Econ homework assignments ch 1-6

In 2005, General Motors announced the closure of many U.S. assembly plants because it had built new plants overseas. Those who lost their jobs as a result would likely be classified as

seasonally unemployed. **structurally unemployed.** cyclically unemployed. frictionally unemployed.

. Which one of these examples is NOT an example of causation?

Temperatures of less than 32˚F cause water to freeze. Kryptonite causes Superman to lose all his powers. **Umbrellas cause rainstorms.** Stepping on the gas pedal causes a car to move faster.

Inflation Rate Equation

(CPI 2 - CPI 1) / CPI 1 x 100

Answer the following questions about correlation and causation. a. Which of the following situations is an example of causation?

**Skipping lunch causes hunger.** Snow causes Christmas. Rain causes clouds. Birthdays cause people to age.

If the supply and demand curves cross at a quantity of 100, then the price necessary to get firms to sell more than that will have to be _______ equilibrium.

**above** below within 10 percent either way of at Since the supply curve is upsloping, firms will sell more as the price rises. So in order for firms to sell more than a quantity of 100, the price would have to be above the equilibrium price.

ch 3 The elasticity of demand is related to the slope of the demand curve

**but also the (price, quantity) position on the demand curve.** and only the slope of the demand curve. but also the slope of the supply curve. and whether the good is normal or inferior. The flatter the demand curve, the greater the elasticity. The steeper the demand curve, the smaller the elasticity. This is not to say that slope and elasticity are the same thing; it just means that slope matters.

In measuring gross domestic product, goods produced by foreign firms in the United States are

**counted, but goods produced by American firms in foreign countries are not counted.** counted, and so are goods produced by American firms in foreign countries. not counted, but goods produced by American firms in foreign countries are counted. not counted, and goods produced by American firms in foreign countries are also not counted.

The optimization assumption suggests that people make

**decisions to make themselves as well off as possible.** decisions without thinking very hard. irrational decisions. unpredictable decisions. Explanation The optimization assumption suggests that the person in question is trying to maximize some objective. Consumers are assumed to be making decisions that maximize their happiness subject to a scarce amount of money.

Of these, economists consider this the worst:

**depression.** deflation of 5 percent. recession. inflation of 5 percent.

A 5 percent decrease in price results in an 8 percent increase in quantity demanded. In this case, demand is

**elastic.** unitary elastic. inelastic. b. Economists say that demand is elastic when the percentage change in quantity is larger than the percentage change in price and inelastic when the percentage change in quantity is smaller than the percentage change in price. Looking at the formula, if the computed elasticity is greater than 1, then demand is elastic; when it is less than 1, then demand is inelastic. When the percentage change in quantity is the same as the percentage change in price (the computed elasticity is exactly 1), demand is unitary elastic.

Economic theory would suggest that the profitability of an industry would be

**inversely related to the number of firms competing in the industry.** zero in the long run, regardless of market structure. directly related to the number of firms competing in the industry. unrelated to the number of firms competing in the industry. When a firm faces a large number of competitors, such that no one firm can influence the price (the case of perfect competition), the entry and exit will drive profits to a normal level. When a firm faces few competitors, such that the firm can influence the price (the case of monopoly), profits can be above the normal level.

The underlying reason for the upward-sloping nature of the supply curve is that

**the production of most goods comes with increasing marginal costs.** the consumption of most goods comes with decreasing marginal utility. the production of most goods comes with increasing marginal benefits. the consumption of most goods comes with increasing marginal utility. As more of a good is produced, the added, or marginal cost, increases. The firm needs to have a higher price to produce more. Therefore, the supply curve is upsloping.

Suppose a firm has $1,000,000 in fixed costs and variable costs equal to $100; for every unit they produce,

**their average costs are decreasing.** their marginal costs are decreasing. their fixed costs are decreasing. the marginal costs are increasing. The fixed costs are fixed and do not change. The marginal cost is constant ($100). The average cost would be decreasing as output increases.

Classify the following as fixed or variable costs:

Fuel: Variable costs Shipping charges: Variable costs Payments for raw materials: Variable costs Real estate taxes: Fixed costs Salaries: Fixed costs Insurance premiums: Fixed costs Wage payments: Variable costs Sales taxes: Variable costs Rental payments on leased office machinery: Fixed costs (Fixed costs are the costs of production that cannot be changed. Variable costs are the costs that can be changed)

Match the choices that are correlated to one another.

