Combo with "ECON ch.6" and 4 others

Dan decides to give up a job earning $110,000 per year as a corporate lawyer and converts the duplex that he owns into a UFO museum. (He had been renting out the duplex for $21,000 a year) His direct expenses include $55,000 per year paid to his assistants and $21,000 per year for utilities. Fans flock to the museum to see his collection of extraterrestrial paraphernalia, which he easily could sell on eBay for $1,050,000. Over the course of the year the museum brings in revenues of $105,000. A. How much is Dane's economic profit for the year?

"-$102,000 - Interest forgone on the $1,050,000 extraterrestrial gear"

Although only __ percent of all firms are corporations, corporations account for _______ of revenue and profits earned by all firms.

-20% -The majority

A bond represents ____, while a share of stock represents ____.

-A loan to the company -part ownership of the company

The United States has three legal categories of firms. Which of the three categories accounts for the most revenue in the United States? _______ account for the most revenue in the United States.

-Corporations

U.S. Gross National Product (GNP) differs from U.S. Domestic product (GDP) in which of the following ways? (mark all that apply)

-GNP considers production that occurs outside the U.S. -GNP is the value of final goods and services produced by residents of the U.S.

In the United States, the difference between GNP and GDP is ______ that of many other countries.

-Smaller than

An Asset is ____, and a liability is ____. An example of an asset would be ____, while and example of a liability would be ____.

-Something that the company owns -anything that the company owes -plant and equipment -a bond that the company has issued

The principal-agent problem arises almost everywhere in the business world- but it also crops up even closer to home, such as the case of the college classroom. In this case, who is the principal and who is the agent? The principal is the ___ and the agent is the ____.

-Student -Professor

A balance sheet shows ___ at some point in time, while an income statement shows ____ at some point in time.

-The firm's overall financial position -The firm's revenues, costs, and profits

What is the GDP deflator, and how is it calulated?

A GDP deflator is a measure of the price levelm calculated by dividing nominal GDP by real GDP and multiplying by 100. formula: nominal GDP/ real GDP X100

What is a production possibilities frontier? How can we show economic efficiency on a production possibilites frontier? How can we show inefficiency? What causes a production possibilities frontier to shift outward?

A PPF is a curve that shows maximum attainable combinations given current resources and technology. We can show efficiency by showing the maximum output given current resources and technology. We can show inefficiency by under untilizing given resources: improving in technology. Incerease in the labor force/capital stock causes it to shift outward.

What is a free market? In what ways does a free market economy differ from a centrally planned economy?

A free market is a market with few gov't restrictions on how a good/service can be provided or sold or on how a factor of production can be employed. A centrally planned ecomony is an economy is an economy in which the gov't decides how economic resources will be allocated.

What do economists means by market equilibrium?

A market outcome where quantity is equal to quantity demanded.

What term do economist use to refer to the conflict between the interests of shareholders and the interests of top management?

A principal-agent problem

What do economics mean when they use the Latin expression ceteris paribus?

All else equal

Real GDP per capita is often used as a measure of general well-being. While increases in real GDP often do lead to increases in the well-being of the population, why is real GDP not a perfect measure of well-being?

All of the above

Think about the increase in spending for the department of homeland security and the wars in Afghanistan and Iraq. These are represent government expenditures that have increased GDP yet the typical person might not necessarily be better off as a result. why?

All of the above

Why in microeconomics can we measure production in terms of quantity, but in macroeconomics we measure production in terms of market value?

All of the above

What is absolute advantage? Comparative advantage? Is it possible for a country to have a comparative advantage in producing a good w/o also having an absolute advantage?

An absolute advatage is the ability to produce more of a good or service using same amount of resources. Comparative advantage is the abolity to produce a good or service at a lower opportunity cost than competitors. Yes.

The GDP of the country Sumeria has grown at an average rate of 6% over the last two years, while the rate of inflation has remained more or less stable. Macro economists in the country are arguing that this increase in GDP is a clear indication of an overall improvement in the well-being of its people. Which of the following, if true about the last two years in Sumeria, would strengthen this argument?

