ECON EXAM 1
The Determinants of the Price Elasticity of Demand
Availability of close substitutes - Proportion of income spent on the good - Time elapsed since price change
Shifts in Supply ("SPENT"): Changes in Technology (T)
Better technology lowers production costs. - Supply of good will increase
Bill says: "The imposition of a tax on tequila will increase its price." Bob says: "Taxes should be imposed on tequila because college students drink too much." Question options:Both statements are normative.Both statements are positive.Bill's statement is normative, and Bob's statement is positive.Bill's statement is positive, and Bob's statement is normative.
Bill's statement is positive, and Bob's statement is normative.
Defining a Market
Buyers and sellers exchange goods and services. - Prices provide incentives. - Markets vary. - Defining a market is difficult.
Competitive market
Buyers and sellers offer similar products. - No single buyer or seller influences market price
Buyers and Sellers
Buyers determine demand. - Buyers include consumers and firms. - Sellers determine supply. - Sellers include firms and resource owners.
Calculating the Price Elasticity of Demand: The Midpoint Method
Calculate percentage change in price. - Divide change in price by the average price. - Example: $2/$20 = 1/10 = 0.10 = 10%
Calculating the Price Elasticity of Demand: The Midpoint Method
Calculate percentage change in quantity demanded. - Divide change of quantity demanded by the average quantity demanded. - Example: 4/80 = 1/20 = 0.05 = 5%
Changes in Prices of Related Goods and Services (P): Substitutes
Can be used in place of each other - Price increase of good causes demand increase of another good. - Price decrease of good causes demand decrease of another good
A Change in Quantity Supplied Versus a Change in Supply
Change in other factors causes shift in the supply curve. - This is called change in supply.
A Change in Quantity Supplied Versus a Change in Supply
Change in price causes change in quantity supplied. - This occurs without moving the supply curve.
A Change in Demand Versus a Change in Quantity Demanded
Change of variables causes change in demand. - Change in demand shifts demand curve
An Increase in Supply and a Decrease in Demand
Changes cause decrease of equilibrium price. - Increase in supply increases equilibrium quantity. - Decrease in demand decreases equilibrium quantity. - As a result, equilibrium quantity is indeterminate.
An Increase in Demand and Supply
Changes cause increase of equilibrium quantity. - Increase in supply decreases equilibrium price. - Increase in demand increases equilibrium price. - As a result, equilibrium price is indeterminate.
Shifts in Demand ("PYNTE")
Changes in prices (P) - Changes in income (Y) - Changes in number of buyers (N) - Changes in tastes (T) - Changes in expectations (E)
Shifts in Supply ("SPENT")
Changes in seller's input prices (S) - Changes in related goods/services' prices (P) - Changes in expectations (E) - Changes in number of sellers (N) - Changes in technology (T)
Which of the following is a statement of positive economics? Question options:New tax laws are needed to help the poor.Teenage unemployment should be reduced.We should increase Social Security payments to the elderly.An increase in tax rates will reduce unemployment.
An increase in tax rates will reduce unemployment.
Assume there is a price floor imposed on a good which is above the equilibrium price. Which of the following changes would reduce the size of the surplus? An increase in demand. A decrease in demand. An increase in supply. Any of the above.
An increase in demand.
Price Floors: The Minimum Wage
10% increase causes teenage unemployment increase of 1% to 3%. - Higher wage might cause teenagers to drop out. - Wage subsidies might help poor families more
Price Ceilings: Price Controls on Gasoline
1974 price control caused gasoline shortage. - People waited in line for hours for gas. - If equilibrium prices allowed, shortages would have been avoided.
Understanding economics would be helpful to which of the following individuals? Question options:a college student planning her next semester coursesa fashion designer selecting fabric for a new spring collectiona restaurant owner deciding whether to expand his establishment's hours of operationAll of the above
?
Which of the following is a positive statement? Question options:Increased money supply growth will lead to a higher rate of inflation.There are more millionaires in Uganda than in the United States.People watch more TV during finals week than during the rest of the term.All of the above are positive statements.
?
Often Economists Do Agree
Against export/import restrictions, subsidies - Favor policies to curb inflation, unemployment - Against minimum wage increase, rent control - Favor increased competition, market solutions
Price Floors: The Minimum Wage
Allows low-income workers to live better - Set by federal government - Also set by some state governments
The Effects of a Change in Demand
Demand decrease upsets market equilibrium. - Quantity supplied becomes greater than quantity demanded. - Surplus causes price to decrease. - Quantity supplied decreases until new equilibrium is reached.
Changes in Income (Y): Inferior Goods
Demand decreases when incomes rise. - Demand increases when incomes fall
The Effects of a Change in Demand
Demand increase upsets market equilibrium. - Quantity demanded becomes greater than quantity supplied. - Shortage causes price to increase. - Quantity supplied increases until new equilibrium is reached
Changes in Income (Y): Normal Goods
Demand increases when incomes rise. - Demand decreases when incomes fall
How Does the Price Elasticity of Demand Impact Total Revenue?
Demand is price inelastic. - Total revenues will fall as price declines. - Percentage increase in quantity demanded less than percentage price reduction
The Combinations of Supply and Demand Shifts
Demand or supply increase: rightward shift of curve. - Demand or supply decrease: leftward shift of curve. - Both supply and demand change; either price or quantity will be indeterminate
Calculating the Price Elasticity of Demand: The Midpoint Method
Divide percentage change of quantity demanded by percentage change in price. - Example: 5%/10% = 0.5
Which of the following statements most likely lies within the realm of macroeconomics? An increase in the price of automobiles will lead to a decrease in the quantity of automobiles demanded. Due to process innovations in computer chip manufacturing, the market supply of computers increased. Due to an economic recession, manufacturing firms began implementing layoffs of their workforces. Anticipating that the benefits would outweigh costs involved, an undergraduate student purchases the course textbook.
