Midterm Study Guide for Macro

Graphically, producer surplus is measured as the area A. under the demand curve and below the actual price. B. under the demand curve and above the actual price. C. above the supply curve and above the actual price. D. above the supply curve and below the actual price.

above the supply curve and below the actual price.

Which of the following is an example of market failure? A. negative externalities B. positive externalities C. public goods D. all of these

all of these

Demand-side market failures occur when A. demand curves don't reflect consumers' full willingness to pay for a good or service. B. demand curves don't reflect the full cost of producing a good or service. C. government imposes a tax on a good or service. D. a good or service is not produced because no one wants it.

demand curves don't reflect consumers' full willingness to pay for a good or service.

People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those 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 A. negative externality. B. supply-side market failure. C. demand-side market failure. D. government failure.

demand-side market failure.

Because successive units of a good produce less and less additional satisfaction, the price must fall to encourage a buyer to purchase more units of the good. This statement is most consistent with which explanation for the law of demand? A. diminishing marginal utility B. the rationing function of prices C. the substitution effect D. the income effect

diminishing marginal utility

The relationship between quantity supplied and price is , and the relationship between quantity demanded and price is. A. direct; inverse B. inverse; direct C. inverse; inverse D. direct; direct

direct; inverse

Purposeful behavior means that A. people are selfish in their decision making. B. people weigh costs and benefits to make decisions. C. people are immune to emotions affecting their decisions. D. decision-makers do not make mistakes when weighing costs and benefits.

people weigh costs and benefits to make decisions.

The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is A. price. B. expectations. C. preferences. D. incomes.

price

The law of demand states that, other things equal A. price and quantity demanded are inversely related. B. the larger the number of buyers in a market, the lower will be product price. C. price and quantity demanded are directly related. D. consumers will buy more of a product at high prices than at low prices.

price and quantity demanded are inversely related.

The demand curve shows the relationship between A. money income and quantity demanded. B. price and production costs. C. price and quantity demanded. D. consumer tastes and quantity demanded.

price and quantity demanded.

In corporations, owners are and managers are. A. agents; principals B. stockholders; bondholders C. agents; employees D. principals; agents

principals; agents

In representative democracy, voters are and politicians are. A. agents; principals B. logrollers; principals C. agents; employees D. principals; agents

principals; agents

Market failure is said to occur whenever A. private markets do not allocate resources in the most economically desirable way. B. prices rise. C. some consumers who want a good do not obtain it because the price is higher than they are willing to pay. D. government intervenes in the functioning of private markets.

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

In deciding whether to study for an economics quiz or go to a concert, one is confronted by the idea(s) of A. scarcity and opportunity costs. B. money and real capital. C. complementary economic goals. D. full production.

scarcity and opportunity costs

As it relates to owners and managers, the principal-agent problem results from the A. separation of corporate ownership and control. B. double taxation of corporate profit. C. limited liability of corporate owners. D. differing interests of corporate stockholders and bondholders.

separation of corporate ownership and control.

Economics may best be defined as the A. interaction between macro and micro considerations. B. social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity. C. empirical testing of value judgments through the use of logic. D. study of why people are rational.

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

Which of the following is the best example of a supply-side market failure? A. No one provides street lights in a town because, once the lights are in operation, people dont have to pay to use them. B. A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area. C. Government imposes taxes on the production of a socially desirable good. D. Street performers dont get full payment for the value of their output because people watch and enjoy the shows without paying the artist.

A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area.

Which of the following is a key difference between the economic activities of government and those of private firms? A. Private firms face the constraint of scarcity; government does not. B. Government focuses primarily on equity; private firms focus only on efficiency. C. Private economic activities create externalities; government activities do not. D. Government has the legal right to force people to do things; private firms do not.

Government has the legal right to force people to do things; private firms do not.

In what way, if any, does the invisible hand affect government resource allocation? A. It enhances government efficiency by promoting competition for resources within government. B. It does not help resource allocation, as there are no competitive forces within government that automatically direct resources to their best uses. C. It rewards government bureaucrats who are most efficient at implementing public policies. D. It reduces government efficiency by sending market signals that interfere with government decision making.