An increasing percentage of the population is choosing leisure time over time spent in the work force.

Which of the following statements most accurately characterizes the role of small firms in the U.S. economy? Small firms

Are important because about 40 percent of new jobs are created by small firms.

Suppose you originally invested in a firm when it was large and profitable. Now the firm has downsized and is small and unprofitable. Would you be better off now if you have bought the firm's stock or the firm's bonds

Bonds

From the list below, select the variable that will cause the demand curve to shift:

Consumer income

What are the four major components of expenditures in GDP?

Consumption, Investment, Government Purchases, and Net Exports.

For which of the following types of business organizations is there a legal distinction between the personal assets of the owners of the firm and the assets of the firm?

Corporations

In the United states, there are three legal categories of firms: Sole proprietorships, partnerships, and corporations. Which of the following is disadvantage for corporations?

Corporations are susceptible to double taxation of income.

In the United States, ____ account for the majority of revenue earned and ____ account for the majority of business organizations.

Corporations; Sole proprietorships

Scarcity is central to the study of economics because it implies that

Every choice involves an opportunity cost

In the circular flow of expenditure and income, why must the total value of production in an economy equal the total value of income?

Every penny spent on a good or service must end up as someone's income.

A firm's

Explicit cost is its monetary cost whereas its implicit cost is its non-monetary opportunity cost.

Why is GDP an imperfect measure of economic well-being? What types of production does GDP not measure? Even if GDP includes these types of production, why would it still be an imperfect measure of economic well-being?

GDP does not include household production and the underground economy. Even if it did include this, it would be an imperfect measure of economic well-being since it does not include the value of leisure, or adjust for pollution/change in crime /social problems and the size may not be equally distributed.

Wages earned by household make up ______ 50% of the total income earned in the U.S. economy

Greater Than

Scarcity implies that every society and every individual face trade-offs because scarcity means that

Human wants are greater than what available resources can produce

Why in microeconomics can we measure production in terms of quantity, but in macroecomics we meansure production in terms of market value?

In Microeconomics we measure in quantity because micro deals w/ individual markets. In Macro, we measure production in terms of market value because macro deals w/ economy as a whole.

Which of the following are likely to increase the measured level of GDP and which are likely to reduce it? C. If lower tax rates cause fewer people to hide the income they earn, the measured GDP

Increases

Which of the following are likely to increase the measured level of GDP and which are likely to reduce it? A. When the number of people working outside the home increases, the measured level of GDP or- When the number of people working outside the home decreases, the measured level of GDP

Increases or- Decreases

What does increasing marginal opportunity mean? What are the implications of this idea for the shape of the PPF?

Increasing Marginal opportunity means that some workers, machines and other resources are better suited for one use than another. The implications are................................

Why does inflation make nominal GDP a poor measure of the increase in total production form 1 year to the next? How does the U.S. Bureau of Economic Analysis deal witht eproblem inflation causes with nominal GDP?

Inflation makes GDP a poor measure because its change can be due to a change in price or a change in production. The Bureau uses real GDP(base year prices) to separate out price changes from quantity changes.

The stock and bond markets provide information to businesses through changes in prices. A decrease in the price of a firm's stock would tell managers which of the following?

Investors expect the firm to have lower profits in the future.

Limited liability becomes more important for firms trying to raise funds from a large number of investors, rather than from a small number of investors, because

Investors that make a small investment in a firm may be unwilling to risk all their personal assets if the firm fails.

If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and service sold during the year, would the total be larger or smaller than measured gross domestic product (GDP)?

Larger: The value of all goods and services sold would include intermediate goods.

What is the difference between microeconomics and Macroeconomics?

Micro-study of how households and firms make choices, how they interact in markets, and how the gov't attempts to influence their choices. Macro- is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

What is the difference between normative analysis and postive analysis? Is economics concerned mainly with normative analysis or with positive analysis?

Normative analysis is concerned with what ought to be. Positive analysis is concerned with what is. Economics are mainly concerned with positive analysis because it can be tested with statistical data.

Suppose that shortly after graduation from college you decide to start your own business. Assuming you are starting a small business and realize that you need someone with particular expertise or business skills, which category or firm are you most likely to start?

