Chapter 1 & 2
Consider the equation of linear function y =-4 + 7x. If it were graphed, the slope would be
"7" Explanation: The slope of the function is the change in y as the variable x changes.
Given the equation for a linear function, a + bxr = y, which term represents the intercept?
"A" Explanation: The intercept term is a constant. In the general formula for a linear function, a is a constant and is the intercept of the line.
In the consumption function C = $1000 + 3Y, C is consumption and Y is national income, How much is consumption when national income is zero?
$1000 Explanation: The constant term, $1000, is the amount of consumption that consumers have when they have no income. They are spending out of their savings.
Suppose a line shows that every time a family's income increases by $1, the family's spending increases by $0.90. If income increased by $300, the spending must have increased by
$270. Explanation: If the change in spending is 90% of the change in income, and if income rises to $ 300, spending would rise to $270.00 (.9 times 300).
Given the demand formula for frisbees P = $8.30 - 1.230, what is the proper interpretation of the value of $8.30?
$8.30 represents the price that would cause the quantity of frisbees demanded to fall to zero. Explanation: When frisbee purchases drop to zero (i.c., Q = 0), the price that would motivate the drop in frisbee purchases would be $8.30: (P = $8.30 - 1.23(0) = $8.30).
false Explanation: Because the opportunity costs vary throughout the table, the corresponding production possibilities curve will be concave. If opportunity costs were constant, the PPF would be straight.
*** True or false?: Referring to the table below, resulting production possibilities curve is a straight line?
1/10 Explanation: On the linear PPF, the opportunity cost of cars in terms of food is found by dividing the endpoints, 100/1000 = 1/10 pound of food. The society gives up 1/10 pound of food to build each car. The good for which you want the cost is in the denominator. "Use the end points to get the ratio"
****According to the graph, the society has to give up ________pounds of food to build one car.
10 Explanation: On the linear PPF, the opportunity cost of food in terms of cars is found by dividing the endpoints, 1000/100 = 10. The society gives up 10 cars to produce another pound of food. The good for which you want the cost is in the denominator. "Use the end points to find the ratio"
****According to the graph, the society has to give up _____cars to produce another pound of food.
seven Explanation: At a price of $3 per loaf, the producer associated quantity on the horizontal axis. supplies seven loaves. Match the price on the vertical axis with the
****According to the supply curve, if the price of bread is $3.00 per loaf, the producer will supply _____loaves of bread.
destruction of resources because of a war. Explanation: Destruction of resources means that the society cannot produce as much of either category of goods as before. The PPF shifts inward. "The PPF curve shows an economy's optimal production combinations of goods given that the economy's resources endowment and technology"
****Examine the accompanying graph of a society's PPF. The most likely cause of the shift from PPF1, to PPF2, is
1 less unit of Good A Explanation: The opportunity costs of Good B, as its production increases from 0 units to 2 units, is the production of 1 less unit of Good A.
****Referring to the table below, what is the opportunity costs of Good B, as the production of Good B inc reases from 0 units to 2 units? Hint how key units of Good A are for egone as a result of the increas ed produoti on of Good B
Factors that shift the demand curve include
****changes in income Changes in the price of substitutes & complements Changes in the expected future prices all of the above. Explanation: Factors that shift the demand curve are outside variables that do not exist on either axis of your graph.
four Explanation: On this supply curve, a price of $1.50 is associated with a quantity of four loaves of bread. The price is on the vertical axis and the quantity supplied is on the horizontal axis.
***According to the graph if the price of bread is $1.50 per loaf, the producer will supply ______loaves of bread.
coffee = 200 - 1 (tea) Explanation: Given the general linear equation y = a ± bx, substitute coffee in the place of y and tea in the place of x. The intercept term a would be replaced by 200 units of coffee (the amount of coffee when tea is 0 units). The slope term b would be replaced by a -1. The -1 represents the opportunity costs of an additional unit of tea production. Putting the components together, the formula for coffee would be coffee = 200 - 1 (tea).
***Assuming that coffee is depicted on the vertical axis and tea on the horizontal axis of the produc tion possibilities curve, what is the formula for the production possibilities curve?
a drought in wheat-producing states. Explanation: Decreased wheat production with every possible level of rice production causes a skewed PPF. The shift is a rotation from one axis.
***Examine the accompanying graph of a PPF for an agricultural society. The most likely cause of the shift of the PPF is
Carl Explanation: Examine the slope of the PPFS for Carl and Nick, Carl's PPF is flatter than Nick's; therefore Carl has a comparative advantage in the good on the horizontal axis: mopping.
***From the graphs below, who has a comparative advantage in mopping, Nick or Carl?
false Explanation: Points A and B are feasible and efficient combinations, because they lie on the production possibilities curve. Point C, however, is outside the realm of possibilities; therefore, it is unattainable.
***In the production possibilities frontier, points A, B, and C represent feasible outcomes for this society.
the consumer is choosing more leisure and less income. Explanation: The consumer has a trade-off between income and leisure. The more the consumer works, the more his income increases but the more leisure time he gives up. Time is the resource that is scarce. "Moving closer to the origin indicates less of each good"
***In this production possibilities frontier, if the consumer moves from A to B,
it must give up military equipment to get more food. Explanation: The PPF curve represents the efficient production combinations of two goods. In this case, a movement from point A to point B represents the trade-off of production of more food and less military equipment. " what is the trade-off between the two goods?"
***Referring to the graph, if this economy moves from point A to point B,
1 pound of coffee Explanation: The opportunity cost of tea in terms of coffee is the amount of coffee that will be foregone as tea production increases by 1 pound. The table shows that as tea production increases by 40 pounds, coffee production falls by 40 pounds. Therefore, 1 pound of coffee must be given up to produce one more pound of tea,
***Referring to the table below, what is the opportunity cost of tea in terms of coffee? [Hint: remember that the o portunity cost of one good is simply the reciprocal of the opportun ity cost of the other good.]
If the economy produces eight units of Good A, it can simultaneously produce only two units of Good B. Explanation: From Table X, the production of eight units of Good A is simultaneously matched by the production of two units of Good B.