Due to an economic recession, manufacturing firms began implementing layoffs of their workforces
When President Harry Truman said that he wanted to find a one-armed economist because his economic advisors always said, "On the one hand... and on the other hand... " he recognized that the advice of economists is often open to more than one interpretation. Why is this? Economists cannot make up their minds on policy matters. Economists agree with each other on all policy issues. Economists are aware that tradeoffs are involved in most policy questions. Economists are often unable to identify the critical questions involved in policy issues.
Economists are aware that tradeoffs are involved in most policy questions.
The Ceteris Paribus Assumption
Economists isolate two variables from other variables. Other variables assumed to be constant. This enables analysis of isolated variables' effects
Types of Demand Curves
Elastic: elasticity is greater than 1. - Quantity demanded changes more than price. - Inelastic: elasticity is less than 1. - Quantity demanded changes less than price.
Is the Demand Curve Elastic or Inelastic?
Elastic: quantity demand is responsive even to small change in price. - Inelastic: price change causes small change in quantity
Elasticities and Taxes: Combining Supply and Demand Elasticities
Elasticity of supply and demand determines tax distribution. - If demand is less elastic than supply, tax is paid by the consumer. - If demand is more elastic than supply, tax is paid by the producer.
Shifts in Supply ("SPENT"): Changes in Expectation (E)
Expected higher prices cause less supply now. - Expected lower prices cause more supply now
Changes in Expectations (E)
Expecting high future prices causes demand increase now. - Expecting low future prices causes demand decrease now
The Fallacy of Composition
Fallacy: individual truth is always true for a group. - What is true for an individual is not always true for a group
Types of Demand Curves
Flatter demand curve shows elastic demand. - Steep demand curve shows inelastic demand. - Elasticity differs from slope.
Availability of Close Substitutes
Goods with close substitutes often have elastic demands. - Goods without close substitutes often have inelastic demands - Broadly-defined goods are often less elastic. - Specific goods are often more elastic
Types of Supply Curves
Goods with supply elasticity greater than 1 are elastic in supply. - Goods with supply elasticity less than 1 are inelastic in supply.
Refer to Exhibit 6-3. The graph that best illustrates a perfectly inelastic demand curve is: Graph A. Graph B. Graph C. Graph D.
Graph D.
The Law of Supply
High price/high quantity supplied. - Low price/low quantity supplied
A Positive Relationship between Price and Quantity Supplied
Higher prices equal more profits. - Lower prices equal less profits
What Is a Market Demand Curve?
Horizontal summing of individual demand curves - Covers all buyers in market - Shows what they will buy at various prices
The Market Supply Curve
Horizontal summing of producers' supply curves - Shows quantity of goods and services all producers supply - Prices vary per producer
How Does the Price Elasticity of Demand Impact Total Revenue?
If demand is price inelastic, total revenues fall as the price declines - If demand is price elastic, total revenues increase as price declines
Both price and quantity will increase when there is a(n) increase in demand. decrease in demand. increase in supply decrease in supply.
Increase in demand.
Shifts in Supply ("SPENT"): Changes in the Number of Sellers (N)
Increase in sellers causes increase in supply. - Decrease in sellers causes decrease in supply
If Education R Us University thought that it faced an inelastic demand for the regular academic year but an elastic demand for summer school, and it wanted to increase its total tuition revenue, it would want to____ tuition in the regular academic year and ____ tuition for summer school Increase; increase. Increase; decrease. Decrease; increase. Decrease, decrease.
Increase; decrease.
Price Floors: The Minimum Wage
Increases can cause unemployment of low-skilled workers. - Teenagers are especially hard hit. - It does not affect workers earning more than minimum wage.
Shifts in Supply ("SPENT"): Changes in the Seller's Input Prices (S)
Input prices increase/output of good decreases. - Input prices decrease/output of good increases.
The Law of Demand
It deals with goods or services. - Quantity demanded varies inversely with price. - Other factors must be equal
The Income Elasticity of Demand
It measures the relationship between income change and the resulting change in demand. - Percentage change in demand is divided by the percentage change in consumer's income.
Individual Demand Schedule
It relates price and quantity demanded. - One price prevails at any moment
Equilibrium Price and Quantity
Market equilibrium: intersection of market supply and market demand curves - Equilibrium price: price at intersection - Equilibrium quantity: quantity at intersection
What Is the Price Elasticity of Supply?
Measures change in quantity supplied resulting from the change in price - Percentage change in quantity supplied divided by the percentage change in price
Price elasticity of demand
Measures responsiveness of quantity demanded to change in price - Percentage change in quantity demanded divided by percentage change in price
Time
More time to adjust to price change creates greater elasticity of demand. - Less time to adjust to price change creates smaller elasticity of demand
Don't Confuse Scarcity and Shortages.
Most goods are scarce. - Shortage is when quantity demands exceeds quantity supplied. - Shortages can be eliminated. - Scarcity cannot be eliminated
Calculating the Income Elasticity of Demand
Normal good: income increase causes demand increase. - Inferior good: income increase causes demand decrease.
Positive Statement
Objective, testable - Describes what happened - Describes why it happened
What is Rational Behavior?
People do their best under certain circumstances. - The person making a choice determines its rationality. - Decisions measure expected benefits/expected costs
Types of Demand Curves
Perfectly elastic: quantity demanded extremely responsive to price changes. - Perfectly inelastic: quantity demanded is same, regardless of price.
Types of Supply Curves
Perfectly inelastic supply: change in price will not change quantity supplied. - Perfectly elastic supply: even a small percentage change in price will change quantity supplied infinitely
Changes in Number of Buyers (N)
Population increase causes demand increase. - Population decrease causes demand decrease
The Critical Role of Price
Price adapts. - Makes quantity demanded equal to quantity supplied.
A Change in Demand Versus a Change in Quantity Demanded
Price change causes change in quantity demanded. - This occurs without moving demand curve
Individual Demand Curve
Price higher/quantity demanded lower. - Price lower/quantity demanded higher
Shifts in Supply ("SPENT"): Changes in the Prices of Related Goods and Services (P)
Price of substitute falls/supply of good increases. - Price of substitute increases/supply of good decreases
Ceteris Paribus and the Law of Demand
Price varies. - Hold other factors constant (ceteris paribus). - All goods are the same. - This allows focus on price
Price Ceilings: Rent Controls
Provides good deal for tenants - Reduces incentive to build new housing - Reduces incentive to upgrade housing - Promotes housing discrimination
The Effects of a Change in Supply
Quantity decrease upsets market equilibrium. - Quantity supplied becomes less than quantity demanded. - Shortage causes price to increase. - Quantity demanded decreases until equilibrium is reached.