It does not help resource allocation, as there are no competitive forces within government that automatically direct resources to their best uses.

For economists, the word "utility" means A. Versatility and Flexibility B. Rationality C. Pleasure or Satisfaction D. Purposefulness

Pleasure or Satisfaction

What two conditions must hold for a competitive market to produce efficient outcomes? A. Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay. B. Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay. C. Firms must minimize production costs, and consumers must minimize total expenditures. D. Firms must maximize profits, and consumers must all pay prices equal to their maximum willingness to pay.

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? A. The benefit surpluses shared between consumers and producers will be maximized. B. The benefit surpluses received by consumers and producers will be equal. C. There will be no consumer or producer surplus. D. Consumer surplus will be maximized, and producer surplus will be minimized.

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

In economics, the pleasure, happiness, or satisfaction received from a product is called A. Marginal Cost B. Rational Outcome C. Status fulfillment D. Utility

Utility

The economic perspective entails A. irrational behavior by individuals and institutions. B. a comparison of marginal benefits and marginal costs in decision making. C. short-term but not long-term thinking. D. rejection of the scientific method.

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

Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences A. a consumer surplus of $10, and Tony experiences a producer surplus of $190. B. a producer surplus of $200, and Tony experiences a consumer surplus of $10. C. a consumer surplus of $670, and Tony experiences a producer surplus of $200. D. a producer surplus of $10, and Tony experiences a consumer surplus of $190.

a consumer surplus of $10, and Tony experiences a producer surplus of $190.

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 $12, and Nathan experiences a producer surplus of $3. B. a producer surplus of $9, and Nathan experiences a consumer surplus of $3. C. a consumer surplus of $9, and Nathan experiences a producer surplus of $3. D. a producer surplus of $9, and Nathan experiences a producer surplus of $12.

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

Economists use the term "demand" to refer to A. a particular price-quantity combination on a stable demand curve. B. the total amount spent on a particular commodity over a fixed time period. C. an upsloping line on a graph that relates consumer purchases and product price. D. a schedule of various combinations of market prices and amounts/quantities demanded.

a schedule of various combinations of market prices and amounts/quantities demanded.

The assertion that "there is no free lunch" means that A. there are always trade-offs between economic goals. B. all production involves the use of scarce resources and thus the sacrifice of alternative goods. C. marginal analysis is used in economic reasoning. D. choices need not be made if behavior is rational.

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

Markets, viewed from the perspective of the supply and demand model A. assume many buyers and many sellers of a standardized product. B. assume market power so that buyers and sellers bargain with one another. C. do not exist in the real-world economy. D. are approximated by markets in which a single seller determines price.

assume many buyers and many sellers of a standardized product.

A recent study found that an increase in the federal tax on beer (which would increase the price of beer) would reduce the demand for marijuana. Based on this information we can conclude that A. beer and marijuana are substitute goods. B. beer and marijuana are complementary goods. C. beer is an inferior good. D. marijuana is an inferior good.

beer and marijuana are complementary goods.

A person should consume more of something when it's marginal A. benefit exceeds its marginal cost. B. cost exceeds its marginal benefit. C. cost equals its marginal benefit. D. benefit is still better.

benefit exceeds its marginal cost.

Information problems create inefficient outcomes in A. the private sector but not the public sector. B. the public sector but not the private sector. C. neither the private nor the public sector. D. both the private and the public sectors.

both the private and the public sectors.

How does government's power to coerce behavior tend to reduce private-sector risk? A. by enforcing contracts and discouraging illegal behavior that threatens private property B. by guaranteeing that the government will financially cover any losses by private-sector firms C. by strictly regulating the allocation of most property resources in the economy D. The coercive power of government only increases private-sector risk.

by enforcing contracts and discouraging illegal behavior that threatens private property

The study of economics is primarily concerned with A. keeping private businesses from losing money. B. demonstrating that capitalistic economies are superior to socialistic economies. C. choices that are made in seeking the best use of resources. D. determining the most equitable distribution of society's output.

choices that are made in seeking the best use of resources.