Partnership

In the United states, there are three legal categories of firms: Sole proprietorships, partnerships, and corporations. Which of the following is an advantage for partnerships?

Partnerships have the ability to share work.

When economics develop models designed to explain the choices people make, they generally assume that

People are rational

Which of the following would be included in the gross national product (GNP) of the United States?

Production from a U.S. firm that operates in Mexico.

What is the difference between productives efficiency and allocative efficiency?

Productive efficiency is when a good/service is produced at its lowest possible cost and allocatiove efficiency is when the consumers choices of production are preferred. In allocative efficiency, the marginal cost of producing a good is equal to the marginal benefits to society.

Discuss these ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin

Rational individual weigh the benefits and costs of every action and choose an action if the benefits outweigh the costs. People respond to incentives if it benefits them. Optimal decisions are made at margin to continue any activity until marginal benefits=marginal costs.

According to an article in the Economist, the Russian economy "may not have been booming by 7% a year, as in the mid-2000s, but GDP grew by 3.6% in 2012." These two percentages are referring to changes in

Real GDP

What is scarcity? Why is scarcity central to the study of economics?

Scarcity is the situation in which unlimited wants exceed limited resources available to fulfull those wants. It is central to the study because ecomomics is the study of the choices people make to attain their goals, given their scarce resources.

What do we mean by the separation of ownership from control in large corporations?

Shareholders own the corporation, but it is controlled by managers.

Suppose that a firm in which you have invested is making a lot of money. Would you rather own the firm's stock or the firm's bonds?

Stock

ExxonMobil is a large corporation. Who owns this company?

Stockholders

Briefly describe the 3 major measures of the price level

The 3 major measures of price level are GDP deflator, Consumer Price Index, and Producer Price Index.

What price index does the government use to measure changes in the cost of living?

The Consumer Price Index is used to measure changes in the cost of Living.

How is the separation of ownership from control related to the principal-agent problem?

The agents (Managers) may pursue their own interests rather than the interests of the principals (shareholders).

The stock and bond markets provide information to businesses through changes in prices. A decrease in the price of a firm's bonds would tell managers which of the following?

The cost of external funds has increased.

From the list below, select the variable that will cause the supply curve to shift:

The cost of raw materials

Ambrosia, a small country in the Mediterranean region, has an agriculture-based economy. in recent years, a decline in global trade barriers has led to a massive increase in agricultural production in Ambrosia. The government of Ambrosia has claimed that this expansion has increased the country's GDP and also improved the overall welfare of its people by increasing employment opportunities. However, critics of the government have claimed that this expansion has actually made the people of Ambrosia worse off.

The expansion was made possible by an expansion of pesticide use that has damaged the natural environment

Opportunity cost is

The highest valued alternative that must be give up to engage in an activity.

Today, the typical American works fewer than 40 hours per week. In 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the population's economic well-being?

The increase in real GDP per capita between 1890 and today understates well-being because the value of leisure is not included in GDP

What does the labor force participate rate measure? Since 1950, how have the labor force participation rates of men and women changed?

The labor forces participation rate determines the amount of labor that will be available to the economy from a given population; the % of the working-age population in the labor force. Labor force participation rate of adult males has decreased and increased for females since 1950.

What is the relationship between frictional unemployment and job search?

The longer the duration of job search the more friction unemployment. Friction unemployment = short term unemployment that arises from the process of matching workers with jobs.

What is the natural rate of unemployment? Why isn't the natural rate of unemployment equal to 0?

The natural rate of unemployment if the normal rate of unemployment, consisting of frictional unemployment plus structural unemployment. The natural unemployment ratenever falls to 0 because there's always frictional and structural unemployment in the economy.

In an attempt to control inflation, the Indian central bank increased interest rates substantially. This was expected to have an adverse impact on the country's GDP this year. Some economists also expected a year-on-year decline in India's GNP. However, Indian GNP actually went up. Which of the following, if true, would best explain this outcome?

The number of Indian IT employees working on projects outside of India increased considerably this year.

