ECON 201 FHSU Test Questions

A perfectly competitive market is a market that meets the conditions of

(1) many buyers and​ sellers, (2) all firms selling identical​ products (3) no barriers to new firms entering the market.

Suppose income increases by 20 percent​ and, as a​ result, the quantity of a particular brand of automobile demanded​ (holding the price for this particular automobile​ constant) decreases by 12 percent. The income elasticity of demand for this brand of car is ____ This particular brand of automobile is​ a(n) _____ good. In another​ example, suppose market research shows that a particular brand of truck is a normal good and a necessity. If​ so, then the income elasticity of demand for this truck is _____

-0.60, inferior, less than 1 but greater than 0

Assume world oil supply is 77 million barrels per day at a price of ​$54 per barrel. Suppose that if the price per barrel of oil increases to ​$60 per​ day, then 80 million barrels of oil will be supplied. Using the midpoint​ formula, what is the price elasticity of supply for​ oil?_______ In this price​ range, the world supply of oil is _____.

.36 inelastic

Suppose the price of pepper increases by 10 percent​ and, as a​ result, the quantity of salt demanded​ (holding the price of salt ​constant) increases by 4 percent. The​ cross-price elasticity of demand between pepper and salt is ____ In this​ example, pepper and salt are _____. ​Instead, suppose pepper and salt were complements. If​ so, then the​ cross-price elasticity of demand between pepper and salt would be

0.4, Substitutes negative

Consider the market for Patagonia pullovers. Suppose average household income increases from ​$38 thousand to ​$52 thousand per year. As a​ result, the demand for Patagonia pullovers increases from 415 to 505. Using the midpoint​ formula, what is the income elasticity of demand for Patagonia pullovers​? ______ In this​ instance, Patagonia pullovers are a _____good. ​Furthermore, Patagonia pullovers are a ________.

0.63, a normal, necessity

Tim mows neighborhood lawns for extra money. Suppose that he would be willing to mow one lawn for ​$13​, a second lawn for ​$17​, and a third lawn for ​$20. Also suppose that three neighbors are interested in having their lawns mowed. Mrs. Jones would be willing to pay ​$35 to have her lawn​ mowed, Mr. Wilson would be willing to pay ​$30​, and Ms. Smith would be willing to pay ​$20. If Tim offers to mow lawns for ​$20 ​each, what will be his producer​ surplus? $_______ ​ Considering Mrs.​ Jones, Mr.​ Wilson, and Ms. Smith​ together, what will be their consumer​ surplus? $_____

10 25

Suppose that legalizing the use of cocaine would decrease its price by 82 percent. If the price elasticity of demand for cocaine is ​-2.75​, what would be the percentage increase in the quantity of cocaine demanded from legalizing cocaine​? _______ percent Suppose instead that the price elasticity of demand for cocaine is ​-0.11. What would be the percentage increase in the quantity of cocaine demanded from legalizing cocaine​? _______percent. The higher the absolute value of the price elasticity of demand for cocaine​, the _______the increase in cocaine use that would result from legalization.

225.50 9.02 greater

Suppose the United States has two​ utilities, Commonweath Utilities and Consolidated Electric. Both produce 20 million tons of sulfur dioxide pollution per year.​ However, the marginal cost of reducing a ton of pollution for Commonwealth Utilities is ​$225 per ton and the marginal cost of reducing a ton of pollution for Consolidated Electric is ​$275 per ton. The​ government's goal is to cut sulfur dioxide pollution in half​ (by 20 million tons per​ year). If the government issues 10 million tradable pollution permits to each​ utility, what will be the cost of eliminating half of the pollution to​ society? Using a cap-and-trade system of tradable emission allowances will eliminate half of the sulfur dioxide pollution at a cost of ​$______ million per year. If the permits are not​ tradable, what will be the cost of eliminating half of the​ pollution? If permits cannot be​ traded, then the cost of the pollution reduction will be ​$_____ million per year.

4500 5000

Economists often are interested in percentage change from one period to the next. The percentage rate of change of gross domestic product​ (GDP) is an important macroeconomic variable. If in 2010 GDP was​ $11,150 billion​ dollars, and GDP increased to ​$11,825 billion in​ 2011, what is the growth rate of the U.S. economy in​ 2011?

6.1%

What is the impact of an increase in worker productivity when demand is relatively more​ elastic?

An increase in sales revenue received by the firm

A market is a group of __________ of a good or service and the institution or arrangement by which they come together to trade.