An increase in the price of a product will reduce the amount of it purchased because A. the higher price will signal to consumers that the good is of low quality. B. the higher price means that real incomes have risen. C. consumers will substitute other products for the one whose price has risen. D. consumers substitute relatively high-priced for relatively low-priced products.

consumers will substitute other products for the one whose price has risen.

The government's ability to coerce can enhance economic efficiency by A. eliminating income inequality. B. correcting market failures. C. preventing resources from going to their most valued uses. D. restraining self-interest.

correcting market failures.

From society's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically A. generates more of a benefit than it costs to produce. B. produces a benefit exactly equal to the cost of producing the last unit. C. maximizes the net benefit to society. D. costs more to produce than it provides in benefits.

costs more to produce than it provides in benefits

Weak government enforcement of contracts and laws tends to A. increase economic efficiency by minimizing government interference. B. stimulate innovation and investment. C. discourage economic activity by encouraging private-sector coercion such as blackmail and extortion. D. not affect economic activity, as incentives for theft and deception are low.

discourage economic activity by encouraging private-sector coercion such as blackmail and extortion.

Which of the following is an activity of government that is not an activity of private firms? A. enforcing involuntary transactions B. paying equitable wages C. creating positive externalities D. pursuing economic efficiency

enforcing involuntary transactions

A producer's minimum acceptable price for a particular unit of a good A. is the same for all units of the good. B. will, for most units produced, equal the maximum that consumers are willing to pay for the good. C. equals the marginal cost of producing that particular unit. D. must cover the wages, rent, and interest payments necessary to produce the good but need not include profit.

equals the marginal cost of producing that particular unit.

The idea of government failure includes all of the following except A. special-interest effect. B. bureaucratic inefficiency. C. pressure by special-interest groups. D. extensive positive externalities from public and quasi-public goods.

extensive positive externalities from public and quasi-public goods.

Factors that impede the attainment of economic efficiency in the public sector are called A. market failures. B. externalities. C. government failures. D. voting irregularities.

government failures.

You should decide to go to a movie A. if the marginal cost of the movie exceeds its marginal benefit. B. if the marginal benefit of the movie exceeds its marginal cost. C. if your income will allow you to buy a ticket. D. because movies are enjoyable.

if the marginal benefit of the movie exceeds its marginal cost.

Even though local newspapers are very inexpensive, people rarely buy more than one of them each day. This fact A. is an example of irrational behavior. B. implies that electronic media sources are displacing print sources for many consumers. C. contradicts the economic perspective. D. implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost.

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

When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes the A. cost effect. B. inflationary effect. C. income effect. D. substitution effect.

income effect.

As it relates to the political process, the principal-agent problem results from the A. negative externalities that are created by some policy actions. B. political rules that encourage elected officials to engage in unethical and illegal behavior. C. inconsistency between voters' interest in programs and politicians' interest in reelection. D. paradox of voting.

inconsistency between voters' interest in programs and politicians' interest in reelection.

Other things equal, a fall in the market price caused by a change in supply will A. increase consumer surplus. B. decrease consumer surplus. C. increase producer surplus while leaving consumer surplus unchanged. D. decrease producer surplus while leaving consumer surplus unchanged.

increase consumer surplus

A demand curve A. shows the relationship between price and quantity supplied. B. indicates the quantity demanded at each price in a series of prices. C. graphs as an upsloping line. D. shows the relationship between income and spending.

indicates the quantity demanded at each price in a series of prices.

Purposeful behavior suggests that A. everyone will make identical choices. B. resource availability exceeds economic wants. C. individuals may make different choices because of different desired outcomes. D. an individual's economic goals cannot involve trade-offs.

individuals may make different choices because of different desired outcomes

Government officials tend to make A. better economic decisions than private individuals because of the wealth of information at their disposal. B. better economic decisions than private individuals because of the efficient processes and flexibility built into the government bureaucracy. C. inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs. D. inefficient choices because the invisible hand directs them away from the resource allocation where marginal benefits equal marginal costs

inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs.