The Effects of a Change in Supply
Quantity increase upsets market equilibrium. - Quantity supplied becomes greater than quantity demanded. - Surplus causes price to decrease. - Quantity demanded increases until equilibrium is reached.
The Cross-Price Elasticity of Demand
Quantity of good demanded affected by price of related good. - This happens with substitutes and complements. - Percentage change in demand of one good is divided by the percentage change of price of another good
For a given change in demand: Quantity will change relatively more in the long run than the short run. Quantity will change relatively more in the short run than the long run. Price will change relatively more in the long run than the short run. Both b. and c. are true.
Quantity will change relatively more in the long run than the short run.
Price Ceilings: Rent Controls
Rent is fixed over tenure of the occupant. - Some increases allowed - When the occupant moves out, owners can raise rent near market level.
An Individual Supply Curve
Shows positive relationship between price and quantity supplied
Proportion of Income Spent on the Good
Smaller income proportion spent on good causes lowers elasticity of demand. - Larger income proportions spent on good causes higher elasticity of demand.
Price Controls
State sets prices different from equilibrium prices. - Price ceiling: legal maximum price - Price floor: legal minimum price
Normative Statement
Subjective, contestable - Describes what should be done
Supply, Demand, and the Market Economy
Supply and demand determine price. - Supply and demand determine resource allocation. - Market prices convey value of resources. - They cause shift of resources to more and less valued uses
How Does Time Affect Supply Elasticities?
Supply is more elastic in the long run than short run. - Firms usually cannot make large adjustments in the short run. - Firms can make large adjustments in the long run
Shifts in Supply ("SPENT"): Changes in the Prices of Related Goods and Services (P)
Supply of complement increases/good's price increases. - Supply of complement decreases/good's price decreases.
Shortages and Surpluses
Surplus: quantity supplied exceeds quantity demanded. - Shortage: quantity demands exceeds quantity supplied.
Correlation does not mean causation (T/F)
T
Changes in Tastes (T)
Tastes change in favor of a good/demand increases. - Tastes change against a good/demand decreases
Which of the following is the most important determinant of the elasticity of supply? The number of uses for the product. The number of close substitutes to the product available to consumers. The amount of time producers have to adjust their behavior in response to a price change. The percentage of their incomes consumers spend on the product.
The amount of time producers have to adjust their behavior in response to a price change.
Price Elasticity Changes along a Linear Demand Curve
The steeper of two demand curves is the more inelastic one. - Slope is ratio of changes in two variables: price and quantity. - Elasticity is ratio of percentage changes in price and quantity.
Suppose a 5 percent increase in price causes a 25 percent decrease in quantity demanded. Which of the following statements is most likely true? There are many substitutes for this good. There are few substitutes for this good. This good is a necessity.
There are many substitutes for this good.
How Does the Price Elasticity of Demand Impact Total Revenue?
Total revenue is the amount sellers receive for goods or services. - Total revenue equals good's price times quantity sold.
Changes in Prices of Related Goods and Services (P): Complements
Two goods generally used together - Price increase of good causes demand decrease of another good. - Price decrease of good causes demand increase of another good
Types of Demand Curves
Unit elastic demand - Demand with a price elasticity of 1 - Quantity demanded changes proportionally to price changes
Changes in Income (Y)
Usually, income increase equals demand increase. - Usually, income decrease equals demand decrease
The Effects of Changes in Both Supply and Demand
We can predict change in one variable. - We cannot predict change in other variable. - Unpredictable change is called indeterminate
Which of the following is most likely a topic of discussion in macroeconomics? an increase in the price of a pizza a decrease in the production of DVD players by a consumer electronics company an increase in the wage rate paid to automobile workers a decrease in the unemployment rate
a decrease in the unemployment rate
Nick is delighted to see that the price of his favorite food, black olives, has fallen. Which of the following could be responsible? an increase in the demand for black olives a decrease in the supply of black olives a simultaneous increase in demand and decrease in supply of black olives a simultaneous decrease in demand and increase in supply of black olives
a simultaneous decrease in demand and increase in supply of black olives
Which of the following observations would be consistent with the imposition of a binding price ceiling on a market? After the price ceiling becomes effective, a smaller quantity of the good is exchanged. a smaller quantity of the good is demanded. a larger quantity of the good is supplied. the price rises above the previous equilibrium.
a smaller quantity of the good is exchanged.
Hypothesis
a testable proposition that predicts behavior
A price floor is binding when it is set above the equilibrium price, causing a shortage. above the equilibrium price, causing a surplus. below the equilibrium price, causing a shortage. below the equilibrium price, causing a surplus.
above the equilibrium price, causing a surplus.
A price ceiling is binding when it is set above the equilibrium price, causing a shortage. above the equilibrium price, causing a surplus. below the equilibrium price, causing a shortage. below the equilibrium price, causing a surplus.
below the equilibrium price, causing a shortage.
A price ceiling will be binding only if it is set equal to the equilibrium price. above the equilibrium price. below the equilibrium price. either above or below the equilibrium price.
below the equilibrium price.
Taxes can affect only buyers. only sellers. only buyers and sellers. buyers, sellers, and government tax revenue.
buyers, sellers, and government tax revenue.
The measure used to determine whether two products are substitutes or complements is called the: price elasticity of demand. income elasticity of demand. cross-price elasticity of demand. inverse elasticity of demand.
cross-price elasticity of demand.
Refer to Exhibit 4-3. The University Theater faces market demand curve D0 and has begun charging $10, up from $5, for tickets for Friday and Saturday night shows. As a result, students have: increased their demand for tickets to Q4. increased their quantity of tickets demanded to Q4. decreased their demand for tickets to Q1. decreased their quantity of tickets demanded to Q1.
decreased their quantity of tickets demanded to Q1.
