ECON 103 MIDTERM

Government Purchases

- All spending on the goods and services purchased by the government (all levels) - Excludes Social Security or unemployment

When does demand decrease the equilibrium price?

-when demand decreases and supply does not change -when demand doesn't change and supply increases -when demand decreases and supply increases simultaneously

Name two economic propositions for which more than 90 percent of economists agree.

A ceiling on rents reduces the quantity and quality of housing available. Tariffs and import quotas usually reduce general economic welfare.

Why does a production possibilities frontier have a negative slope (slope down and to the right)?

Because if an economy is operating efficiently, production choices have opportunity costs. If we want more of one thing, we must have less of another.

Why is the production possibilities frontier bowed outward?

Because resources are specialized and, thus, are not equally well suited for producing different outputs

Which of the following statements about import quotas is true? A. Import quotas are preferred to tariffs because they raise more revenue for the imposing government. B. Voluntary quotas established by the exporting country generate no deadweight loss for the importing country. C. For every tariff, there is an import quota that could have generated a similar result. D. An import quota reduces the price to the domestic consumers.

C. For every tariff, there is an import quota that could have generated a similar result.

Total expenditure

Consumption, investment, government purchases, and net exports

Net Exports

Exports - Imports

Describe in words the sources of the deadweight loss from a tariff.

First, the rise in the price due to the tariff causes overproduction because units are produced that cost more than the world price. Second, the rise in price causes underconsumption because consumers fail to consume units where the value to consumers is greater than the world price.

Under what conditions would a tax fail to produce a deadweight loss?

If either supply or demand were perfectly inelastic (insensitive to a change in price), then a tax would fail to reduce the quantity exchanged and the market would not shrink.

Is air scarce? Is clean air scarce?

No, you don't have to give up anything to get air. Yes, you can't have as much clean air as you want without giving up something to get it (pollution equipment on cars, etc.).

Nominal GDP

Price X Quantity

Real GDP

Price X Quantity Uses Base Year

Incentive

Punishment or reward that induces a person to act

Difference between nominal and real GDP

Real GDP is adjusted for inflation

Why is there a trade-off between equality and efficiency?

Taxes and welfare make us more equal but reduce incentives for hard work, lowering total output.

Is the impact of a binding price ceiling greater in the short run or the long run? Why?

The impact is greater in the long run because both supply and demand tend to be more elastic in the long run. As a result, the shortage becomes more severe in the long run.

What is the opportunity cost of saving some of your paycheck?

The items you could have enjoyed had you spent that portion of your paycheck (current consumption).

Water is necessary for life. Diamonds are not. Is the marginal benefit of an additional glass of water greater or lesser than an additional one-carat diamond? Why?

The marginal benefit of another glass of water is generally lower because we have so much water that one more glass is of little value. The opposite is true for diamonds.

What is the impact on the price and quantity in a market if a price floor is set above the equilibrium price?

The quantity supplied increases, and the quantity demanded decreases, causing a surplus.

Suppose there is an increase in consumers' incomes. In the market for automobiles (a normal good), does this event cause an increase in demand or an increase in quantity demanded? Does this cause an increase in supply or an increase in quantity supplied? Explain.

There would be an increase in the demand for automobiles, which means that the entire demand curve shifts to the right. This implies a movement along the fixed supply curve as the price rises. The increase in price causes an increase in the quantity supplied of automobiles, but there is no increase in the supply of automobiles.

Suppose there is an advance in the technology employed to produce automobiles. In the market for automobiles, does this event cause an increase in supply or an increase in the quantity supplied? Does this cause an increase in demand or an increase in the quantity demanded? Explain.

There would be an increase in the supply of automobiles, which means that the entire supply curve shifts to the right. This implies a movement along the fixed demand curve as the price falls. The decrease in price causes an increase in the quantity demanded of automobiles, but there is no increase in the demand for automobiles.

True or false- If a producer is self-sufficient, the production possibilities frontier is also the consumption possibilities frontier.

True

Total Income

Wages, rent, profit

If the price elasticity of supply for wheat is less than 1, then the supply of wheat is a. inelastic. b. elastic. c. unit elastic. d. quite sensitive to changes in income.

a. inelastic

A tax imposed on the sellers of a good will raise the a. price paid by buyers and lower the equilibrium quantity. b. price paid by buyers and raise the equilibrium quantity. c. effective price received by sellers and lower the equilibrium quantity. d. effective price received by sellers and raise the equilibrium quantity.

a. price paid by buyers and lower the equilibrium quantity.