Buyers and sellers

Societies organize their economies in two main ways to answer the three questions of​ what, how, and who. A society can have a _____ economy in which the government decides how economic resources will be allocated. Or a society can have a ______ economy in which the decisions of households and firms interacting in markets allocate economic resources.

Centrally Planned, Market

The basis for trade is ____ advantage

Comparative

How do market economies ultimately determine what goods and services are​ produced, how the goods and services will be​ produced, and who will receive the goods and​ services?

Consumers determine what goods and services are​ produced, firms determine how to produce​ them, and markets determine who will receive them.

decide(s) what goods and services will be produced.

Consumers, firms, and government

the study of the choices people make to attain their​ goals, given their scarce resources

Economics

MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be -2.5 and the price elasticity of demand for all types of breakfast cereals to be -0.9. The demand for Post Raisin Bran cereal is ____, and the demand for all types of breakfast cereals is _____. Why might the demand for Post Raisin Bran cereal be more elastic than the demand for all types of breakfast​ cereals? Post Raisin Bran cereal

Elastic, Inelastic is defined more narrowly

​A(n) _____ is someone who operates a​ business, bringing together the factors of production ​labor, ​capital, and natural resources to produce goods and services.

Entrepreneur

How do property rights affect externalities and market​ failure?

Externalities and market failure will result from the difficulty of enforcing property rights.

In England during the Middle​ Ages, each village had an area of​ pasture, known as a​ commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land used​ optimally?

Grazing created a negative externality, resulting in the commons being overused.

Two key groups participate in markets. A ____ consists of all the individuals in a home. _______are suppliers of goods and services. We can use a simple economic model called the _______ to see how participants in markets are linked.

Household, Firms, Circular-flow Diagram

Consider the market for airplanes. The supply of airplanes over a short period of time​ (such as a​ month) is likely to be relatively ________. Over a longer period of time​ (such as a couple of​ years), the supply of airplanes will likely become increasingly _____.

Inelastic elastic

Between 1950 and​ 2006, the price of wheat fell dramatically from​ $15.81 per bushel to​ $3.40 per bushel. Suppose between 1950 and​ 2006, the supply of wheat increased substantially due to increases in​ productivity, shifting the wheat supply curve to the right. With this supply​ shift, the amount by which the price of wheat falls will be larger the more _____the demand for wheat. In​ addition, assume that between 1950 and 2006 the income of the average American increased substantially and that wheat is a normal good. With this increase in​ income,

Inelastic the amount by which the price of wheat rises will be smaller the lower the income elasticity of wheat

Suppose Dell is currently selling 2,000,000 computers per year. ​ However, managers at Dell are considering whether to increase production by 200,000 computers. One manager explains that after increasing production by this​ amount, total profit would be​ $100 million. Given this​ information, should Dell increase production by 200,000 computers​?

Information about the additional revenue earned and the additional cost incurred from producing 200,000 additional computers is required to answer this question

Which of the following covers the study of topics such as inflation or​ unemployment?

Macroeconomics

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

A price ceiling is a legally determined _______price that sellers may charge. A price floor is a legally determined ______price that sellers may receive.

Maximum Minimum

A ____economy is an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Mixed

​Trade-offs force society to make​ choices, particularly when answering the following three fundamental​ questions:

One, what goods and services will be​ produced? Two, how will the goods and services be​ produced? Three, who will receive the goods and services​ produced?

______is concerned with what is​, and _______is concerned with what ought to be. Economics is about ______, which measures the costs and benefits of different courses of action.

Positive analysis, normative analysis, postivie analysis

_______ occurs when a good or service is produced at the lowest possible cost. _____ occurs when production is in accordance with consumer preferences.

Productive efficiency, Allocative efficiency

One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls

Scarcity

One of the great benefits of trade is

That it makes it possible for society to become better off by increasing its consumption.

Suppose you own a bookstore where you currently sell 22 John Grisham mystery novels per day at a price of ​$40 per book. ​ However, if you were to reduce the price to ​$26​, then you would sell 32 John Grisham mystery novels per day.

Using the midpoint​ formula, what is the price elasticity of demand for John Grisham mystery ​novels? -0.87 In this price​ range, the demand for John Grisham mystery books is inelastic

According to the law of demand, there is an inverse relationship between price and quantity demanded. That​ is, the demand curve for goods and services slopes downward.​ Why?

When the price of a good​ increases, consumers' purchasing power​ falls, and they cannot buy as much of the good as they did prior to the price change

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.

