bad harvest increases the price of oranges.

Which of the following is a normative statement? a. An increase in the price of cameras will decrease the number of cameras sold. b. A decrease in the price of digital cameras will decrease the demand for camera film. c. A camera makes a good wedding gift. d. The United States imports most of its cameras from Asia.

c. A camera makes a good wedding gift.

Which one of the following statements is not true of a market economy? a. Productive resources are scarce. b. Every choice involves an opportunity cost. c. A central planning authority makes decisions about production and consumption. d. People will respond to incentives.

c. A central planning authority makes decisions about production and consumption.

Ahmed, Boris, Roberto, and Sunil all want to attend a football game. The admission price is $48. Ahmed is willing to pay $59 for the ticket. Boris is willing to pay $39. Roberto is willing to pay $45 and Sunil is willing to pay $55. Based on this information, who will go to the game? a. Ahmed, Boris, Roberto, and Sunil b. Boris and Roberto c. Ahmed and Sunil d. Boris, Roberto, and Sunil

c. Ahmed and Sunil

Suppose you hear an economist make an assertion that, between the two countries, France has a comparative advantage in the production of chocolate and that Italy has a comparative advantage in the production of wine. Which of the following statements is another way of stating the same idea expressed in the assertion? a. French chocolate is better tasting than Italian chocolate. b. French wine is better tasting than Italian wine. c. France can produce chocolate at a lower opportunity cost than Italy can. d. France can produce wine at a lower opportunity cost than Italy can.

c. France can produce chocolate at a lower opportunity cost than Italy can.

With which one of the following statements would economists be most likely to agree? a. When transactions occur voluntarily, the seller gains and the buyer loses. b. Market economies generate economic growth, but they do not promote efficiency. c. People usually exploit opportunities to make themselves better off. d. If people make wise decisions, they can avoid incurring any opportunity cost.

c. People usually exploit opportunities to make themselves better off.

Assume that we have a PPF. Point A lies inside (to the left) of the frontier. Point B and C are located along the frontier and Point D is located outside (to the right) the frontier. Which points represent efficient production points? a. All points (A, B, C and D) are efficient. b. Points A, B and C are efficient. c. Points B and C are efficient. d. Points B, C and D are efficient.

c. Points B and C are efficient.

If an economist argues that everyone gains from trade, what reasoning is most likely underlying her argument? a. That trading with other countries does not affect the number or the type of remaining domestic jobs. b. That trading with other countries enriches those who work in the shipping industry, and that shipping is a key sector of the economy. c. That production according to the principle of comparative advantage lowers overall costs and therefore allows everyone to have a higher standard of living. d. That export industries are the most important part of the economy.

c. That production according to the principle of comparative advantage lowers overall costs and therefore allows everyone to have a higher standard of living.

Which of the following would cause a surplus of newsprint? a. The supply of newsprint decreases, and the price does not change. b. The demand for newsprint decreases, and the price adjusts to the new equilibrium. c. The demand for newsprint decreases, and the price does not change. d. The supply of newsprint decreases, and the price adjusts to the new equilibrium.

c. The demand for newsprint decreases, and the price does not change.

How would an increase in the price of cotton affect the market for cotton T-shirts at your university bookstore? a. The demand curve for cotton T-shirts will shift to the left. b. The demand curve for cotton T-shirts will shift to the right. c. The supply curve for cotton T-shirts will shift to the left. d. The supply curve for cotton T-shirts will shift to the right.

c. The supply curve for cotton T-shirts will shift to the left.

The purpose of an economic system is to: a. eliminate scarcity. b. protect the environment. c. allocate scarce resources. d. create an equal distribution of wealth.

c. allocate scarce resources.

The equilibrium price of a good is the price: a. that consumers prefer. b. that producers prefer. c. at which there is no surplus and no shortage of the good. d. there is no opportunity cost associated with producing the good.

c. at which there is no surplus and no shortage of the good.