Height: Shoe size Level of education: Income Temperature: Snowfall

Picture of graph:

The underlying reason production possibilities frontiers are likely to be bowed out (rather than linear) is there is always some level of unemployment. choices have consequences. there is always opportunity costs. **some resources and people can be better used producing one good rather than another.** A linear production possibilities frontier implies **constant opportunity cost.** increasing opportunity cost. zero opportunity cost. none of the above.

Match the statement about goods sold in a market with the market type.

There are similar substitutes for the goods: Monopolistic competition There are no substitutes for the goods: Monopoly The goods may or may not be identical: Oligopoly The market for college education has many producers and similar, but not identical products. -The soft drink market has few producers and identical products. -There are similar substitutes for the goods: Monopolistic competition -There are no substitutes for the goods: Monopoly -The goods may or may not be identical: Oligopoly -College education: Many producers and differentiated products (monopolistically competitive) -Soft drink market: Few producers; an identical, uniform product; and an oligopoly

Graph explanation

Total revenue (TR) is the price of a unit times the number of units. Marginal revenue (MR) is the additional revenue the firm receives from the sale of each unit.

Inflation is measured using _________ in a price index.

a multiyear weighted average increase **the percentage year-to-year increase** the absolute increase logarithm-adjusted absolute increase The inflation rate is the percentage increase in the consumer price index.

Ch 2: If the supply and demand curves cross at a price of $2, at any price above that there will be

a shortage. **a surplus.** a crisis. an equilibrium. At any price above the equilibrium price where demand and supply intersect, there will be a surplus of the good or service.

Whether a firm stays in business or shuts down depends heavily on the concept of

actual profit. concentration ratios. market share. **economic profit.** Normal profit is the level of profit that business owners could get in their next best alternative investment. The next best alternative would be whatever investment an owner would choose if he or she decided to go out of business. Any profit above normal profit is called economic profit. If business owners do not make their normal profit, they will quit the business and move into another. This means that we might think of normal profit as the salary the business owners pay themselves and, as such, part of the "cost of doing business." If they make less than normal profit, then the salary they can pay themselves is too low to keep them in the industry. On the other hand, if profits are routinely more than that, others will want to enter the industry. This means that in the long run profit will shrink to normal levels.

Scarcity implies that the allocation scheme chosen by society can

always make more of any good. not make more of any one good. always make more of all goods simultaneously. **typically make more of a good but at the expense of making less of another.** Explanation: Scarcity implies that choices involve trade-offs.

Recently, the amount of time men devote to housework has been increasing while the amount of time women devote to housework has been decreasing. An economic explanation for this trend could be

as women have more employment opportunities, their opportunity cost of doing housework relative to men has fallen. as women have fewer employment opportunities, their opportunity cost of doing housework relative to men has risen. as women have fewer employment opportunities, their opportunity cost of doing housework relative to men has fallen. **as women have more employment opportunities, their opportunity cost of doing housework relative to men has risen.** Explanation The opportunity cost of any activity is the highest-valued alternative that must be given up to engage in that activity. If women have more employment opportunities, then their opportunity cost of doing housework relative to men will rise.

Imagine an economist ordering pizza by the slice. When deciding how many slices to order she would pick that number where the enjoyment of the _____ equals the enjoyment she could get from using the money on another good.

average slice first slice **last slice** total number of slices Explanation The enjoyment of the last slice is the marginal benefit of that slice. If this enjoyment is more than the enjoyment from some alternative, more will be consumed.

Which of the following would most likely have an inelastic demand?

books brand X shoes **gasoline ** movie tickets The demand curve for this would be: relatively steep a, b. The demand curve for a good you need is going to be rather steep. If the good is a luxury item, you are more likely to eliminate it from your budget if it becomes overly expensive. When there are many substitutes that all serve nearly as well as the good in question, demand is likely to be more elastic (flatter), because price increases induce changes to other goods.

The underlying reason production possibilities frontiers are likely to be bowed out (rather than linear) is

choices have consequences. there is always some level of unemployment. **some resources and people can be better used producing one good rather than another.** there are always opportunity costs. Explanation If the production possibilities frontier is not a line but is bowed out away from the origin, then opportunity cost is increasing. The reason for this is that as we add more resources to the production of, for example, pizza, we are using fewer resources to produce soda. Compounding that problem, at each stage as we take the resources away from soda and put them into pizza, we are moving workers who are worse at pizza production and better at soda production than those moved in the previous stage. This means that the increase in pizza production is diminishing and the loss in soda production is increasing. An economist would call this an example of increasing opportunity cost. If the production possibilities frontier is a straight line that is not bowed out away from the origin, then opportunity cost is constant.