The government proposes a tax on flowers in order to boost its revenue. Consumers will bear no part of this tax if the: demand for flowers is perfectly inelastic. supply of flowers is perfectly elastic. demand for flowers is perfectly elastic. demand for flowers is unit elastic.
demand for flowers is perfectly elastic.
The government proposes a tax on flowers in order to boost its revenue. Consumers will bear all of this tax if the: demand for flowers is perfectly inelastic. supply of flowers is perfectly inelastic. demand for flowers is perfectly elastic. demand for flowers is unit elastic.
demand for flowers is perfectly inelastic.
Pizza is a normal good if the demand for pizza rises when income rises. for pizza rises when the price of pizza falls. curve for pizza slopes upward. curve for pizza shifts to the right when the price of burritos rises, assuming pizza and burritos are substitutes.
for pizza rises when income rises.
Ceteris paribus, a decrease in the price of a good will increase demand. decrease demand. increase quantity demanded. decrease quantity demanded.
increase quantity demanded.
A shortage exists in the market for corn at the current price. The shortage will be eliminated by a price: increase, increasing the supply and decreasing the demand. decrease, increasing the supply and decreasing the demand. decrease, increasing the quantity supplied and decreasing the quantity demanded. increase, increasing the quantity supplied and decreasing the quantity demanded.
increase, increasing the quantity supplied and decreasing the quantity demanded.
Shaina and Mariah have a business that provides personal fitness training services. They know that after raising their prices from $50 to $75 per hour, the quantity of hours they spent delivering training services fell from 90 to 80 hours per week. The demand for their services is: inelastic, with a price elasticity coefficient greater than one. inelastic, with a price elasticity coefficient less than one. elastic, with a price elasticity coefficient greater than one. elastic, with a price elasticity coefficient less than one.
inelastic, with a price elasticity coefficient less than one.
Resources
inputs used to produce goods, services
Suppose Sprite and 7-Up are considered by consumers to be substitutes. The likely economic impact of a decrease in the price of 7-Up is a: movement up along the demand curve for Sprite. decrease in the supply of 7-Up. rightward shift of the demand curve for Sprite. leftward shift of the demand curve for Sprite.
leftward shift of the demand curve for Sprite.
Economics can be divided into two main branches of study: Question options:capitalism and communism.capitalism and socialism.demand and supply.microeconomics and macroeconomics.
microeconomics and macroeconomics.
economists disagree about:
normative issues
Causation
one event brings about another event.
Economists believe that individuals act as if they are motivated: Question options:primarily by the opinions of their peers.primarily by human emotions.primarily by self-interest.only by concern for the larger community.
primarily by self-interest.
Each of the following is a determinant of demand except tastes. production technology. expectations. the prices of related goods.
production technology.
Economists believe that most individuals act as if they are motivated by self-interest and: Question options:respond selfishly.respond in predictable ways to changing circumstances.it leads to inconsistent and unpredictable behavior.all of the above.
respond in predictable ways to changing circumstances.
Economic problem
scarcity forces us to choose, and choices are costly because we must give up other opportunities that we value
Macroeconomics
studies aggregate, or total, economy
Microeconomics
studies smaller economic units
Economics
study of choices made when presented with limited resources
An upward-sloping supply curve shows that: buyers are willing to pay more for particularly scarce products. suppliers expand production as the product price falls. suppliers are willing to increase production of their goods if they receive higher prices for them. buyers are willing to buy more as the product price falls. buyers are not affected either directly or indirectly by the sellers' costs of production.
suppliers are willing to increase production of their goods if they receive higher prices for them.
Buyers of a good will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden, when the tax is placed on the sellers of the good. tax is placed on the buyers of the good. supply of the product is more elastic than the demand for the good. demand for the product is more elastic than the supply of the good.
supply of the product is more elastic than the demand for the good.
Empirical analysis determines:
validity of hypothesis
A movement along the demand curve might be caused by a change in income. the prices of substitutes or complements. expectations about future prices. the price of the good.
the price of the good.
Correlation
two events occur together
Scarcity
unlimited wants exceed limited resources
In economics, the demand for a good refers to the amount of the good people: would like to have if the good were free. will buy at various prices. need to achieve a minimum standard of living. will buy at alternative income levels.
will buy at various prices.
In a congressional debate about agricultural price supports, senators, members of congress, and other experts made the following four statements. Which of these is a normative statement? "Price supports are important because America should preserve the small family farm." "Without price supports, the price of wheat and corn will fall by over twenty percent." "The decline in commodity prices caused by the removal of price supports will result in fewer, larger farms." "The decline in commodity prices caused by the removal of price supports will reduce the number of tractors sold in the United States."
"Price supports are important because America should preserve the small family farm."
Fantastic Cuts Hair Salon knows that a 15% increase in the price of their haircuts will result in a 5% decrease in the number of haircuts sold. What is the elasticity of demand facing Fantastic Cuts? 0.05 0.10 0.33 3.0
0.33
Suppose there is a 10 percent increase in the price of good X and it causes a 10 percent decrease in the quantity of X demanded. Price elasticity of demand for X is 0. 1. 10. 100.
1.
Bailey's Barber Shop knows that a 5% increase in the price of their haircuts results in a 15% decrease in the number of haircuts purchased. What is the elasticity of demand facing Bailey's Barber Shop? 0.05 0.10 0.33 3.0
3.0
Exhibit 4-1 Price per lb. of ice cream Sven Larry Rest of Market Market $8 5 0 7 $6 8 5 9 $5 11 9 11 $4 14 11 14 $3 17 14 20 Refer to Exhibit 4-1. At $4 the quantity demanded in the market would be: 12. 22. 31. 39.
39.