***Referring to the table below, which describes the production of Good A and G 0od B by a small economy? Hint the combin ations of Good A and Good B refle cted in the table above represents combin ations that can be s imultane ously produced.
1/10 of a barrel of oil Explanation: Use the endpoints on the PPF. Set up a ratio of oil to beer: 10/100 = 1/10 barrel of oil.
***Suppose Canada produces only beer and oil. One unit of labor can produce, in a one hour period, either 100 barrels of beer or 10 barrels of oil. Examine the PPF for Canada. What is Canada's opportunity cost for one barrel of beer?
10 barrels of beer Explanation: Using the endpoints of the PPF, set up a ratio of beer to oil: 100/10 10 barrels of beer.
***Suppose Canada produces only beer and oil. One unit of labor can produce, in a one hour period, either 100 barrels of beer or 10 barrels of oil. Examine the PPF for Canada. What is Canada's opportunity cost for one barrel of oil?
-50 Explanation: Slope = ($5.00 - $4.00)/(1 - 3) = $1.00/-2 = -50. A$.50 reduction in price is needed to increase hot dog consumption by 1 unit.
***The table below contains price (P) and quantity demanded (Qd) information for hot dogs. Assume that the price and quantity demanded information is plotted on the vertic al and horizontal ax es, respectiv ely. What is the slope between points A and B ? Hint: slope is defined as 🔺P➗🔺Q " rise over run"
"C" Explanation: Point C is outside the curve, meaning that it falls outside of the possibilities for this society. Any point beyond the curve means that this society does not have the resources or technology to produce the combination.... "look at points not on the curve"
***Which point on the graph is not attainable?
The upward-sloping supply curve
***all of the above. Explanation: The upward-sloping supply curve says that, at higher prices, suppliers are willing and able to put more product on the market. The supply curve is the suppliers' opportunity cost because it represents the prices at which suppliers will add one more unit, foregoing production of something else.
The production possibilities frontier illustrates the supply side of an economy because
***both A and B It makes an engineering statement in efficiency and it tells nothing about consumer preferences. Explanation: consideration consumer preferences. The PPF shows supply because it gives possible combinations of what to produce without taking into The PPF presents a range of possibilities from which society must choose.
Given demand formula for frisbees of P= $8.30 - 1.230, what is the proper interpretation of the value of -1.23?
-1.23 represents the decrease in price necessary to cause the quantity demanded of frisbees to increase by one unit. Explanation: A negative slope value (-1.23) suggests that a negative relationship exists between the two variables.
Bobby can vacuum two rooms in ten minutes or dust two rooms in twenty minutes. Assuming that dusting is on the vertical axis, the slope of Bobby's production possibilities frontier is
-1/2. Explanation: The slope is rise /run, or the change in y divided by the change in x. You can use the end points, twelve rooms dusted and six rooms vacuumed, to determine the slope. The slope is 6/12 = -1/2.
Consider the equation of linear function y = -4 + 7x. If it were graphed, the intercept would be
-4 Explanation: The intercept of function is the constant term. In this example, the constant term is -4 or the value of y when x is 0.
Given the equation for a linear function, 20 + .67x y, what is the value of y when x is zero?
20 Explanation: The value of the variable y, when the variable x is zero, is equal to the constant term. In this equation the constant is 20.
Which of the following examples represents a method of presenting data in terms of the relative size of vertical columns?
A bar graph Explanation: The vertical format fixes the definition of "bar graph." It displays information by using columns or horizontal bars. It is often used to compare data in one time period.
In a market for a product, why is the price of the product higher at higher output levels?
Because producers' opportunity costs are higher at higher output levels Explanation: The upward-sloping supply curve shows a producer's opportunity cost for the production of a particular good. The producer has to forego other activities or other production to produce a particular product. As the production increases, consumers will have to pay more to entice the producer away from other activities.
Which of the following items go together?
Change in quantity demanded and movement along a demand curve Explanation: The difference between movement along a demand curve and a shift in a demand curve is important. A change in price causes a change in quantity demanded and thus is movement along a demand curve. A change in any other determinant is a change in demand and thus a shift the demand curve.
Russia can produce a bushel of corn with four workers and a bushel of rice with three workers. China can produce a bushel of corn with three workers and a bushel of rice with two workers. Which country has an absolute advantage for either good?
China has an absolute advantage for both goods. Explanation: An absolute advantage indicates that you can make more with less resources than others. In this case, China can produce more corn and rice with fewer workers than Russia.
Russia can produce a bushel of corn with four workers and a bushel of rice with three workers. China can produce a bushel of corn with three workers and a bushel of rice with two workers. How would these countries specialize?
China would specialize in producing rice, and Russia would specialize in producing corn. Explanation: China's opportunity cost for corn is one and one-half bushels of rice. Russia's opportunity cost for corn is one and one-third bushels of rice. Each country's opportunity cost of the other good is the reciprocal of the first one. Therefore, China should specialize in rice and Russia should specialize in corn. Each specializes in the product for which it has a comparative advantage.
Which of the following resources is scarce?
Clean air Explanation: Scarcity is the imbalance between what is freely available and what people want. Clean air has a cost so it is not freely available.
If a country's PPF shows capital goods on one axis and consumer goods on the other axis, the country's PPF will shift out faster if it spends more on consumer goods in the current time period...true or false?
False Explanation: The country's PPF will shift out faster if the country invests in capital goods and foregoes current consumption. Capital goods represent an investment in future productive capacity.
The slope of a demand curve is the change in the x-axis divided by the change in the y-axis... true or false
False Explanation: The slope is the change in the y-axis divided by the change in the x-axis. It is the "rise over the run.
When the demand curve shifts, the intercept remains the same...true or false
False Explanation: A shift in a demand curve means that an outside variable has changed. The entire demand curve, including the intercept, shifts parallel to itself.
Which of the following is not a scarce good?
Garbage is not a scarce resource because no one wants garbage. In fact, most people pay to have it removed. Air, space, and water are commodities because, under certain circumstances, people will pay for them.
The total product curve
Is the curve of the production function Is not linear Has varying slope Explanation: The total product curve is the graph of the production function. It is not linear and changes slope over the range of output.