Suppose you observe that minor changes in supply seem to cause dramatic changes in price. You would conclude that

demand is inelastic. demand is perfectly inelastic. demand is unit elastic. **demand is elastic.** Economists say that demand is elastic when the percentage change in quantity is larger than the percentage change in price and inelastic when the percentage change in quantity is smaller than the percentage change in price.

Suppose a firm cannot figure out whether the demand for the good it sells is elastic or inelastic but discovers that every time it raises its price, its total revenue declines. Their

demand is inelastic. demand is perfectly inelastic. demand is unit elastic. **demand is elastic.** If the price and the amount you spend both go in the same direction, then demand is inelastic, whereas if they go in opposite directions, demand is elastic. If demand for a good is elastic (the absolute value of the price elasticity of demand is greater than 1), an increase in price reduces total revenue. If demand for a good is inelastic (the absolute value of the price elasticity of demand is less than 1), an increase in price increases total revenue. If the demand for the good is unit elastic (the absolute value of the price elasticity of demand is 1), an increase in price does not change total revenue.

ch 4: When firms add workers and get more efficient, they are benefiting from

diminishing marginal utility. the law of large numbers. **the division of labor.** diminishing returns. Division of labor enables a small increase in labor to result in a dramatic increase in output.

Gross domestic product is counted using two methods: one that counts all the ways people _____ money and another that counts all the ways people _____ money.

earn, save spend, save **earn, spend** loan, borrow The computation of the GDP is done in two distinct ways. One way is to count all those things for which people pay money. This is called the expenditures approach. The expenditures approach adds up all of the following: consumption, investment, government spending on goods and services, and net exports (net exports = exports - imports). The other approach, which counts all those ways in which people earn money, is called the income approach.

If MR > MC, then when an additional unit is sold, the firm's

profit will be positive. profit will be negative. **profit will increase.** profit will decrease. If the additional revenue (MR) exceeds the additional cost (MC), producing another unit will add more to revenue than to cost, and if produced, will increase profit.

A 10 percent decrease in price results in a 15 percent increase in quantity demanded. In this case, demand is

elastic. inelastic. unitary elastic. Economists say that demand is elastic when the percentage change in quantity is larger than the percentage change in price and inelastic when the percentage change in quantity is smaller than the percentage change in price. If the computed elasticity is greater than 1, then demand is elastic; when it is less than 1, then demand is inelastic. When the percentage change in quantity is the same as the percentage change in price (the computed elasticity is exactly 1), demand is unitary elastic.

The demand curve for this good would be relatively ______

flat The greater the absolute value of the price elasticity of demand, the flatter the demand curve. The smaller the absolute value of the price elasticity of demand, the steeper the demand curve. The demand curve for a good you need is going to be rather steep. If the good is a luxury item, you are more likely to eliminate it from your budget if it becomes overly expensive. In this case, there is a substantial reaction of quantity to a change in price. The demand curve for a luxury is likely to be flatter.

According to the law of diminishing marginal utility, as more of a product is consumed,

income falls. the price falls. the amount of extra happiness increases. ** the amount of extra happiness decreases. ** a. Each time you consume another unit of a good, the value you place on the next unit falls. This means that the value you place on a good depends on how many you have already had. Economists refer to the amount of extra happiness that people get from an additional unit of consumption as marginal utility and say that it decreases as you consume more. This law of diminishing marginal utility suggests that the amount of additional happiness that you get from an additional unit of consumption falls with each additional unit. Stated more simply, because each additional unit increases your happiness less than the previous unit, the most you would be willing to pay for each additional unit is less than before. One reason why a demand curve is downward sloping, then, is that for most goods there is diminishing marginal utility.

ch 1: A production possibilities frontier is a simple model of

inputs and outputs. production and costs. prices and output. **scarcity and allocation** Explanation: The production possibilities frontier shows the quantity of two goods that can be produced. It implies that scarcity requires that choices be made as to how to use resources.

The underlying reason that there are unattainable points on a production possibilities frontier diagram is that there

is government. is unemployment of resources. **is a scarcity of resources within a fixed level of technology.** are always choices that have to be made. Explanation The points outside the production possibilities frontier are unattainable. This means that currently available resources and technology are insufficient to produce amounts greater than those illustrated on the frontier. On a graph, everything beyond the frontier is unattainable.

One problem with using real gross domestic product as a measure of social welfare is that

it double, triple, and sometimes quadruple counts goods that are produced in stages. it fails to count services, a growing part of the economy. **it fails to count home production.** it fails to account for imports, a growing part of the economy.

Combined, the consumer surplus and producer surplus at equilibrium is

lower than it would be at prices below equilibrium. typically negative. **as big as it can get. ** lower than it would be at prices above equilibrium. When the market is at equilibrium, the consumer surplus plus the producer surplus will be as large as it can be.

