econ test prep
Sugar is freely traded in the world market. Assume that country, Loriland, is a price taker in the world market for sugar. Some of the sugar consumed in Loriland is produced domestically while the rest is imported. The world price of sugar is $2 per pound. The graph below shows Loriland's sugar market, and PW represents the world price. (see graph on #52) Given the world price of $2, what per-unit tariff maximizes the sum of Loriland's domestic consumer surplus and product surplus?
$0 No tariffs good, make it $0
Suppose that Loriland imposes a per-unit tariff on sugar imports and the new domestic price including the tariff is $4. What is the domestic consumer surplus?
$25 million (($9 - $4) x 10million pounds)/2 = $25 million
Jack Rose decided to take a trip to the bank where he gets two options to choose from. Option A is he gets $130 today, but gets $11 taken away in a year. Option B is he gives $20 to the bank today but gets $110 at the end of the year. Assume the inflation rate is 0%, the interest rate is 10% and the money is compounded once (n=1). By choosing option A, what is the difference in total money between option A and option B after a year?
$40 Option A: 130 - (11/1.1) = 120 Option B: (110/1.1) - 20 = 80 120 - 80 = 40
This graph shows the cost curves and marginal revenue curves for Rose Watch Company. How much is this company's profit? (check graph on #8)
$400,000 Profit = Quantity x (Price - Average Total Costs) = $10,000 x ($120 - $80) = $10,000 x ($40) = $400,000
The value of the gross domestic product in 2000, in terms of 1990 prices, was ___. (see tabel on #57)
$600 GDP Deflator = nominal GDP / real GDP: 1200 x (100/200) = 600
The US economy's actual unemployment is currently greater than its natural unemployment. This creates a $10 billion gap. If MPS= 0.8, how much should the government spend to fix this gap?
$8 billion Because the government is spending to fix the gap, we would use the spending multiplier which is [1/(1-MPC)]. MPC=1-MPS, so it would be 0.2. Then we would plug in 0.2 into the spending multiplier to get 1.25. Then to find out how much is needed to fix the gap, you would divide $10 billion by 1.25 to get a total increase of $8 billion.
Suppose that Loriland imposes a per-unit tariff on sugar imports and the new domestic price including the tariff is $4. Calculate the total revenue generated from tariffs in this scenario.
$8 million ($4 - $2) x (10 million pounds - 6 million pounds) = $8 million
Jack Rose sells Lady Gaga tickets in a monopolistic competitive market. The graph above is his monthly income. What is his income? (see graph on #58)
-$15 MR = MC at Q = 5 so the price is sold at . D(Q=5) at $8. ATC has a minimum at $11. So the loss is $3. We multiply 5 x $3 = $15 net loss or -$15.
The table below gives output, marginal product, and average product of a Jack Rose's firm producing coffee beans. Coffee beans and tea leaves are substitutes. Disregard the APL of tea leaves. The firm produces coffee beans in a perfectly competitive market where the price of a coffee bean is $10. (check table on #17)
-$200 MRPL = MP x MR Fourth Worker MRPL = 10 x 70 = $700 First Worker MRPL = 10 x 90 = $900 $700 - $900 = -$200
Blammo Roseton is the only firm in Rosetown Gammo where people are employed. The figure below represents the labor market in Rosetown Gammo. (see graph on #55) If the government of Rosetown Gammo imposes a minimum wage of $45 per day in this market, how much labor is employed? Gammo has a lot of salesmen in town, marketing to geriatric patients.
300 workers At the point where Wage=$45 does not matter. So, QL= 300 workers.
A plane ticket initially costs 4200 yuan, which is $420 at an exchange rate of 10 yuan per dollar. After Chinese prices rise by 1000% and the yuan appreciates against the dollar by 20%, how much will the plane ticket cost in dollars?