Rational choice
Requires the undertaking of cost-benefits analysis and is defined as self-interested decision making. Rational choice requires the undertaking of costs-benefit analysis (i.e., the determination of the "best" choice) to ultimately maximize self-interest.
Russia can produce a bushel of corn with four workers and a bushel of rice with three workers. China can produce a bushel of corn with three workers and a bushel of rice with two workers. Which country has a comparative advantage in the production of corn and which has a comparative advantage in rice?
Russia has a comparative advantage in the production of corn, and China has a comparative advantage for the production of rice. Explanation: Comparative advantage indicates that one country can produce one good more efficiently than the other. In this case, Russia has a lower opportunity cost for producing corn, and China has a lower opportunity cost for producing rice. Russia's opportunity cost for corn is 4/3, or 1.33 bushels of rice; China's opportunity cost for corn is 3/2, or 1.5 bushels of rice. Russia's opportunity cost for rice is 3/4, or 0.75 bushels of corn; China's opportunity cost for rice is 2/3, or 0.67 bushels of corn.
The slope of a line on a graph is defined as
The change in the y-axis variable divided by the change in the x-axis variable...& "rise over run". Explanation: The slope of a line on a graph is calculated by dividing the change in the y-axis variable by the change in the x-axis variable. The common expression is "rise over run."
The slope of the line is defined by
The coefficient of Q in the demand formula P=$12-.50Q and the change in y divided by the change in x. Explanation: The slope is determined by the change in y over the change in x and is used to figure the demand formula.
What happens to the demand curve for hot dogs when the price of hot dog buns decreases?
The demand curve for hot dogs will shift outward. Explanation: The decrease in the price of a complement will cause the demand for a particular good to increase, resulting in a shift outward. The two goods are closely related and have to be purchased together.
An increase in the price of Fords will have what likely effect in the market for Chevrolets?
The demand for Chevrolets will increase. Explanation: Related goods such as substitutes affect the demand for the primary good. In this case, Fords and Chevrolets are substitutes for each other, so when the price of one increases, demand for the other increases.
Which of the following is not a determinant of an individual's demand for a good?
The number of buyers Explanation: The number of buyers of a good is not related to an individual's demand for that good.
An inward shift in the production possibilities frontier (PPF) could be the result of a decline in the general level of education....true or false
True Explanation: A decline in education will be reflected in declines in technological advances, worker productivity, etc. Such declines will result in a decrease in production possibilities (an inward shift of the PPF).
A relatively flat demand curve indicates that the demand for a product is very sensitive to a change in price.
True Explanation: A flat demand curve indicates that a small change in price will cause a large change in quantity demanded.
Mandatory retirement at age 55 will cause an inward shift in the PPF...true or false?
True Explanation: A mandatory early retirement age would make less labor resources available for production purposes. Accordingly, the reduction in labor resources would cause the PPF to shift inward.
The slope of a linear function depends on the units of measurement...true or false
True Explanation: Slope changes if you use different units of measurement. For example, changing the price on a demand curve from dollars to cents changes the slope.
When a demand curve shifts, the slope of the curve remains the same...true or false
True Explanation: The demand curve shifts parallel to itself. The slope does not change. The intercept, however, does change.
In an economy, assume that labor is the only factor of production. One worker can produce either twelve pounds of food a year or six rifles. The slope of the country's PPF is -2 if rifles are on the horizontal axis...true or false?
True Explanation: The opportunity cost of rifles in terms of food is two pounds of food. Set up a fraction with the good whose cost you want as the denominator and the one you have to give up as the numerator. In this example, the fraction is 12/6 = 2. Even though it technically is negative, use the absolute value as the cost. The slope is the opportunity cost of the good on the horizontal axis.
The vertical intercept is defined in the demand formula as the constant number.. true or false
True Explanation: The vertical intercept is the price value where no quantity is demanded and is represented as $12 in the demand formula P= $12-500.
ceteris paribus
a Latin term translated as "all other things equal" and used by economists to indicate that some variables in a functional relationship are being held constant
change in demand
a change in the amount of a good demanded in response to a change in any demand determinant except price; a change in the amount of a good demanded at any price; a shift in the demand curve
A shift in the production possibilities frontier curve will occur as a result of all of the following except
a change in the production of one good relative to another good. Explanation: An outward shift of the PPF curve occurs when technology increases, new resources are discovered, population increases, or capital increases. All of these factors are increases in societal endowments and will extend the PPF. A change in the production of one good relative to another good simply changes the combination being produced and does not represent a change in possibilities. This change is movement along the PPF curve.
change in quantity demanded
a change in the quantity of a good that consumers demand in response to a price change; movement along a demand curve
scatter diagram
a collection of points on a two-variable graph showing all observations of the two variables
Fitting a line with a positive slope to a scatter diagram indicates
a direct relationship of the variables
demand
a general term to describe the behavior of consumers in the market for a good or service
inferior good
a good characterized by decreased demand when consumer income increases and increased demand when consumer income decreases
normal good
a good characterized by demand increases when a consumer's income increases and demand decreases when a consumer's income decreases
substitute good
a good or service that can be used in place of another good or service and which satisfies the same economic need as the original good or service
production possibilities frontier (PPF)
a graph showing all combinations of output that an economy can produce in a given time period, given its scarce resources and fixed technology
demand curve
a graph showing the relationship between the price of a good and the quantity of the good that consumers are willing and able to purchase in a given time period
demand function
a mathematical relationship showing the quantity of a good demanded as a function of factors that influence the amount of a good that consumers are willing and able to buy
A choice to produce more of one good and less of another results in
a movement along the PPF curve. Explanation: An increase in the production of one good and a decrease in another represents a new combination on the existing production possibilities curve.
nonlinear relationship
a relationship between two variables that changes at every point on the curve
A change in price of a particular good indicates all of the following except
a shift in the demand curve. Explanation: change in the price of a particular good will change the quantity demanded by moving production to a new point on the demand curve. Price changes lead to a movement along the demand curve. The other determinants cause a shift in the curve.
tangent line
a straight line that touches the graph of a function at only one point and is used to calculate the slope of the function at that point
demand schedule
a table showing the relationship between the price of a good and the quantity demanded of the good in a given period of time
A supply schedule is
a table showing the relationship between the price of a good and the quantity supplied. Explanation: A supply schedule is a table that shows the relationship A supply schedule gives the same information as a supply curve. between quantity supplied and the price of a good.