When a firm chooses to shut down, it is

making a poor decision because it should always produce where marginal cost equals marginal revenue. making a poor decision because it should always produce where average costs exceed average revenue. making a good decision as long as the price it is getting is less than its average costs. **making a good decision as long as the price it is getting is less than its average variable costs.** If a firm cannot cover its variable costs, then it will lose more than the fixed costs by continuing to operate.

The result that a firm should produce where MC = MR except when the shutdown condition is met is based on the assumption that it is attempting to

maximize market share. **maximize profit.** minimize marginal costs. minimize average costs. The business of business is making money, and the money business makes is called profit. Marginal revenue (MR) is the amount the firm brings in from selling one more, and the marginal cost (MC) is the amount of money that it costs to produce one more. To maximize profits, MR should be equal to MC.

Local telephone service was once an area in which consumers had no choices. Many young people no longer use "landlines," preferring instead to use their cell phones. This means that the market has moved toward

monopoly. **oligopoly.** perfect competition. monopsony. Local telephone service used to be a monopoly. It became an oligopoly as fewer consumers used this option for phone service.

An industry in which there are a very limited number of large firms is likely to be characterized by

monopoly. perfect competition. monopolistic competition. **oligopoly. ** An oligopolistic market is a situation in a market where there are very few discernible competitors.

The major difference between nominal GDP and real GDP is

nominal GDP measures the value of output in constant prices, while real GDP measures output using current-year prices. **nominal GDP measures the value of output in current-year prices, while real GDP measures output using constant prices.** nominal GDP measures the value of output with current-year output levels, while real GDP measures output using constant output levels. nominal GDP measures the value of output with constant output levels, while real GDP measures output using current-year output levels. Nominal GDP is the value of goods and services (output) produced in an economy measured at current prices. Real GDP is the value of goods and services (output) produced in an economy measured using constant prices.

ch 5: An industry in which there are many competitors with specific marketing niches is likely to be characterized by

oligopoly. monopoly. **monopolistic competition.** perfect competition. Explanation: When a firm faces a large number of competitors, such that no one firm can influence the price, when the good a firm sells is indistinguishable from those its competitor sells, when firms have good sales and cost forecasts, and when there is no legal or economic barrier to its entry into or exit from the market, then we have what economists call perfect competition. Monopolistic competition refers to a situation in which there are many firms producing similar but not identical goods.

. If a consumer purchases more of a good as the price falls, we can assume that the consumer's

preferences have changed. total utility has also fallen. marginal utility has risen. ** marginal utility has also fallen. ** b. The consumer's demand curve reflects marginal utility. As the price falls, consumers purchase more since their marginal utility is also falling.

An increase in the income of consumers will cause the

supply of all goods to fall. supply of all goods to rise. ** demand for some goods to rise and for others to fall.** demand for all goods to rise. A rise in income can either increase demand if the good is a normal good, or decrease demand if the good is an inferior good.

The consumer price index (CPI) is a heavily criticized measure of inflation because

the government does nothing to fix its known deficiencies. **it consistently overstates the increase in the cost of living.** the government constantly makes adjustments in it without warrant. it consistently understates the increase in the cost of living. Economists have argued for many years that the CPI overstates the cost of living. The degree of that overstatement has been the subject for significant economic research. Part of the problem in resolving the agreed-upon problems is that any correction has the effect of reducing Social Security checks and increasing taxes.

When firms add workers and find that the additional workers add less to output than their predecessors did, they are experiencing

the law of large numbers. **diminishing returns** the division of labor. diminishing marginal utility. Although it is usually the case that having more workers increases output, workers find that the existing plant and equipment are too limiting for them to get the most out of new employees. As a result, output increases but not as fast as it had before. This phenomenon is referred to by economists as diminishing returns.

The opportunity cost for you to attend college might best be described as

the value to you of not working. the cost of books. the cost of tuition. **income you could have earned at a full-time job.**

A retailer noticed that by decreasing its price, its total revenue increased. In this case, demand is

unitary elastic. inelastic. **elastic. ** a. If the price and the amount you spend both go in the same direction, then demand is inelastic, whereas if they go in opposite directions, demand is elastic. If demand for a good is elastic (the absolute value of the price elasticity of demand is greater than 1), an increase in price reduces total revenue. If demand for a good is inelastic (the absolute value of the price elasticity of demand is less than 1), an increase in price increases total revenue. If the demand for the good is unit elastic (the absolute value of the price elasticity of demand is 1), an increase in price does not change total revenue.