According to economists, economic self-interest A. is a reality that underlies economic behavior. B. has the same meaning as selfishness. C. means that people never make wrong decisions. D. is usually self-defeating.

is a reality that underlies economic behavior.

A market A. reflects upsloping demand and downsloping supply curves. B. entails the exchange of goods, but not services. C. is an institution that brings together buyers and sellers. D. always requires face-to-face contact between buyer and seller.

is an institution that brings together buyers and sellers.

"Vote for my special local project and I will vote for yours." This political technique A. illustrates the paradox of voting. B. is called "logrolling." C. illustrates the median voter model. D. undermines the benefits-received principle.

is called "logrolling."

Consumer surplus A. is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B. is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept. C. is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. D. rises as equilibrium price rises.

is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.

The many layers of the federal government in the United States A. lead to economic inefficiencies because of difficulty aggregating and conveying information. B. enhance government's ability make effective decisions quickly. C. better allow the invisible hand to direct government resources to their best uses. D. improve accountability of government officials, thus leading to more efficient policies.

lead to economic inefficiencies because of difficulty aggregating and conveying information.

When economists say that people act rationally in their self-interest, they mean that individuals A. look for and pursue opportunities to increase their utility B. generally disregard the interests of others C. are mainly creatures of habit D. are impulsive and unpredictable

look for and pursue opportunities to increase their utility

One reason that the quantity demanded of a good increases when its price falls is that the A. price decline shifts the supply curve to the left. B. lower price shifts the demand curve to the left. C. lower price shifts the demand curve to the right. D. lower price increases the real incomes of buyers, enabling them to buy more.

lower price increases the real incomes of buyers, enabling them to buy more

Economics involves marginal analysis because A. most decisions involve changes from the present situation. B. marginal benefits always exceed marginal costs. C. marginal costs always exceed marginal benefits. D. much economic behavior is irrational.

most decisions involve changes from the present situation.

Joe sold gold coins for $1,000 that he bought a year ago for $1,000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money because he could have received a 3 percent return on the $1,000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of... A. opportunity costs B. marginal benefits that exceed marginal costs. C. imperfect information. D. normative economics.

opportunity costs

According to Emerson: "Want is a growing giant whom the coat of Have was never large enough to cover." According to economists, "Want" exceeds "Have" because A. people are greedy B. productive resources are limited C. human beings are inherently insecure. D. people are irrational

productive resources are limited

Public choice theorists contend that A. government can efficiently correct instances of market system failure. B. the existence of cost-benefit analysis has brought about the efficient use of resources in the public sector. C. public bureaucracies are inherently more efficient than private enterprises. D. public bureaucracies are inherently less efficient than private enterprises.

public bureaucracies are inherently less efficient than private enterprises.

Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services they purchase. This is a reflection of A. resource scarcity and the necessity of choice. B. purposeful behavior. C. marginal costs that exceed marginal benefits. D. the trade-off problem that exists between competing goals.

purposeful behavior.

In a market economy, the government's power to coerce can A. undermine economic efficiency by increasing private-sector risk. B. improve economic efficiency by directing all resources to their most valued uses. C. reduce private-sector risk and increase economic efficiency. D. cause significant negative externalities.

reduce private-sector risk and increase economic efficiency.

Suppose American winemakers convince the federal government to issue a directive to serve only domestically produced wine at government functions. This would be an example of A. moral hazard. B. the principal-agent problem. C. logrolling. D. rent-seeking behavior.

rent-seeking behavior.

Market failures A. are only a concern when they result in prices that are too high. B. apply exclusively to situations where private markets do not produce any of an economically desirable good. C. result in overproduction or underproduction of a good. D. result from government interference in private markets.

result in overproduction or underproduction of a good.

Supply-side market failures occur when A. supply curves don't reflect consumers' full willingness to pay for a good or service. B. supply curves don't reflect the full cost of producing a good or service. C. government regulates production of a good or service. D. a good or service is not supplied because no one wants it.

supply curves don't reflect the full cost of producing a good or service.