In your economics​ class, you scored a 62 on the first​ quiz, a 91 on the second​ quiz, and an 77 on the third quiz.

Your average quiz grade is 76.7. On the fourth quiz you scored an 82. Did the fourth quiz raise your average? Yes

Consider the consumption of public pasture land. What type of good is public pasture land​? Public pasture land is

a common resource

A production possibilities frontier (PPF) is

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

An example of technological change is

a firm rearranging the factory floor to increase production a firm installing faster or more reliable machinery or equipment a hurricane damaging firm faclitities

A black market is

a market in which buying and selling take place at prices that violate government price regulations

Economic efficiency is

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum

A hypothesis in an economic model is

a statement that may be either correct or incorrect about an a economic variable. usually about a causal relationship. tested before it can be accepted​ (or not​ rejected).

The primary difference between absolute and comparative advantage is

absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.

In​ general, the term ​"ceteris paribus​" means

all else equal

What must be true for the Coase Theorem to​ hold? For the Coase Theorem to​ hold,

all parties to an agreement must have full information about the costs and benefits of the externality

Economics assumes people and firms:

are rational​, respond to​ incentives, and make decisions by comparing marginal benefits with marginal costs.

Market price is determined by

both supply and demand

Economic surplus in a market is the sum of​ _____ surplus and​ _____ surplus. In a competitive​ market, with many buyers and sellers and no government​ restrictions, economic surplus is at a​ _____ when the market is in​ _____.

consumer producer maximum equilibrium

Suppose Wendy's hamburgers have many close substitutes available. If​ so, then an increase in the price of Wendy's hamburgers will likely

decrease the quantity of Wendy's hamburgers demanded by a relatively large amount.

Consider firms that introduce new​ products, such as DVDs in 2001. When firms introduce new​ products, how do they typically determine the price elasticity of demand for those​ products? Firms with new products often

estimate price elasticity of demand by experimenting with different prices

To develop a model that will answer economic​ questions, economists​ typically:

first make simplifying​ assumptions, then formulate a​ hypothesis, test the​ hypothesis, and finally revise the model if necessary

According to the law of​ demand,

here is an inverse relationship between price and quantity demanded

In the United​ States, who receives the goods and services produced depends largely on

how income is distributed

A portion of microeconomics examines:

how individual households make​ choices, such as how they react to changes in product prices

What goods and services will be​ produced, how the goods and services will be​ produced, and who will receive the goods and services are​ determined

in centrally planned economies by the government in market economies by the decisions of households and firms interacting in markets.

In the​ circular-flow diagram showing how a market system​ works,

income flows to in firms through product markets.

Consider the demand for cigarettes. Suppose the government decreases the price of cigarettes by lowering cigarette taxes. How will this affect the demand for cigarettes over​ time? If the price of cigarettes decreases​, then the quantity of cigarettes demanded will

increase​, and this effect will likely become larger​ (in absolute​ value) over time.

Economics is a social science because

it considers human it behavior particularly ​decision-making behavior. it is based on studying the actions of individuals. it applies the scientific method to the study of the interactions among individuals.

Consider the market for wheat. Suppose that productivity growth increases the supply of wheat. If the demand for wheat is relatively inelastic​, then the price of wheat will fall by a relatively ______ amount.

large

Firms choose how to produce the goods and services they sell. In many​ cases, firms face a​ trade-off between using more workers or using more machines. For​ example,

many times in the past several​ decades, firms may have chosen between a production method in the United States that uses fewer workers and more machines and a production method in China that uses more workers and fewer machines.

Compared to a command and control government approach to reducing​ pollution, a​ market-based system of tradable pollution allowances​ is:

more efficient because polluters that can only reduce pollution at high cost do not and instead buy allowances

Compare the demand for pencils with demand for food. The demand for pencils is likely

more inelastic because pencils tend to represent a smaller fraction of a​ consumer's budget.

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.

Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargaining can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution​ reduction? If the electric utility and the people suffering the effects of the​ utility's pollution can​ bargain, then making the utility legally liable for the damages from its pollution will

not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.