Refer to Exhibit 5-2. If a price floor of $4 is imposed, a surplus of _____units of butter will be created. zero 3,000 4,000 7,000
4,000
Refer to Exhibit 5-2. If a price ceiling of $2 is imposed, a shortage of _____units of butter will be created. zero 3,000 5,000 8,000
5,000
Which of the following is likely to result in a lower equilibrium price? An increase in both demand and supply. A decrease in both demand and supply. An increase in demand and a decrease in supply. A decrease in demand and an increase in supply.
A decrease in demand and an increase in supply.
The elasticity in the vicinity of five different points along a demand curve varies as follows: Point A B C D E Elasticity 1.25 0.3 1.0 0.2 2.1 Refer to Exhibit 6-1. At which of these points would a price increase be accompanied by an increase in total revenue? and D A and E A, C, and E A and D
B and D
Which of the following is true of a competitive market? The rules of supply and demand do not apply to it. Buyers and sellers have little market power. Each buyer's or seller's effect on market price is substantial. Few sellers offer similar products.
Buyers and sellers have little market power.
A decrease in demand and an increase in supply are indicated by Upward shifts in both curves. Downward shifts in both curves. Rightward shifts in both curves. Leftward shifts in both curve
Downward shifts in both curves.
When President Harry Truman said that he wanted to find a one-armed economist because his economic advisors always said, "On the one hand... and on the other hand... " he recognized that the advice of economists is often open to more than one interpretation. Why is this? Question options:Economists cannot make up their minds on policy matters.Economists agree with each other on all policy issues.Economists are aware that tradeoffs are involved in most policy questions.Economists are often unable to identify the critical questions involved in policy issues.
Economists are aware that tradeoffs are involved in most policy questions.
Good A has an income elasticity equal to 0.4 and a cross price elasticity with respect to Good B of 1.2. Then: Good A is an inferior good and Goods A and B are substitutes. Good A is an inferior good and Goods A and B are complements. Good A is a normal good and Goods A and B are substitutes. Good A is a normal good and Goods A and B are complements.
Good A is a normal good and Goods A and B are substitutes.
Refer to Exhibit 6-3. The graph that best illustrates a relatively inelastic (but not perfectly inelastic) range along a demand curve is: Graph A. Graph B. Graph C. Graph D.
Graph C.
Which of the following best illustrates the fallacy of composition? I hate driving to work when the traffic is so heavy, so I decide to leave 30 minutes earlier than in the past. If everyone were to leave 30 minutes earlier for work, we'd all get to work faster. A great many people have been immunized against polio because it can be such a devastating disease. As a result, I probably do not personally need to be immunized against polio. Whenever I attend a baseball game at the local stadium, the home team wins. Therefore, if I attend all of the team's local games, they will achieve a perfect winning record at home. The parking at Ohio State University is in short supply on the main campus. It would be better for more people to ride the bus to school.
I hate driving to work when the traffic is so heavy, so I decide to leave 30 minutes earlier than in the past. If everyone were to leave 30 minutes earlier for work, we'd all get to work faster.
Which of the following best illustrates the fallacy of composition? Question options:If I have more money, I will be better off; therefore if we all had more money, we all would be better off.If I buy more gas each week, my gas consumption increases; therefore, if all gas consumers buy more gas each week, total gas consumption will increase.If I spend more time studying, I will learn more; therefore, if all students spend more time studying, they will learn more.If women's hemlines are higher this year, the Dow Jones Industrials average will fall.
If I have more money, I will be better off; therefore if we all had more money, we all would be better off.
Which of the following is a normative statement? An increase in taxes will cause higher unemployment. An increase in tariffs will increase the domestic prices paid by consumers. Income should be redistributed from the top 2% of wage earners to the lower income brackets. Running government budget deficits leads to higher market interest rates.
Income should be redistributed from the top 2% of wage earners to the lower income brackets.
If the short run elasticity of demand for widgets is 1.1 and the long run elasticity of demand for widgets is 3.6, a decrease in price will ____ total revenue in the short run and ____ total revenue in the long run. Increase; increase. Increase; decrease. Decrease; increase. Decrease; decrease.
Increase; increase.
Which of the following would lead to a decrease in the supply of watches? An increase in the price of watches A decrease in the price of watches A decrease in the expected future price of watches None of the above
None of the above
If individuals who sit in the back of the classroom receive lower grades on average than the rest of the class, does that mean that sitting in the back of a classroom causes one to perform poorly on exams? Question options:Not necessarily. The reoccurrence of a certain relationship between two variables does not necessarily imply causation.It is not possible for an economist to determine causation between variables.The reoccurrence of such a relationship is sufficient evidence that sitting in the back of a classroom will lead to lower grades.none of the above
Not necessarily. The reoccurrence of a certain relationship between two variables does not necessarily imply causation.
If the price of apples falls and apples and oranges are substitutes, we would expect: The quantity of apples demanded to increase and the demand for oranges to increase. The quantity of oranges demanded to decrease and the demand for apples to increase. The quantity of apples demanded to increase and the demand for oranges to decrease. The quantity of oranges demanded to decrease and the demand for apples to decrease.
The quantity of apples demanded to increase and the demand for oranges to decrease.
Suppose the United States steps up efforts to combat drug trafficking and, with the aid of the Colombian military, destroys a significant percentage of cocaine crops. Predict the impact of increased drug interdiction on the market for cocaine in Los Angeles. The supply of cocaine will increase causing the price of cocaine to increase. The demand for cocaine will increase causing the price of cocaine to increase. The supply of cocaine will decrease causing the price of cocaine to increase. There will be a movement up along the supply curve of cocaine.
The supply of cocaine will decrease causing the price of cocaine to increase.
If the price elasticity of demand was 4.0 (in absolute terms), a 10% off sale would lead to: a 40% increase in purchases by customers. a 40% decrease in purchases by customers. a 2.5% increase in purchases by customers. a 2.5% decrease in purchases by customers.
a 40% increase in purchases by customers.