The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others. If Transcontinental does not pay for the damage it causes, what has occurred? A. positive externality B. demand-side market failure C. supply-side market failure D. all of these

supply-side market failure

The government of Southland wants to improve resource allocation in the country. Which of the following actions by the Southland government is most likely to accomplish this? A. weakening enforcement of laws and contracts B. promising to cover every risk of loss for private firms C. coercing all firms to innovate and invest D. taxing polluters and subsidizing firms that are creating significant positive externalities

taxing polluters and subsidizing firms that are creating significant positive externalities

Individual accountability within the government bureaucracy A. tends to be greater than in private firms, making government more efficient than private firms. B. is not a problem because government bureaucrats are not affected by the self-interest that affects private sector individuals. C. is easy to monitor because of the small size and scope of government. D. tends to be lacking because of civil service protections and the complexity of government.

tends to be lacking because of civil service protections and the complexity of government.

Opportunity costs exist because A. the decision to engage in one activity means forgoing some other activity. B. wants are scarce relative to resources. C. households and businesses make rational decisions. D. most decisions do not involve sacrifices or trade-offs.

the decision to engage in one activity means forgoing some other activity.

Which of the following is a source of government failure? A. the invisible hand B. the lack of bureaucracy in government C. the enormous size and scope of government D. excessive flexibility

the enormous size and scope of government

As it relates to corporations, the principal-agent problem is that A. the goals of the corporate managers (the principals) may not match the goals of the corporate owners (the agents). B. the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals). C. the federal government (the agent) taxes both corporate profits and the dividends paid to stockholders (the principals). D. it is costly for the corporate owners (the principals) to obtain a corporate charter from government (the agent).

the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals)

If someone produced too little of a good, this would suggest that A. rational choice cannot be applied to many economic decisions. B. the good was produced past the point where its marginal cost exceeded its marginal benefit. C. government should intervene to produce more of the good. D. the good was produced to the point where its marginal benefit exceeded its marginal cost.

the good was produced to the point where its marginal benefit exceeded its marginal cost.

Graphically, the market demand curve is A. steeper than any individual demand curve that is part of it. B. greater than the sum of the individual demand curves. C. the horizontal sum of individual demand curves. D. the vertical sum of individual demand curves.

the horizontal sum of individual demand curves

Steve went to his favorite hamburger restaurant with $3, expecting to buy a $2 hamburger and a $1 soda. When he arrived, he discovered that hamburgers were on sale for $1 each, so Steve bought two hamburgers and a soda. Steve's response to the decrease in the price of hamburgers is best explained by A. the substitution effect. B. the income effect. C. the price effect. D. a rightward shift in the demand curve for hamburgers.

the income effect.

When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes A. an inferior good. B. the rationing function of prices. C. the substitution effect. D. the income effect.

the income effect.

According to the concept of diminishing marginal utility, consumers will purchase more of a good when the price falls because A. substitutes are relatively more expensive. B. consumers' real income has increased. C. the marginal benefit of additional units of the good now outweigh the marginal cost. D. the good is now perceived as having higher quality.

the marginal benefit of additional units of the good now outweigh the marginal cost.

Producer surplus is the difference between A. the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B. the quantity supplied and quantity demanded at an above equilibrium price. C. the minimum prices producers are willing to accept for a product and the higher equilibrium price. D. the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.

the minimum prices producers are willing to accept for a product and the higher equilibrium price.

When the price of Nike soccer balls fell, Ronaldo purchased more Nike soccer balls and fewer adidas soccer balls. Which of the following best explains Ronaldo's decision to buy more Nike soccer balls? A. the substitution effect B. the income effect C. an increase in the demand for Nike soccer balls D. the price effect

the substitution effect

When the price of a product rises, consumers with a given money income shift their purchases to other products whose prices are now relatively lower. This statement describes A. an inferior good. B. the rationing function of prices. C. the substitution effect. D. the income effect.

the substitution effect

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle A. under the demand curve and below the actual price. B. under the demand curve and above the actual price. C. above the supply curve and above the actual price. D. above the supply curve and below the actual price.

under the demand curve and above the actual price