Adam Smith used the idea of the invisible hand to refer to the ability of market economies to: a. recover from recessions. b. solve the problem of market failure. c. harness the power of individual self-interest for the good of society as a whole. d. convince people that society is better off if its members sacrifice their own self-interest for the cause of the greater good.

c. harness the power of individual self-interest for the good of society as a whole.

If coffee is a normal good, then an increase in consumer income will: a. increase the supply of coffee b. decrease the supply of coffee. c. increase the demand for coffee. d. decrease the demand for coffee.

c. increase the demand for coffee.

The focal point of economic inquiry is: a. the stock market. b. the value of the dollar. c. individual choice. d. business ethics.

c. individual choice.

Those points lying beyond the production possibilities frontier: a. are inefficient. b. represent outcomes in which resources would be unemployed. c. represent outcomes unattainable with the current level of technology and resources. d. represent outcomes that are attainable with the current level of technology and resources, but are less desirable than those on the frontier.

c. represent outcomes unattainable with the current level of technology and resources.

As an economy moves from point to point along its production possibilities frontier, what is changing? a. the amount of resources available in the economy b. the productivity of the resources available in the economy c. the allocation of resources within the economy d. the size of the labor force

c. the allocation of resources within the economy

What is measured along the horizontal axis in a graph of the production possibilities frontier? a. the amount of labor input b. the amount of capital input c. the quantity of one good produced d. the quantity of one good exported

c. the quantity of one good produced

If the supply curve shifts to the left, and the demand curve does not change then the equilibrium price: a. and quantity both will increase. b. and quantity both will decrease. c. will increase, and the quantity will decrease. d. will decrease, and the quantity will increase.

c. will increase, and the quantity will decrease.

Changes in quantity demanded

caused only by a change in the product's own price

Which of the following statements is true? a. A country cannot have a comparative advantage in producing a particular good unless it first has an absolute advantage in producing that good. b. Comparative advantage in producing a certain item arises from being the first country to manufacture that item. c. A country cannot have comparative advantage in producing a certain item if it incurs an increasing opportunity cost in producing the item. d. All countries can gain from trade if they all specialize in production according to comparative advantage.

d. All countries can gain from trade if they all specialize in production according to comparative advantage.

Many firms compete in providing overnight delivery services. If the market for overnight delivery services experiences an increase in price, what must have happened? a. An increase the supply. b. A decrease in supply and a decrease in demand. c. A decrease in demand d. An increase in demand and a decrease in supply.

d. An increase in demand and a decrease in supply.

With which one of the following statements would economists be most likely to disagree? a. People respond to incentives. b. Making a choice involves an opportunity cost. c. Markets move towards equilibrium. d. Resources and inputs used in production are unlimited.

d. Resources and inputs used in production are unlimited.

Consider the market for kayaks. What happens when the process of manufacturing kayaks becomes less costly through the use of new technology? a. The demand curve for kayaks will shift to the left. b. The demand curve for kayaks will shift to the right. c. The supply curve for kayaks will shift to the left. d. The supply curve for kayaks will shift to the right.

d. The supply curve for kayaks will shift to the right.

What happens in the market for wheat when dry winter weather causes a poor harvest? a. The demand for wheat increases and the supply remains unchanged. b. The demand for wheat increases and the supply decreases. c. The demand for wheat decreases and the supply increases. d. The supply of wheat decreases and the demand remains unchanged.

d. The supply of wheat decreases and the demand remains unchanged.

In a voluntary exchange: a. the amount of consumer surplus will equal the amount of producer surplus. b. if the consumer derives consumer surplus, the supplier will derive no producer surplus. c. if the supplier derives producer surplus, the consumer will derive no consumer surplus. d. both the producer and the consumer can experience a net benefit.

d. both the producer and the consumer can experience a net benefit.

An economic system is in ________ when no individual would be better off by making a different choice. a. chaos b. decline c. jeopardy d. equilibrium

d. equilibrium

Macroeconomics is the branch of economics studying: a. how prices are determined. b. why trade-offs exist. c. how decisions are made at the margin. d. fluctuations in the overall level of business activity.

d. fluctuations in the overall level of business activity.