In order to find the market quantity demanded,
add the individual quantities demanded by each individual consumer. Explanation: The market demand is the summation of all of the individual demand curves in the market,
On a demand curve,
all nonprice determinants are held constant. Explanation: All determinants except the price are held constant. Price varies along the vertical axis of the graph.
rise over run
an informal term for the slope of a line; the change in the variable on the vertical axis (the rise) divided by the change in the variable on the horizontal axis (the run)
The reason that producers supply more to a market at higher prices is that
as the price increases, the producers' opportunity cost of not producing that good increases. Explanation: The supply curve indicates opportunity costs. An opportunity costs. A producer must forego more and more good increases. upward-sloping supply curve indicates increasing resources to produce more as the price of the
The demand curve is downward-sloping because
as the price of the good rises, the quantity demanded falls.
A country that has an absolute advantage in a good
can produce the good using fewer resources than its trading partner. Explanation: An absolute advantage means that a country can produce a good with fewer resources, that is, at a lower absolute cost than the trading partner. However, the country should specialize in the goods for which it has a comparative advantage. Absolute advantage is not part of the decision to specialize and trade.
On a demand curve, an increase in the price of a good will
cause a decrease in the quantity demanded. Explanation: An increase in the price of a good causes the quantity demanded to fall. This decrease in quantity demanded is represented by movment along the demand curve. A change in any variable, except price, causes the demand curve to shift and is called a change in demand.
Each point on a two-dimensional graph consists of
combinations of variables that represent two pieces of information. Explanation: Each point contains information that represents the variables that are on each axis.
Two producers can gain from trade if the trade is based on
comparative advantage. Explanation: The basis of trade is comparative advantage, or lower opportunity costs. Two trading partners can both gain if they trade based on their comparative advantages.
The law of demand states that, all other things being equal,
consumers will buy more of a good if price falls. Explanation: The law of demand describes the inverse relationship between the price of a good and the quantity demanded of that good. As the price of a good falls, consumers are willing and able to buy more of the good, and as the price rises, consumers are willing and able to buy less.
All of the following factors influence how much of a product is supplied to a market except
consumers' income. Explanation: Consumers' incomes is a demand factor. It does not influence supply. It would, however, be a determinant for the demand side of the market.
For country A to have a comparative advantage in the production of agricultural products means that, relative to country B, with the same resources,
country A is better at producing agricultural products than country B. Explanation: Comparative advantage is a relative measure. If a country is better at producing something relative to another country, then it has a comparative advantage.
When the price of bagels decreases, the demand for English muffins
decreases. Explanation: By definition, substitute goods are two goods for which a decrease in the price of one causes a decrease in the demand for the other. In this case, a decrease in the price of bagels causes consumers to reduce their demand of its substitute, English muffins, and purchase bagels instead. Because the two goods can be substituted for each other, consumers will tend to purchase the cheaper good.
When the price of a complement for good X rises, the demand for good X
decreases. Explanation: When the price of a complement for good X rises, consumers will buy less of good X at every price. Demand for good X falls because the price for a product that is used with good X has increased.
If the population of a market area increases, all other factors being equal,
demand in the market will increase. Explanation: Market demand is the horizontal summation of all consumers' individual demands. When population increases, the number of buyers in a market increases and market demand has to expand.
If one variable increases when another one increases, then we say that the two variables are
directly related. Explanation: Variables are directly related when both change in the same direction. This phenomenon is also known as a positive relationship.
When a production possibilities frontier shifts outward, society experiences
economic growth. Explanation: When the PPF shifts outward, the economy is able to produce more of all goods. This change is the definition of economic growth. The PPF does not address the questions of allocation or income distribution.
A good is not scarce if...
everybody can have all they want of it. Scarcity means an imbalance between what people want and what is freely available. If a good is freely available it is called a "free good" and is not scarce.
Economic scarcity
exists in all economies.
The determinants of supply are
factors that influence the quantity of a product that producers choose to put on the market. Explanation: The following are the determinants of supply: the price of the good, the price of input goods, expectations of future prices, and technology. Supply determinants are behavioral factors that influence how much of a product suppliers want to put on the market.
A shift in the demand curve is caused by a change in one of the variables that affects the demand curve and is called a change in the quantity demanded...true or false?
false Explanation: A shift or change in the demand curve is called a change in demand; a change in the quantity demanded happens along a single unchanging demand curve.
In analyzing a supply function and then drawing a supply curve from it, you hold the price of a good constant but change the values of the other variables...true or false?
false Explanation: A supply function describes schedule and curve, you the variables that determine quantity supplied in any want to describe the quantity supplied at various prices, so you allow price to market. In setting up a vary and hold all other variables constant.
If the demand for steak falls when a consumer's income rises, then there is evidence that steak is a normal good... true or false?
false Explanation: Any good for which demand moves in the opposite direction of a person's income is an inferior good.
When each trading partner specializes in the production of a good for which it has a comparative advantage, each partner can gain from trade, but total production remains unchanged... true or false?
false Explanation: By specializing in those goods for which it has a comparative advantage, each partner can produce the goods that it produces best and can allow others to produce those goods that they produce best. The result is that total production can increase over non-specialized production.
In any trade between two trading partners and two goods, it is possible for one of the partners to have a comparative advantage in both goods.
false Explanation: Comparative advantage is caused by differences in opportunity costs, not resource endowments. In the two-person, two-good model, a trading partner who has a comparative advantage in one good by definition has a comparative disadvantage in the other good.
Economists only use three-dimensional graphs when using three variables...true or false?
false Explanation: Economists can use two-dimensional graphs to map three variables. Each axis represents a variable; additional variables can be represented as isoquants.
The supply of coal is fixed because there is only a finite amount in the ground that can be mined... true or false?
false Explanation: It is true that there is a finite amount of coal in the ground but the economic defintion of supply is the amount of coal that producers are willing to sell. This amount is not fixed.