The Laffer curve relates a. the tax rate to tax revenue raised by the tax. b. the tax rate to the deadweight loss of the tax. c. the price elasticity of supply to the deadweight loss of the tax. d. government welfare payments to the birth rate.

a. the tax rate to tax revenue raised by the tax.

Property Rights

ability of individual to exercise control over scarce resources

Productivity

amount of goods/services produced from each unit of labor input

Economists face an obstacle that many other scientists do not face. What is that obstacle? a. It is often difficult to formulate theories in economics. b. It is often impractical to perform experiments in economics. c. Economics cannot be addressed objectively; it must be addressed subjectively. d. The scientific method cannot be applied to the study of economics.

b. It is often impractical to perform experiments in economics.

A marginal change is one that a. is not important for public policy. b. incrementally alters an existing plan. c. makes an outcome inefficient. d. does not influence incentives.

b. incrementally alters an existing plan.

When a country that imported a particular good abandons a free-trade policy and adopts a no-trade policy, a. producer surplus increases and total surplus increases in the market for that good. b. producer surplus increases and total surplus decreases in the market for that good. c. producer surplus decreases and total surplus increases in the market for that good. d. producer surplus decreases and total surplus decreases in the market for that good.

b. producer surplus increases and total surplus decreases in the market for that good.

If a nonbinding price ceiling is imposed on a market, then the a. quantity sold in the market will decrease. b. quantity sold in the market will stay the same. c. price in the market will increase. d. price in the market will decrease.

b. quantity sold in the market will stay the same.

If the price of a good is low, a. firms would increase profit by increasing output. b. the quantity supplied of the good could be zero. c. the supply curve for the good will shift to the left. d. firms can and should raise the price of the product

b. the quantity supplied of the good could be zero.

If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would a. increase by more than $1,000. b. increase by exactly $1,000. c. increase by less than $1,000. d. decrease by an indeterminate amount.

c. increase by less than $1,000.

Market power and externalities are examples of a. laissez-faire economics. b. public policy. c. market failure. d. welfare economics

c. market failure.

If soybean farmers know that the demand for soybeans is inelastic, in order to increase their total revenues they should a. use more fertilizers and weed killers to increase their yields. b. plant additional acres to increase their output. c. reduce the number of acres they plant to decrease their output. d. Both a and b are correct

c. reduce the number of acres they plant to decrease their output.

What are the gains from trade?

can be measured by the increase in total production that comes from specialization.

Inefficiency can be caused in a market by the presence of a. market power. b. externalities. c. imperfectly competitive markets. d. All of the above are correct.

d. All of the above are correct.

In the circular-flow diagram, firms produce a. goods and services using factors of production. b. output using inputs. c. factors of production using goods and services. d. Both (a) and (b) are correct.

d. Both (a) and (b) are correct.

Demand is said to be price elastic if a. the price of the good responds substantially to changes in demand. b. demand shifts substantially when income or the expected future price of the good changes. c. buyers do not respond much to changes in the price of the good. d. buyers respond substantially to changes in the price of the good.

d. buyers respond substantially to changes in the price of the good.

The difference between economists speaking as scientists or policy advisers boil down to the difference between a. assumptions and theories. b. true statements and false statements. c. specific statements and general statements. d. positive statements and normative statements.

d. positive and normative statements

The market demand curve a. is found by vertically adding the individual demand curves. b. slopes upward. c. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the good. d. represents the sum of the quantities demanded by all the buyers at each price of the good.

d. represents the sum of the quantities demanded by all the buyers at each price of the good.

A movement along the supply curve might be caused by a change in a. production technology. b. input prices. c. expectations about future prices. d. the price of the good or service that is being supplied.

d. the price of the good or service that is being supplied.

A production possibilities frontier is bowed outward when a. the more resources the economy uses to produce one good, the fewer resources it has available to produce the other good. b. an economy is self-sufficient instead of interdependent and engaged in trade. c. the rate of tradeoff between the two goods being produced is constant. d. the rate of tradeoff between the two goods being produced depends on how much of each good is being produced.

d. the rate of tradeoff between the two goods being produced depends on how much of each good is being produced.

Marginal change

describes small incremental adjustment to an existing plan of action, compare marginal benefits and cost when making decisions

Equality

distributing economic prosperity uniformly among members of society (how pie is divided into individual slices)

Business cycle

fluctuations in economic activity (employment and production)

Positive statements

make a claim about how the world is, descriptive, confirm/refute by examining evidence

Normative statements

make a claim about how the world should be, involve judgements, cannot come from positive analysis alone.

Efficiency

society getting the most it can from its scarce resources, size of economic pie