What is the difference between the value of a firm's final product and the value added by the firm to the final product?

The value of a firm's final product is the sale price; value added is the difference between the sale price and the price of intermediate goods.

Your friend asks you to join him in the new Internet business he is setting up as a partnership. If you invest $10,000 in the business, what is the limit to your liability?

There is no limit to your liability

The principal-agent problem in the public corporation between ownership and top management results from asymmetric information. All of the following are correct, except

This principal-agent problem can be prevented or reduced if the managers are allowed to have freedom in running the company.

Which of the following best describes scarcity?

Unlimited wants exceeds the limited resources available

In 2012, the largest component of gross domestic income was

Wages

When looking at GDP as the amount of total income, the largest component of total income in the U.S. is

Wages

Which equation represents the relationships between GDP and the four major expenditure components?

Y=C+I+G+NX

When the price of Microsoft stock is increased more than 27 percent in the first part of 2013, Bill Gates, who owns 436 million shares of Microsoft stock, once again became the worlds richest man. Does Bill Gates, the richest person in the world, face scarcity?

Yes

Dan decides to give up a job earning $110,000 per year as a corporate lawyer and converts the duplex that he owns into a UFO museum. (He had been renting out the duplex for $21,000 a year) His direct expenses include $55,000 per year paid to his assistants and $21,000 per year for utilities. Fans flock to the museum to see his collection of extraterrestrial paraphernalia, which he easily could sell on eBay for $1,050,000. Over the course of the year the museum brings in revenues of $105,000. B. Is he earning an accounting profit?

Yes, he is earning an accounting profit.

All of the following statements are true, expect

a firm maximizes profit when total cost equals total revenue.

A sole proprietorship is

a firm owned by a single individual and not organized as a corporation.

Productive efficiency means that

a good or service is produced at the lowest possible cost.

The principal-agent problem occurs when

an agent pursues his own interests rather than the interests of the principal who hired him.

Household production and the underground economy:

are not accounted for in the Commerce Department's estimates of GDP

An underground economy involves all of the following except

buying and selling of goods and services by obtaining a permit from the government

The establishment of limited liability for the owners of corporations

causes the businesses to produce more and over time the country's production possibilities frontier shifts to the right.

"When there is a shortage of a good ____________. the process continues until the market is finally in equilibrium."

consumers compete against one another by bidding the price upward.

Allocative efficiency means that

every good or service is produced up to the point where marginal benefit is equal to marginal cost.

It is better to have outside directors on the board of directors, as opposed to only inside directors, because

independent outsiders would be better suited to monitor and control the management of the corporations

Suppose a business earned a positive accounting profit, but a negative economic profit, then

it will be very unlikely for the firm to remain in business in the long run.

The owners of corporations have

limited liability

Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when

marginal benefit equals marginal cost

Which of the following are likely to increase the measured level of GDP and which are likely to reduce it? B.When there is a sharp increase in the crime rate, the measured level of GDP.

may increase or decrease

Consumer and producer surplus measure the _____ benefit rather than the _____ benefit.

net; total

"Rent controls, government farm programs, and other price ceilings and price floors are bad." This is an example of a

normative statement. The statement is concerned with what should be.

Some countries have larger underground economies than do other countries, because

of government policies that are retarding economic growth

If the GDP deflator in 2012 has value of 98.0, then

prices have decreased 2 percent between the base year and 2012.

Limited liability means that

shareholders in a corporation cannot lose more than their investment in the firm.

The three major types of firms in the United States are called

sole proprietorships, partnerships, and corporations

When the government imposes price floor or price ceilings,

some people win, some people lose, and there is a loss of economic efficiency.

Tax incidence is

the actual division of the burden of a tax between buyers and sellers in a market.

Economics assume that people are rational in the sense that

they use all available information as they take actions intended to achieve their goals

The government grants limited liability to the owners of corporations

to limit shareholder risk and thus encourage investment in corporations

Microsoft charges a price of $599 for a copy of Windows 7. Is this pricing decision rational?

when we assume the managers at microsoft have used all available information and have weighed all known benefits and costs, we are assuming rationality.