The law of supply states that, when the price of a good rises, the quantity supplied of the good falls...true ir false?
false Explanation: When the price of a good rises, producers have an incentive to supply more of the good. Therefore, quantity supplied rises when the price of a good increases.
If trade benefits one country, it will make the other country worse off...true or false?
false Explanation: With specialization, trade makes both countries better off. Each country gets a wider variety of goods consume and total output increases.
complementary goods
goods or services which are used with other goods or services and which are essential to the consumption of the original goods or services
Bobby can vacuum two rooms in ten minutes or dust two rooms in twenty minutes. Bobby's schedule of possibilities indicates that
he can dust three rooms and vacuum six rooms in one hour. Explanation: Bobby's schedule permits him to dust two rooms in twenty minutes and vacuum two rooms in ten minutes. Dividing his time between the two chores allows him to dust three rooms and vacuum six rooms in one hour.
If the price of bread falls from $3 per loaf to $1.50 per loaf,
households will demand a different quantity of bread. Explanation: A decrease in the price of bread means that households will demand greater quantity of bread at the new, lower price. This change is represented by movement along the demand curve. When the price changes (all other variables constant), there is movement along the curve, but no shift.
Economics is the study of...
how to manage society's scarce resources. Given the fact that all societies face limited resources, the economic problem that they face is how to manage those resources to the greatest benefit.
If two variables, consumption (C) and income (I), are directly related we can say that
if income increases, then consumption increases. Explanation: A direct relationship is one in which a change in one variable causes a change in another variable in the same direction. In this example, a change in income causes a change in consumption in the same direction. The slope of the function is positive.
The idea of opportunity costs indicates that
if the production of one good is increased, the production of another good must decrease. Explanation: Opportunity costs are represented by the numerical value of the quantity of one good given up in order to produce more of another good. The opportunity cost of any choice is what you give up when you make that choice.
For most goods, if a consumer's income increases, his /her demand for the goods will
increase. Consumers have a tendency to increase their demand for most goods when their income increases. Goods that are like this are called normal goods.
When income decreases, the demand for inferior goods
increases. Explanation: The demand for inferior goods increases with an income decrease and decreases with an income increase. Consumers would prefer to purchase more expensive goods than inferior goods, so when their income increases, they buy fewer inferior goods, and when their income decreases, they buy more inferior goods.
When the price of a substitute for good X rises, the demand for good X
increases. Explanation: When the price of a substitute for good X rises, consumers will avoid the substitute and increase their consumption of good X at every price. Good X is relatively less expensive than its substitute. Therefore, the demand for good X increases.
If everyone made rational choices...
individuals would still differ in their choices. Individuals make different choices because they have different information and different constraints. Economists assume that individuals act rationally given their constraints and information.
A scatter plot is
information arrayed in a two-dimensional space to represent two variables for each data point. Explanation: A scatter plot is used on a two-dimensional graph to illustrate data points that contain two variables. The points are not connected.
When two people divide their labor according to their comparative advantages,
more work can be completed in a given period of time. Explanation: Dividing labor based on comparative advantage means that the two people can divide their labor based what each does best. When this division occurs, each specialized and more production can take place than if they did not trade their labor.
Russia can produce a bushel of corn with four workers and a bushel of rice with three workers. China can produce a bushel of corn with three workers and a bushel of rice with two workers. The opportunity cost for China to produce one bushel of corn is
one and a half bushels of rice. Explanation: The opportunity cost for China to produce one bushel of corn is measured in terms of the amount of rice given up. In this case, each Chinese worker can produce one-half bushel of rice. For China to produce an additional bushel of corn it has to move three workers from rice production to corn production and will lose one and one-half bushels of rice.
Russia can produce a bushel of corn with four workers and a bushel of rice with three workers. China can produce a bushel of corn with three workers and a bushel of rice with two workers. The opportunity cost for Russia to produce one bushel of corn is
one and one-third bushels of rice. Explanation: The opportunity cost for Russia to produce one bushel of corn is measured in terms of the amount of rice given up. In this case, one and one-third bushels of rice aregiven up. Each worker inRussia can produce one-third bushel of rice. To produce another bushel of corn Russia must move four workers from rice to corn production and lose one and one-third bushels of rice.
A negative relationship between variables exists when
one variable increases while the other variable decreases. Explanation: A negative relationship, also called an inverse relationship, describes a situation in which an increase in one variable causes a decrease in another variable. Negative relationships are graphed with a downward- sloping curve.
The display of three variables in a two-dimensional graph are organized with
one variable on each axis and the other variable held constant as the value on the isoquant. Explanation: Two variables are represented on each axis and the third variable is held constant. Each isoquant represents a different value of the third variable.
Suppose a person can produce either two bushels of wheat per hour or six bushels of corn per hour. This person's opportunity cost of one bushel of corn is
one-third of a bushel of wheat. Explanation: To find the opportunity cost of one good in terms of another, you must determine how much of one good that you give up to get another. Divide the amount of the product you are giving up by the amount of the product whose cost you want. Be sure that the time resource used is the same for each good. In this problem, the opportunity cost of corn in terms of wheat is two bushels of wheat/ six bushels of corn or 1/3 bushel of wheat given up to produce another bushel of corn.
In a farming economy that produces barley and flax, a new fertilizer is invented. The fertilizer only works on Correct! barley. The production possibilities frontier will
only shift outward on the barley axis. Explanation: A fertilizer that only affects barley will cause the PPF to shift outward only on that axis. The technology for the other crop does not change; therefore, its axis remains the same.
Suppose a soybean farmer expects a lower price for soybeans at harvest time than the market price at the time of planting. This farmer is likely to
plant fewer acres in soybeans. Explanation: The farmer will probably cut the soybean acres and plant something else. Because the farmer expects lower future prices, the opportunity cost of harvesting soybeans is rising, so he will most likely pool his resources in the production another good.
Suppose a soybecan farmer expects a higher price for soybeans at harvest time than the market price at the time of planting. This farmer is likely to
plant more acres in soybeans to take advantage of the expected higher price. Explanation: The farmer would likely plant to estimate the price at harvest. more acres to take advantage of the expected higher price. Farmers attempt
The relationship between price and quantity supplied is
positive. Explanation: The supply curve slopes upward. Therefore, price and quantity supplied are positively, or directly, related.