Assume there is a price ceiling imposed on a good which is below the equilibrium price. Which of the following changes would reduce the size of the shortage? an increase in demand a decrease in demand a decrease in supply a lower price ceiling
a decrease in demand
If many more home sellers and builders have become more eager to sell their homes, we would expect to see: an increase in equilibrium price and an increase in equilibrium quantity of homes sold. an increase in equilibrium price and a decrease in equilibrium quantity of homes sold. a decrease in equilibrium price and an increase in equilibrium quantity of homes sold. a decrease in equilibrium price and a decrease in equilibrium quantity of homes sold.
a decrease in equilibrium price and an increase in equilibrium quantity of homes sold.
"The minimum wage should be increased so that low-income workers can afford to feed their families." This is an example of: Question options:a positive economic statement.a negative economic statement.the fallacy of composition.a normative economic statement.
a normative economic statement.
"A reduction in the rate at which stock dividends are taxed will lead to greater investment in the stock market." This is an example of: a positive economic statement. a negative economic statement. the fallacy of composition. a normative economic statement.
a positive economic statement.
If oil is considered a non-renewable resource, than oil is an unlimited resource. a scarce resource. not a productive resource. has no opportunity cost
a scarce resource.
In economic terms, religious and spiritual services are treated as: Question options:goods that people desire.resources or inputs.marginal benefits.priceless commodities.
goods that people desire.
The supply curve of books (which are produced using paper made from trees) will shift to the left in response to: a decline in college tuition. a sharp increase in the demand for and construction of wood-frame homes. an increase in the supply of lumberjacks. an end to government regulations that limit timber harvesting in national forests.
a sharp increase in the demand for and construction of wood-frame homes.
Assume a price ceiling is imposed at the current equilibrium price in the market for wheat. If the supply of wheat then decreases as a result of bad weather, a surplus of wheat will be created. a shortage of wheat will be created. the quantity of wheat traded remains the same. the quantity of wheat supplied will increase.
a shortage of wheat will be created.
Which of the following is associated with a less elastic demand curve? availability of many close substitutes a greater amount of time for consumers to respond to a price change a smaller percentage of income spent on the good in question all of the above
a smaller percentage of income spent on the good in question
Which of the following lies primarily within the realm of macroeconomics? a study of the elasticity of demand for gasoline a study of how tax cuts stimulate aggregate production an analysis of supply and demand conditions in the electricity market a study of the impact of "mad cow" disease on the price of beef worldwide
a study of how tax cuts stimulate aggregate production
Which of the following would not cause an increase in the demand for cheese? a decrease in the price of crackers, which are consumed with cheese an increase in the income of cheese consumers, assuming that cheese is a normal good an increase in the population a technological advance that makes it cheaper to produce cheese
a technological advance that makes it cheaper to produce cheese
The real core of the economic problem is to: increase the amount of leisure time available to people. guarantee everyone on the planet a minimum level of food, shelter and clean water. allocate limited resources among competing uses. eliminate scarcity.
allocate limited resources among competing uses.
All of the following factors will affect the supply of shoes except one. Which will not affect the supply of shoes? higher wages for shoe factory workers higher prices for leather a technological improvement that reduces waste of leather and other raw materials in shoe production an increase in consumer income
an increase in consumer income
Which of the following would cause an increase in demand for golf balls? a decrease in the price of golf balls an increase in the price of green fees an expectation by buyers that their incomes will increase in the very near future a change in consumer tastes away from golf and toward tennis
an increase in the price of green fees
Macroeconomics primarily examines: the behavior of individual households and firms. how prices are determined within individual markets. the output levels that maximize the profits of business firms. broad issues such as national output, employment and inflation.
broad issues such as national output, employment and inflation.
When the price of a good is lower than the equilibrium price, a surplus will exist. buyers desire to purchase more than is produced. sellers desire to produce and sell more than buyers wish to purchase. quantity supplied exceeds quantity demanded.
buyers desire to purchase more than is produced.
To say that a price floor is binding is to say that the price floor results in a shortage. is set below the equilibrium price. causes quantity supplied to exceed quantity demanded. All of the above are correct.
causes quantity supplied to exceed quantity demanded.
A legal maximum on the price at which a good can be sold is called a price floor. subsidy. support. ceiling.
ceiling.
If the demand for milk is downward sloping, then an increase in the price of milk will result in a(n): increase in the demand for milk. decrease in the demand for milk. increase in the quantity of milk demanded. decrease in the quantity of milk demanded.
decrease in the quantity of milk demanded.
If the cross price elasticity between Goods A and B equals 0.7, then a reduction in the price of Good B will: increase the demand for Good A and increase Good A's price as a result. increase the demand for Good A and decrease Good A's price as a result. decrease the demand for Good A and increase Good A's price as a result. decrease the demand for Good A and decrease Good A's price as a result.
decrease the demand for Good A and decrease Good A's price as a result.
If the demand curve is perfectly inelastic, then an increase in supply will: increase both the price and the quantity exchanged. increase the price but result in no change in the quantity exchanged. increase the quantity exchanged but result in no change in the price. decrease the price but result in no change in the quantity exchanged.
decrease the price but result in no change in the quantity exchanged.
Ceteris paribus, if the market demand for a product decreases, then equilibrium quantity will (be) ____ and equilibrium price will (be) ____. increase; increase indeterminate; decrease indeterminate; increase decrease; decrease
decrease; decrease
As a result of the decrease in donut prices at Real Yum Donuts, Dippin Donuts managers discover that the demand for their donuts has: increased. decreased. not changed. none of the above
decreased.
Two goods are substitutes when a decrease in the price of one good decreases the demand for the other good. decreases the quantity demanded of the other good. increases the demand for the other good. increases the quantity demanded of the other good.
decreases the demand for the other good.
Assume an industry initially in equilibrium has a price ceiling imposed at a price below the equilibrium price. Total revenue received by the producers from sales will: rise as a result. rise as a result only if supply is inelastic. rise as a result only if demand is inelastic. fall as a result.
fall as a result.
The following schedule represents a portion of Kate's demand for sub sandwiches. Price Quantity Demanded per Month $6 3 $5 5 $4 8 Along this portion of Kate's demand curve for sub sandwiches, price elasticity of demand is: equal to zero. less than one. equal to one. greater than one.
greater than one.