35,000 ($4200 x 10) x 1.2 = 35,000
This graph illustrates Jack Rose's firm's marginal factor cost of labor (MFCᶫ) , marginal revenue product of labor (MRPᶫ), and the supply of labor (Sᶫ), This firm hires labor in a monopsony labor market. Jack Rose is friends with bureaucrats and the government, coincidentally, might hold off on regulating his firm. What wage and quantity combination will Jack Rose's firm choose to maximize profits? (check graph on #14)
400 workers, $25 per day The profit-maximizing choice of labor in a monopsonistic labor market is the quantity where the MRPL equals MFCL, which is 400 in this case. The firm then goes down to the supply curve to find the wage that they must pay in order to get that many people willing to work, which in this case is $25 dollars per day
Jacky Rose, P. Pickle Inc. is a perfectly competitive firm producing pickles. It pays $60 per pickle, for the 10 units of capital it uses, and the marginal product of the 10th unit of capital is 420 pickles. Jacky Rose, P. Pickle Inc. can't change its use of capital in the short run, but it can change its use of labor, and it can hire as much labor as it wants at a wage of $30. Jacky Rose, P. Pickle Inc.'s production function is given in the table shown here: (look at table on #24)
5 Find, MR =MC, and where Firms will hire more employees until the wage rate (marginal cost of labor) equals the MRPL. Going to 6 employees results in higher MCL than MRPL.
The reserve requirement is 10% and the federal fund rate is 4%. Which of the following would be a sensible percentage for the discount rate?
5% The discount rate should be around 1% higher than the federal fund rate. The discount rate must be higher than the federal fund rate or else the discount rate would become obsolete.
Hooters CEO Jack Rose decides that his corporation should purchase government bonds. This open-market purchase of government bonds is accompanied by a decrease in income taxes. What will be the short run effect of the bond purchase and tax decrease?
A decrease in unemployment When government bonds are purchased, money supply increases, rates down, I-spending up, AD up, Unemployment down
Which of the following would cause a negative supply shock?
A large group of workers decide to go on strike and burn down their factories When the workers go on strike, that would decrease their productivity, simultaneously, burning down the factories would also worsen the productivity even more. These would all decrease short run and possibly the long run supply curves.
The United States and the United Kingdom are trading partners, and the United States has a zero current account balance. Assume now that the inflation rate in the United States decreases relative to the inflation rate in the United Kingdom. How would this affect the AS/AD model, the Phillips curve, exports, and the capital account in the United Kingdom? (see chart on #41)
AD decreases, Exports decrease, CA increases, SRPC no change Since the inflation rate in the United States is decreasing, this means US goods are cheaper relative to the UK. As a result, US exports increase and imports decrease. The opposite occurs in the UK - because the US goods are cheaper, UK imports increase and exports decrease. Shifts in aggregate demand are reliant on changes in exports -- since exports in the UK decrease, AD will also decrease. The current account also relies on changes in exports -- since exports in the UK are decreasing, current account will decrease and capital account will increase. The SRPC only responds to shifts in the short-run aggregate supply curve, and since there is no shift in SRAS, there is no shift in the SRPC. Therefore, D is the correct answer.
Assume we start at long-run macroeconomic equilibrium at point A. The federal government has decreased the federal fund rate and decreased the reserve requirement. In the short run, how will this affect the AS/AD model, market for loanable funds, and Philips curve?
AD increases SLF increases Point A moves up along the SRPC The decrease in FFR and rr will increase the MS, which decreases the nominal interest rate, leading to more investment spending, increasing AD. When AD increases, so does RGDP, so the overall amount of spending and saving increases, leading to an increase in SLF. The increase in AD also moves point A up along the SRPC, since inflation increased and unemployment decreased when AD increased.