The economic term "specialization" refers to the behavior of trading partners when each partner
produces only those goods for which it has a comparative advantage Explanation: Comparative advantage is defined by the relative, or lower, opportunity costs of one trading partner compared with another and should result in an improved production possibilites frontier.
Any combination of two goods lying outside the production possibilities frontier
represents an unattainable combination of goods. Explanation: Any combination of goods found beyond the PPF is not attainable because the resources or technology do not exist to reach that combination.
Scarcity
requires people to make choices. Explanation: Scarcity means that resources are limited. Therefore, unlimited wants cannot be satisfied so people must make choices.
The opportunity cost of supplying more of a particular good
rises as the quantity supplied increases. Explanation: The opportunity cost of supplying more of a particular good increases as the producer has to put more of his /her resources into producing more product. The producer is foregoing more resources are used in the production of the particular good. This foregone production is the firm's production of other products as opportunity cost.
If a producer of bread thinks that the price of bread will fall next week, the producer will
sell all the bread this week if possible. Explanation: The producer who expects lower prices in the future will try to sell all he or she can at the current, relatively higher price. In this situation, a rational producer would produce and sell as much as possible in the current week and sell less the next week when the price is expected to fall.
A decrease in a consumer's income causes his demand curve to
shift inward. Explanation: A decrease in income, an exogenous variable, causes an inward shift in demand. The consumer can afford to buy fewer of the goods at every price.
In a farming economy of wheat and rice, a warming trend occurs. This trend increases the production of both goods. However, the rice production is affected more than the wheat. The production possibilities frontier will
shift outward for both goods, but the rice axis will shift further. Explanation: The PPF will shift outward representing the increase in production for both goods. The axis for rice will shift more than the axis for wheat.
If you expect the price of ice cream to increase next week, your demand curve for ice cream will
shift outward. You will buy more of the good at the lower price today. Explanation: If you expect a price increase for a certain good in the future, you will buy more of the good today at the lower price and your demand curve will shift outward.
A shift in the demand curve
shifts the whole demand curve inward or outward. Explanation: A shift in the demand curve occurs when an exogenous variable either increases or decreases, causing the demand curve to shift to the right or to the left.
The demand curve
shows the relationship between the price of a good and the quantity that the consumer is willing and able to purchase in a given period of time, holding all other factors that influence consumer behavior constant. Explanation: The demand curve shows the relationship between the price of a good and the quantity demanded of that good while holding factors of influence constant.
If Sue demands six packs of gum at seventy-five cents each and John demands four packs of gum at seventy- five cents, the market quantity demanded at that price is
ten. Explanation: Add Sue's quantity demanded and John's quantity demanded at the equilibrium price. The market quantity demanded is ten.
The law of demand states, all other things being equal,
that consumers will buy more of a good if the price falls. Explanation: The law of demand states that ceteris paribus, price and quantity demanded are inversely related: when the price falls, consumers demand more of a good; when the price increases, consumers demand less of a good.
A steeply sloping demand curve shows
that the change in quantity demanded (x-axis) is not very sensitive to a change in price (y-axis). Explanation: The downward-sloping demand curve indicates an inverse relationship between price and quantity demanded. A steep slope indicates that quantity demanded is not very sensitive to a change in price.
The slope of a demand curve describes consumer behavior by showing
that the consumer increases his/her consumption of a good when the price goes down. Explanation: The demand curve slopes downward indicating that a consumer's quantity demanded increases as price decreases and decreases as price increases. The slope illustrates the law of demand.
comparative advantage
the advantage that one producer has over other producers by producing a good or service at a lower opportunity cost
rational choice
the assumption that economic actors are consistent and logical in making choices
Demand is defined by
the behavior of consumers or households. Explanation: Demand is the study of the behavior of consumers or households, whereas supply is the study of producer behavior.
A rational person makes a choice if...
the benefits outweigh the costs. Explanation: A rational person chooses actions based on benefits being greater than costs.
opportunity costs
the best alternative that one gives up when making a choice; the amount of some products given up by choosing to produce one unit of another product
Opportunity cost is defined as
the best alternative that you give up when you make a choice. Explanation: Because of scarcity, opportunity cost is a means by which to evaluate alternative choices. It is the best alternative that we give up when we make choice.
If you wait in line one hour to buy a concert ticket for $30, the opportunity cost of that ticket is...
the best alternative to both the $30 and the one hour. Explanation: The opportunity cost of this trade is both the alternative use of the money and the time.
income effect
the change in the consumption of a good caused by an effective change in a consumer's income when the price of the good changes
substitution effect
the change in the consumption of a good that is the result of the consumer substituting to lower priced goods, when the price of a good changes
slope
the change in the variable on the vertical axis divided by the change in the variable on the horizontal axis; the rate of change or degree of steepness of a line
slope
the change in the variable on the vertical axis divided by the change in the varlable on the horizontal axis; the rate of change or degree of steepness of a line
intercept
the constant term in a linear function; the point at which a linear graph intersects one of the axes
If a household's income decreases,
the demand for normal goods will decrease, and the demand curve will shift inward. Explanation: The demand of a normal good will fall when income decreases and rise when income increases. When a household's income falls, the demand for normal goods decreases, and the demand curve shifts inward.
An inward shift in the PPF could be caused by
the destruction of resources in a war. Explanation: The PPF would shift inward when resources are destroyed. A destruction of resources would cause production of all goods to fall and represents the opposite of growth.
value
the difference between the benefit and the cost of any activity
Economic value is defined as
the difference between the benefits and costs of an activity. Explanation: The basic definition of economic value is the difference between the benefits and costs of an activity. Accordingly, profit (the excess of business revenues over business costs) represents the concept of economic value as applied to business operations.