"Ceteris paribus" means: Question options:if events A and B occur together, one must cause the other.all relevant details are included.what is true for the individual must be true for the whole.holding other things constant.
holding other things constant.
Economics is primarily the study of: human greed. how firms compete for profits in the marketplace. how limited resources are allocated to satisfy unlimited wants. how successful investors make money in the stock market.
how limited resources are allocated to satisfy unlimited wants.
The fallacy of composition is the erroneous view that: Question options:an increase in the supply of money will cause a general increase in the level of prices.a small change in an economic variable will have an unrecognizable but significant effect on the economy.when two events are associated, the one observed first must have caused the second.if something is true for an individual, then it must also be true for a group.
if something is true for an individual, then it must also be true for a group.
An increase in quantity demanded illustrated by a movement downward and to the right along a demand curve. illustrated by a movement upward and to the left along a demand curve. shifts the demand curve to the left. shifts the demand curve to the right.
illustrated by a movement downward and to the right along a demand curve.
An increase in both equilibrium price and quantity is a consequence of a(n): increase in supply. increase in demand. decrease in demand decrease in supply
increase in demand
An increase in the price of a good will increase supply. decrease supply. increase quantity supplied. decrease quantity supplied.
increase quantity supplied.
An increase in demand for a product and a reduction in the costs of production would: increase the equilibrium quantity and increase the equilibrium price. increase the equilibrium quantity and decrease the equilibrium price. increase the equilibrium quantity and cause an indeterminate change in the equilibrium price. decrease the equilibrium quantity and cause an indeterminate change in the equilibrium price.
increase the equilibrium quantity and cause an indeterminate change in the equilibrium price.
If the demand curve is perfectly elastic, then an increase in supply will: increase both the price and the quantity exchanged. increase the price but result in no change in the quantity exchanged. increase the quantity exchanged but result in no change in the price. decrease the price but result in no change in the quantity exchanged.
increase the quantity exchanged but result in no change in the price.
An increase in the price of good X due to a reduction in its supply will: increase the total revenue of good X. decrease the total revenue of good X. increase the total revenue of goods that are substitutes for X. increase the total revenue of goods that are complements for X.
increase the total revenue of goods that are substitutes for X.
Ceteris paribus, if the market demand for a product increases, then equilibrium quantity will (be) ____ and equilibrium price will (be) ____. increase; indeterminate decrease; decrease indeterminate; decrease increase; increase
increase; increase
If both market demand and supply increase simultaneously, then equilibrium quantity will (be) ____ and equilibrium price will (be) ____. indeterminate; decrease increase; increase increase; indeterminate decrease; decrease
increase; indeterminate
A safety report is released that contends that sport utility vehicles are less prone to roll over during crashes than was previously thought. At the same time, the price of steel (used to produce motor vehicles) decreases. The net effect of these two incidents on the market for sport utility vehicles is a(n): indeterminate change in price and an increase in equilibrium quantity. indeterminate change in price and a decrease in equilibrium quantity. decrease in price and an increase in equilibrium quantity. increase in price and an increase in equilibrium quantity.
indeterminate change in price and an increase in equilibrium quantity.
Suppose there is a reduction in consumer income and an increase in the price of jet fuel, an important resource used to produce air travel. If air travel is a normal good, how will these changes influence the price and quantity of air travel? The price of air travel will (be) ____ and quantity purchased will (be) ____. decrease; indeterminate increase; indeterminate decrease; decrease indeterminate; decrease
indeterminate; decrease
If market demand decreases and market supply increases, then equilibrium quantity will (be) ____ and equilibrium price will (be) ____. indeterminate; decrease indeterminate; increase decrease; indeterminate increase; indeterminate
indeterminate; decrease
In 1991, Congress levied a 10 percent luxury tax on yachts over $100,000. The tax brought in far less than was anticipated, they must have passed the legislation thinking the demand for yachts was more ___ than it actually was. elastic inelastic unit elastic none of the above
inelastic
The law of demand refers to the: negative relationship between the price of a good and the willingness of producers to sell it. price increase that results from an increase in demand. inverse relationship between the price of a good and the quantity demanded. increase in the quantity of a good made available when its price increases.
inverse relationship between the price of a good and the quantity demanded.
The law of demand illustrates a(n) ____ relationship between price and ____. direct; quantity demanded inverse; quantity demanded inverse; demand direct; demand
inverse; quantity demanded
To say that a price ceiling is nonbinding is to say that the price ceiling results in a surplus. is set above the equilibrium price. causes quantity demanded to exceed quantity supplied. All of the above are correct.
is set above the equilibrium price.
The ceteris paribus assumption is used in economic analyses in order to: Question options:cover special cases.include all relevant factors.add realism.keep the relationship between the two variables isolated from other events.
keep the relationship between the two variables isolated from other events.
Scarcity means that: resources are unlimited. human wants are limited. limited resources cannot satisfy all of our unlimited human wants. choices are unnecessary.
limited resources cannot satisfy all of our unlimited human wants
When a surplus exists in a market, sellers raise price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated. raise price, which decreases quantity demanded and increases quantity supplied, until the surplus is eliminated. lower price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated. lower price, which decreases quantity demanded and increases quantity supplied, until the surplus is eliminated.
lower price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated.
Microeconomics differs from macroeconomics in that: microeconomics studies individual decision making while macroeconomics examines aggregate decision making. microeconomics studies aggregate decision making while macroeconomics examines individual decision making. microeconomics utilizes positive economic analysis while macroeconomics utilizes normative economic analysis. microeconomics is concerned with consumer behavior while macroeconomics is concerned with firm behavior.
microeconomics studies individual decision making while macroeconomics examines aggregate decision making.
The long run demand curve for wheat is likely to be: more elastic than the short run demand curve for wheat. more inelastic the short run demand curve for wheat. the same as the short run demand curve for wheat. more inelastic than the short run supply of wheat.
more elastic than the short run demand curve for wheat.
You lose your job and, as a result, you buy fewer iTunes music downloads. This shows that you consider iTunes music downloads to be a(n) luxury good. inferior good. normal good. complementary good.
normal good.