The Scottish philosopher Adam Smith argued in 1776 that

prices would do a better job of coordinating the activities of buyers and sellers than guilds could

How might society solve problems associated with externalities and market failure? If an externality is​ present, resulting in market​ failure, then

private solutions may reduce or correct market failure

The primary difference between product markets and factor markets is that

product markets are markets for goods, while factor markets are markets for factors of production--​labor, ​capital, natural​ resources, and entrepreneurial ability

How do externalities in the production of electricity result in market failure? Because of​ externalities, the market for electricity will

provide too much electricity

Compare the demand for water with the demand for wine. The demand for wine is likely

relatively more elastic because wine is a luxury

When we graph the relationship between two​ variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing​ so, however, can lead to incorrect conclusions. Reasons for drawing incorrect conclusions about cause and effect include

reverse causality an omitted variable

Consider a pair of Nike shoes. Is the consumption of Nike shoes rival and excludable? The consumption of Nike shoes is

rival and excludable

Economic models are:

simplified versions of reality designed to analyze ​ "what is" to explain human decision making in any context.

When the government imposes price floors or price​ ceilings,

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

The distinction between substitutes and complements is

substitute goods are used for the same purposes while complementary goods are used together

Economist X. M. Gao and two colleagues have estimated that the​ cross-price elasticity of demand between beer and wine is 0.31. If​ so, then beer and wine are ____. Gao and colleagues have estimated that the​ cross-price elasticity of demand between beer and spirits is 0.15. If the price of spirits increases by 10​ percent, then the quantity of beer demanded will ____ by _____percent. In​ addition, Gao and colleagues have estimated the income elasticity of demand for beer to be -0.09. If​ so, then beer is ______

substitutes, increase, 1.5%, an inferior good

Tax incidence is

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

What information must economists have to estimate the price elasticity of​ demand? To estimate the price elasticity of​ demand, economists need to know

the demand curve for a product

Macroeconomics examines:

the economy as a whole, such as how rapidly the economy grows.

Equity

the fair distribution of economic benefits

Suppose a common resource--wood in a public forest--is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being​ overused? To prevent overuse of the common​ resource,

the government could impose restriction on access to wood in the forest

Opportunity cost

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

In a free market, the actions people take are largely determined by

the motivation of financial reward

Which of the following is a primary determinant of the price elasticity of supply​? The price elasticity of supply is affected by _____ In​ particular, the supply curve for a particular product will be increasingly more elastic over a ____ period of time.

the passage of time longer

How is the price elasticity of demand​ measured? The price elasticity of demand is measured as

the percentage change in the quantity demanded divided by the percentage change in price

When the federal government crafts environmental policies that make it less expensive for firms to follow green​ initiatives

the policies are consistent with economic incentives.

How do externalities affect​ markets? If a positive externality in consumption is present in a​ market, then

the private benefit from consumption will be different than the social benefit from consumption.

In economics, the best definition of technology is ____ Further, positive technological change is defined as _____

the process a firm uses to turn inputs into outputs being able to produce more output using the same inputs and being able to produce the same output using fewer inputs

What is technology? Technology is ___ An example of technological change is ____

the processes a firm uses to turn inputs into outputs of goods and services being able to produce more output using the same inputs and being able to produce the same output using fewer inputs and a decline in the quantity of output that can be produced from a given quantity of inputs

Property rights are

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.

Over the past 30​ years, the price of oil has been relatively​ unstable, fluctuating between​ $11.00 and well over​ $100 per barrel. Which of the following potentially contributes to​ oil-price instability? Oil prices are relatively unstable because

the supply of oil is inelastic

Suppose a professional basketball game is to be played at a downtown urban ​arena, which increases demand for parking on the night of the game. If the urban area has limited ability to create additional parking during periods of peak​ demand, then

the supply of parking will be more inelastic and the price of parking will increase by a relatively large amount the night of the game

Which of the following is an example of a transaction cost associated with negotiating the reduction of a negative​ externality? An example of a transaction cost is _____ How might transaction costs affect private solutions to externality​ problems? Transaction costs _______

the time required to negotiate an agreement to reduce a negative externality may make private solutions to reduce negative externalities no longer feasible

According to the law of supply

there is a positive relationship between price and quantity supplied as the price of a product increases, firms will supply more of it to the market

Any model is based on making assumptions because

we cannot analyze an economic issue unless we reduce its complexity models have to be simplified to be useful

The distinction between a normal and an inferior good is

when income increases, demand for a normal good increases while demand for an inferior good falls.

A free market exists

when the government places few restrictions on how a good or a service can be produced or sold or on how a factor of production can be employed.

Which of the following shows a negative nonlinear ​relationship? ​ (assume values of x greater than 0​)

y=12/x

Consider the following​ statement: ​"An increase in supply decreases the equilibrium price. The decrease in price increases​ demand." The statement is

​​false: decreases in price affect the quantity​ demanded, not demand