Profit is
the difference between the cost of providing a service or good and the revenue earned by selling the service or good. Explanation: Profit is the difference between total revenue and total costs.
comparative disadvantage
the disadvantage that a producer has in the production of a good or service by having a higher opportunity cost for the production of that good or service
The slope of a downward-sloping straight line is calculated as
the distance from the vertical intercept of the line to the origin divided by the distance from the origin to the horizontal intercept of the line. Explanation: The slope of a line is calculated by dividing the change in the variable on the y-axis by the change in the variable on the x-axis. For a straight line, we can use the vertical and horizontal distances from the origin to calculate the slope.
When an economist analyzes "market demand" in a particular market, the economist is referring to
the entire demand curve. Explanation: Because the market demand is the horizontal summation of all individual demand curves, economists refer to market demand to analyze the entire demand curve.
scarcity
the fact of limited resources in a world of unlimited material human wants
In a two-person, two-good trading model, the individual with a flatter production possibilities frontier has a comparative advantage in
the good on the horizontal axis. Explanation: A relatively flat production possibilities frontier means that the individual gives up little of the good on the vertical axis to specialize in the good on the horizontal axis. In the model, the individual would specialize in the production of the good for which she has a comparative advantage, that is, a lower opportunity cost.
linear relationship
the graphical depiction of a relationship between two variables that can be plotted as a straight line
The opportunity cost of a college education is?
the highest salary that you could make if you worked full-time instead of going to school. The opportunity cost of any activity is the highest valued activity that you give up when you make a choice. In the case of a college education, the highest valued activity is usually the salary you could make if you were not going to school and were working instead. Opportunity cost is always something that is given up.
Each coordinate of a graph is written as
the horizontal axis x and the vertical axis y (x, y). Explanation: A coordinate of a graph represents the horizontal axis x and the vertical axis y, and is written as (x. y).
market demand
the horizontal summation of all individual demand curves in a particular market; the sum of all quantities of a specific good or service demnaded by all consumers in a given period of time
Households will buy more of a normal good at every price when
the household income increases. Explanation: Demand for a normal good responds to an increase in income, by increasing. The change is represented by an outward shift in the demand curve.
Scarcity is defined as...
the imbalance between what is wanted and what is freely available. By definition, scarcity is concerned with the imbalance between what is wanted and what is freely available. The mismatch between the goods and services wanted and the inputs needed to produce such goods and services is at the core of the study of economics.
The opportunity cost of attending college includes...
the income you could have earned while in classes. Potential income is something that one gives up to attend college.
If a jeweler sees a fall in the price of gold and gold is an input good to the jeweler's products, with all other factors being equal we would expect
the jeweler to produce more jewelry at each possible price. Explanation: If the price for a major input falls, producers would have an incentive to produce more of the product.
direct relationship
the mathematical property of two variables changing in the same direction, positively or negatively
The production possibilities frontier is a straight line when
the opportunity cost is constant. Explanation: The PPF is a straight line when all the resources of an economy are well suited for all uses. The PPF has a constant slope and a constant opportunity cost.
In weighing cost against benefits in any economic trade, the total cost can be viewed as
the opportunity cost. Explanation: The total costs of any economic trade can be considered the opportunity cost.
If there is an agricultural economy in which land can be used either as pasture for cattle or as crop land for wheat, the opportunity cost of converting one acre from pasture to wheat production is the
the pounds of beef that are lost. Explanation: The opportunity cost of turning the acre into wheat production is the lost beef production that results. Opportunity cost is always measured in terms what must be given up.
Besides the price of substitutes and complements, other determinants of demand include
the price of the product, income, and consumers' tastes. Explanation: Factors affecting the demand for any particular good are the price of the good, the price of substitutes and complements, consumers' income, consumers' tastes and preferences, and future expectations.
efficiency
the production of the goods that society wants at the least possible cost
law of demand
the real-world observation that when the price of a qood changes, the quantity of that good demanded changes in the opposite direction
A demand schedule shows
the relationship between the price of a good and the quantity demanded of the good. Explanation: A demand schedule is a table showing the relationship between the price of a good and the quantity demanded of a good. A demand curve is a demand schedule in graphical form.
A graph of the demand curve measures
the relationship between the price of a product and the quantity demanded. Explanation: The demand curve shows the relationship between a product's price and the quantity demanded.
Factors that shift the market demand curves are
the same as for the individual demand curves. Explanation: Factors that shift the market demand are the same as for the individual demands because the market is made up of many individual demand curves.
On an exponentially increasing curve,
the slope is not constant. Explanation: The slope of an exponentially increasing curve is not constant and changes from point to point on the curve. The curve is not linear.
The PPF is a tool in economics to illustrate
the study of rational choice in situations of scarcity. Explanation: Economics studies the rational choices that are made by producers and consumers in situations of scarcity.
economics
the study of rational choice under conditions of scarcity; alternatively defined as the study of the creation and distribution of value
Alternatively, economics may be defined as
the study of the creation and distribution of economic value. Explanation: Given the scarcity of resources, economics is very concerned as to whether the usage of resources is producing economic value.
When the price of a good rises, consumers will stop buying the more expensive goods and switch to substitutes. This behavior is explained by
the substitution effect. Explanation: The substitution effect states that an increase in the price of a particular good will lead consumers to substitute away from the good and seek less expensive substitutes.
Which of the following statements regarding the tangent line is false?
the tangent line cannot be used to find the slope of the TP curve at a point on the line. Explanation: The tangent line touches the TP curve and has a slope equal to the TP curve at the point it touches. A tangent line is always used to find the slope of the TP curve at any point.
The production possibilities frontier (PPF) represents
the various combinations of output that an economy can produce with its available resources and technology. Explanation: The PPF shows all the possible combinations on the curve that represent a maximum amount of one good produced for a certain quantity of another good produced. Points beyond the graph are impossible points; points inside the graph are inefficient points.
If the price of a soft drink changes from $1.00 to $2.00, then
there is a change in quantity demanded. Explanation: When there is a change in the price of a good, there is change in quantity demanded. A change in quantity demanded is shown by movement along the demand curve. There is no change in demand which is a shift in the demand curve.
According to the Law of Demand, when the price of a good increases,
there is movement along the demand curve but it does not shift. Explanation: A change in price changes the quantity demanded. It is represented by movement along the demand curve. Other factors, such as income and tastes, cause the curve to shift.