Refer to Exhibit 5-11. In which panel(s) of the figure would there be a shortage of the good at the price ceiling? panel (a) only. panel (b) only. both panel (a) and panel (b). neither panel (a) nor panel (b).
panel (b) only.
The elasticity of supply is defined as the ____ change in quantity supplied divided by the ____ change in price. total; percentage percentage; marginal marginal; percentage percentage; percentage
percentage; percentage
A jeweler cut prices in his store by 20% and the dollar value of his sales fell by 20%. This is indicative of: elastic demand. inelastic demand. perfectly elastic demand. perfectly inelastic demand.
perfectly inelastic demand.
Economics is primarily concerned with the study of: Question options:problems such as poverty and unemployment.limited desires pursuing unlimited resources.production and distribution of goods in a world of unlimited resources.production and distribution of goods in a world of limited resources.
production and distribution of goods in a world of limited resources.
The difference between a change in quantity demanded and a change in demand is that a change in: quantity demanded is caused by a change in a good's own current price, while a change in demand is caused by a change in some other variable, such as income, tastes, or expectations. demand is caused by a change in a good's own current price, while a change in quantity demanded is caused by a change in some other variable, such as income, tastes, or expectations. quantity demanded is a change in the amount people actually buy, while a change in demand is a change in the amount they want to buy. A change in demand and a change in quantity demanded are the same thing.
quantity demanded is caused by a change in a good's own current price, while a change in demand is caused by a change in some other variable, such as income, tastes, or expectations.
When the demand and supply of grapes both decrease at the same time, we can safely predict that the: price of grapes will fall. price of grapes will rise. quantity of grapes exchanged will fall. quantity of grapes exchanged will rise.
quantity of grapes exchanged will fall.
If a nonbinding price floor is imposed on a market, then the quantity sold in the market will decrease. quantity sold in the market will stay the same. price in the market will increase. price in the market will decrease.
quantity sold in the market will stay the same.
When the price of a good is higher than the equilibrium price, a shortage will exist. buyers desire to purchase more than is produced. sellers desire to produce and sell more than buyers wish to purchase. quantity demanded exceeds quantity supplied.
sellers desire to produce and sell more than buyers wish to purchase.
Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a shortage to exist and the market price of roses to increase. shortage to exist and the market price of roses to decrease. surplus to exist and the market price of roses to increase. surplus to exist and the market price of roses to decrease.
shortage to exist and the market price of roses to increase.
In an effort to reduce the surplus of dairy products, agricultural legislation paid dairy farmers to slaughter their herds and sell them to packinghouses (meat producers) in 1996-1997. How did this influence the market for beef? demand increased, leading to higher beef prices demand decreased, leading to lower beef prices supply increased, leading to lower beef prices supply decreased, leading to higher beef prices
supply increased, leading to lower beef prices
Which of the following is not a determinant of supply? input prices technology tastes expectations
tastes
If the elasticity of supply coefficient for a good is 6, we know: that for every 1% increase in quantity, there will be a 6% increase in price. that for every 1% increase in quantity, there will be a 6% decrease in price. that for every 6% increase in quantity, there will be a 1% increase in price. that for every 6% increase in quantity, there will be a 1% decrease in price.
that for every 6% increase in quantity, there will be a 1% increase in price.
The nation's largest cable TV company tested the effect of a price reduction for premium movie channels. It lowered prices 10% and found that the number of customers rose by almost 50%. This means: the demand curve for the premium movie channels shifted to the right. the supply curve for premium movie channels shifted to the left. the demand for premium movie channels is elastic in this price range. the demand for premium movie channels is inelastic in this price range.
the demand for premium movie channels is elastic in this price range.
If the price of tennis rackets were to increase, we would expect: the demand for tennis balls to increase. the demand for tennis balls to decrease. the supply of tennis balls to increase, leading to a movement along the demand curve for tennis balls. the supply of tennis balls to decrease.
the demand for tennis balls to decrease.
If a price ceiling is not binding, then the equilibrium price is above the price ceiling. the equilibrium price is below the price ceiling. it cannot be legally enforced. None of the above is correct because all price ceilings must be binding.
the equilibrium price is below the price ceiling.
When there is an excess quantity supplied of a product at the current price, then: the market price must be below equilibrium price. the quantity demanded is greater than the equilibrium quantity. the market price will tend to rise. the market price will tend to fall.
the market price will tend to fall.
The formula for calculating the cross price elasticity of demand is: the change in the quantity demanded of one good divided by the change in the price of another good. the percentage change in demand of one good divided by the percentage change in the price of another good. the percentage change in the quantity supplied of one good divided by the percentage change in the price of another good. the percentage change in the price of one good divided by the percentage change in the quantity demanded of another good.
the percentage change in demand of one good divided by the percentage change in the price of another good.
Macroeconomic topics do not generally include: Question options:inflation.aggregate demand.government spending and taxation.the production decisions of individual firms.
the production decisions of individual firms.
Whenever there is a surplus at a particular price, the quantity sold at that price will equal: the quantity demanded at that price. the quantity supplied minus the quantity demanded. the quantity supplied at that price. (quantity demanded plus quantity supplied)/2.
the quantity demanded at that price.
When quantity demanded decreases in response to a change in price: the demand curve shifts to the right. the demand curve shifts to the left. there is a movement down along the demand curve. there is a movement up along the demand curve.
there is a movement up along the demand curve.
If the equilibrium price of widgets is $22, and then a price ceiling of $24 is imposed by the government, as a result, there will be no effect on the widget market. there will be a shortage of widgets. there will be a surplus of widgets. the price of widgets will increase.
there will be no effect on the widget market.
If input prices rose and production technology improved at the same time, as a result: larger quantities to be exchanged. prices would rise. prices would fall. larger quantities to be exchanged. we would not know which direction either prices or quantities exchanged would be altered without more information.
we would not know which direction either prices or quantities exchanged would be altered without more information.
Refer to Exhibit 5-2. If a price ceiling of $3 is imposed, a shortage of _____units of butter will be created. zero 3,000 4,000 7,000
zero