The result of free trade between nations is that: a. wealthy countries benefit; developing nations lose. b. developing nations benefit; wealthy countries lose. c. the worldwide level of unemployment increases. d. goods can be produced in the location where their opportunity cost is the lowest.

d. goods can be produced in the location where their opportunity cost is the lowest.

If the price of a bale of cotton increases from $0.80 to $1.20, and a pound of Kenyan coffee decreases from $12 a pound to $10 a pound, we can expect a(n): a. shift to the left in the supply curve of cotton. b. increase in the quantity supplied of Kenyan coffee. c. shift to the left in the demand curve for cotton. d. increase in the quantity demanded of Kenyan coffee.

d. increase in the quantity demanded of Kenyan coffee.

What is traded in factor markets? a. agricultural products b. mineral products c. exports and imports d. land, labor, capital, and human capital

d. land, labor, capital, and human capital

Consider gas stations. As a result of an economic recession and a decrease in consumer incomes, there will be a: a. rightward shift in the station's supply curve and lower gas prices. b. leftward shift in the station's supply curve and higher gas prices. c. rightward shift in the station's demand curve and higher gas prices. d. leftward shift in the station's demand curve and lower gas prices.

d. leftward shift in the station's demand curve and lower gas prices.

An efficient outcome is one in which: a. all consumers who desire the good can afford it at the current price. b. no individual buyer could be made better off. c. no individual seller could be made better off. d. no individual can be made better off without making someone else worse off.

d. no individual can be made better off without making someone else worse off.

After finishing high school, LeBron James decided to enter the NBA rather that going to college to begin his studies to become a doctor. This choice between the two careers can best be described by: a. equilibrium. b. scarcity. c. market failure. d. opportunity cost.

d. opportunity cost.

Consumer surplus is: a. the difference between the quantity of a good demanded and the quantity supplied. b. the quantity of a good that remains on the market in instances of market failure. c. the amount of revenue collected from a tax. d. the difference between the price that consumers are willing to pay for a good and the amount they actually pay.

d. the difference between the price that consumers are willing to pay for a good and the amount they actually pay.

Producer surplus is: a. the difference between the quantity of a good demanded and the quantity supplied. b. the price the producer receives at equilibrium. c. the amount of revenue collected from a tax. d. the difference between the price that producers receive and the amount for which they are willing to sell the good.

d. the difference between the price that producers receive and the amount for which they are willing to sell the good.

A shortage is the result of when: a. demand for a good increases, causing an increase in the equilibrium price. b. demand for a good decreases, causing a decrease in the equilibrium price. c. the price of a good is held above the equilibrium price. d. the price of a good is held below the equilibrium price.

d. the price of a good is held below the equilibrium price.

Consumer surplus is positive when: a. the price the consumer is willing to pay equals the market price. b. there is no tax applied to the good. c. the price the consumer is willing to pay is less than the market price. d. the price the consumer is willing to pay is more than the market price.

d. the price the consumer is willing to pay is more than the market price.

Producer surplus is positive when: a. the price the producer is willing to charge equals the market price. b. there is no tax applied to the good. c. the price the producer is willing to charge is less than the market price. d. the price the producer is willing to charge is greater than the market price.

d. the price the producer is willing to charge is greater than the market price.

When economists want to describe how much an economy can produce with a given amount of resources, they use a model known as: a. the positive model. b. the normative model. c. comparative advantage. d. the production possibilities frontier.

d. the production possibilities frontier.

Why do economists use models? a. to distinguish between positive and normative statements b. to solve disagreements about the desirable extent of income equality c. to choose the correct political opinion among many competing ones d. to make forecasts

d. to make forecasts

An opportunity cost arises: a. only when a monetary cost is incurred. b. only when a time cost is incurred. c. only when the wrong decision is made. d. whenever any choice is made.

d. whenever any choice is made.

Supply and demand

the lower the prices the higher the demand

Surplus

too much product not enough demand

total surplus

total gain to society of producing and consuming the good