If the price of inputs for making pizza increases,
there will be less pizza supplied because the costs are increasing. Explanation: An increase in the price of inputs would increase the costs to supply a product. If costs become greater than revenues, producers will experience losses. Supply will fall to zero if producers move their resources to other products.
Economists prefer elasticities for all of the following reasons except that
they are based on total changes in units. Explanation: Elasticities are based on percent changes and illustrate a relationship that is independent of the type of unit. Elasticity is unaffected by the units of measurment.
Suppose a person can produce either two bushels of wheat per hour or six bushels of corn per hour. This person's opportunity cost of one bushel of wheat is
three bushels of corn. Explanation: To find the opportunity cost of one good in terms of another, you must determine how much of one good that you give up to get another. Divide the amount of the product you are giving up by the amount of the product whose cost you want. Be sure that the time resource used is the same for each good. In this problem, the opportunity cost of wheat in terms of corn is six bushels of corn/ two bushels of wheat or three bushels of corn given up to produce another bushel of wheat. The opportunity cost of one product is the reciprocal of the opportunity cost of the other product.
Suppose the market for automobiles is a national market. If personal income nationwide increases, then (other factors being equal) the market demand for automobiles is likely
to increase. Explanation: Any factor that can shift an individual demand curve can also shift a market demand curve. An increase in personal income nationwide would shift the market demand curve outward, which represents an increase in demand.
When increasing opportunity costs exist, resources are not perfectly substitutable for each other..true or false?
true Explanation: A concave production possibilities curve (PPF) reflects the trade-off of greater quantities of a good when more of the other good is produced. Accordingly, the greater trade-off reflects the incompatability of resources.
A demand function is a mathematical formula that specifies the relationship between the demand for a good or service and the variables that influence that demand...true or false?
true Explanation: A demand function is a mathematical relationship that predicts the quantity demanded of a good as a function of the factors that influence consumer behavior. It describes consumer behavior.
A supply function is a mathematical representation of the quantity of a good that a firm is willing to supply the market profitably as a function of all the variables that influence the firm's decision...true or false?
true Explanation: A supply function represents the quantity of a product a firm will supply to a market based on determinants such as the price of the product, the price of inputs, the industry's technology, and the firm's expectations of future prices.
An example of an isoquant is a curve that shows the combinations of longitude and latitude that have the same altitude...true or false?
true Explanation: An isoquant is the name of the curve that shows the pairs of values for the variables (latitude and longitude) on two axes of a graph for which a third variable (altitude) has a given value. The third variable is constant and its value is the numerical value of the isoquant.
To derive a market demand curve, add the quantity demanded by each individual in the market at each price and construct a new demand schedule... true or false?
true Explanation: Horizontal summation is the sum of each individual's quantity demanded at each price. The market demand curve is derived by horizontal summation.
To economists, the Latin phrase ceteris paribus means "all other variables held constant."...true or false?
true Explanation: In economics, the phrase ceteris paribus means "all other variables held constant." Economists use this phrase as a reminder that they are holding constant all variables except the one they are interested in studying.
The determinants of market demand include all determinants of individual demand, and, as well, the number of buyers in the market, since the individual demand functions of all of them must be summed to arrive at market demand... true or false?
true Explanation: Market demand is the summation of all individual demand functions.
If sellers expect prices to rise in the future, prices today will rise because sellers might reduce current supply and wait for higher prices...true or false?
true Explanation: Sellers respond to current prices and to anticipated future prices. If they expect prices to rise in the future, they may hold back current production and wait for a higher price to sell their products. This could actually lead to a higher current price as current supplies are restricted.
The income effect says that when the price of a good increases, consumers buy less of the good because their purchasing power is shrinking in terms of that particular good...true or false?
true Explanation: The income effect suggests that consumers are able to purchase less because the purchasing power of their income is shrinking. A change in the price of a good essentially is a change in income.
The slope of the production function is flatter near the bottom of the curve...true or false?
true Explanation: The production function defines the relationship between output and number of workers. When there are few workers, each worker is not very productive. Therefore, the curve is flat near the bottom.
Points on the production possibilities frontier are the only efficient production points.
true Explanation: The production possibilities frontier graphically illustrates all production combinations that are efficient. That is, the PPF curve shows which combinations efficiently use an economy's resources. Points outside the curve are unattainable, and points inside the curve are inefficient.
The supply curve is a collection of points representing the quantity of a particular good that a producer is willing and able to offer for sale in a given period of time as a function of the price of the particular good... true or false?
true Explanation: The supply curve illustrates the relationship between price and quantity supplied for a particular good. It is upward-sloping because suppliers will supply more as price increases.
Assuming that hamburgers and mustard are complements, a decrease in the price of hamburgers would increase the demand for mustard... true or false
true Explanation: When the price of a good decreases, the quantity demanded for that good increases. The demand for its complement increases because it is used with the original good.
A movement along the demand curve for a particular good is a response to the change in price of a particular good... true or false?
true Explanation: to a change in the price of that good A change in the quantity demanded of particular good is a response and is shown as a movement along the demand curve. A change in any determinant of demand, other than price, will shift the curve inward or outward.
Bobby can vacuum two rooms in ten minutes or dust two rooms in twenty minutes. Using his unit labor requirement, Bobby's potential for vacuuming is
twelve rooms per hour or dusting is six rooms per hour. Explanation: The unit labor requirement describes the productivity and the time required for a specific activity. His potential gives the ratios of what he can produce.
Bobby can vacuum two rooms in ten minutes or dust two rooms in twenty minutes. The opportunity cost of dusting one more room is
vacuuming two rooms. Explanation: The opportunity cost is giving something up in order to perform another activity. In this case, Bobby gives up vacuuming two rooms to dust one more room.
Suppose a PPF has capital goods on the vertical axis and consumption goods on the horizontal axis. The PPF has a constant slope with a vertical intercept of 80 and a horizontal intercept of 160. Last year, 160 units of consumption goods were produced, so the economy produced _____units of capital goods.
zero Explanation: The PPF is the entire range of possibilities for the economy. When the economy maximizes its production of one good, it is unable to produce any of the other good. The intercepts on each axis represent the maximum for each good.