Leah Nutkis and Jack Rose decided to open up a bank together. After months and months of collaboration and back and forth dilemmas, they came to the agreement to call their corporation Rose-Kissed LLC. It just so happened that at the same time Rose-Kissed was opening, the US central bank, Li-Ladin Corporations, was having internal issues within their bank and needed the Rose-Kissed LLC to take over as the central bank of America. Out of pure excitement from receiving this promotion and wanting to create some movement within the economy, Jack and Leah put their heads together and decide to sell bonds. Stupidly though, this decision ended up having the opposite effect that they had hoped for. What is the long run effect on both aggregate price level and output as a result of Leah and Jack's decision?
Aggregate price level Decreases, Aggregate output No Change We know that in the long run a decrease in the money supply decreases the aggregate price level but has no effect on the aggregate output.
Which of the following is most likely to cause an increase in the long-run aggregate supply curve?
An increase in literacy levels of the population. LRAS only shifts when the economy productivity changes, and if literacy levels increase then people have more skills and more work will get done. This also means education is increasing.
Which of the following best describes the operation of an automatic stabilizer in the midst of a recession?
As unemployment rises in a recession, more people are eligible for unemployment compensation, which should help lift the economy from the recession if the money is spent. An automatic stabilizer is a mechanism that helps curb fluctuations in the economy without direct government intervention. Answer choice A can be eliminated because it doesn't explain how the economy can reverse the recession. While answer choice B is true, it doesn't have any connection to the function of an automatic stabilizer. Once again, answer choice C doesn't explain the effect of an automatic stabilizer. Answer choice E can be eliminated because as unemployment rises, people pay lower income taxes. This leaves answer choice D - it correctly identifies how the economy can get out of recession through the spending of the unemployment compensation (the spending would increase AD, therefore curbing the recession).
Jack Rose decides to advertise his stencils and the market for stencils is perfectly competitive. Why is Jack Rose idiotic for doing this?
Because all products are non differentiable and everyone has perfect knowledge In a perfectly competitive market, all information is perfect and all the products are the same so there's no need to advertise; it would only increase the firm's costs
Five companies share a market, in which they all currently make $20 each. Two years later, three of the companies leave the market. The remaining companies need to determine whether they should advertise. For each company, advertising costs $5 and captures $15 from the competitor provided that they advertise. Where is the Nash equilibrium?
Both companies advertise C is the right answer. When both A and B advertise, both have an output of $15. When neither A or B advertise, both have an output of $20. When A advertises and B doesn't, A has an output of $30 and B has an output of $5. The opposite is true for the converse.
Jack Rose, a British inventor recently came up with an innovative new smartphone that can produce edible deserts with the click of a button. The news of his invention travels fast and can soon be heard about on nearly every news channel all around the world. Jack Rose becomes extremely rich and careless with his money. He buys a crazy huge mansion (7 million$), a new Bentley (245,000), a private jet (3 mil), and a million dollars' worth of chewing gum. How does his invention affect the British current account and unemployment rate?
CA decrease, UER increase Jack has invented a new innovative good that can only be bought out of britain, this will increase the demand for british dollars, ex-rate increase, exports decrease, imports increase, CA decrease, Xn decrease, AD shifts down, GDP decrease, UER increase
Jack Rose was recently elected as the dictator of a newly found country of Roseland. He wanted to make some changes within the economy and took immediate action. He decided to set a minimum wage because he thought it would help poverty levels, but it only raised unemployment. He set the minimum wage to $33.33. Point A falls on the demand curve at $33.33 and to the right of the equilibrium. Point B falls on the P axis at $33.33. Point C lies upon the supply curve and has the same Q as point F. Point D is at the value where the Q of the supply curve equals 0. Point E is the equilibrium at $20.15. Point F falls on the demand curve at $33.33 and to the left of the equilibrium. Which of the following must be true:
CS < PS, The triangle of DWL is bound by points F, E, C In a price floor consumer surplus always is less than producer surplus because the floor is above equilibrium. DWL is bound by the equilibrium, and the area between the supply and demand curves until the output quantity.
With an increase in investment demand in Roselantia, the real interest rate rises. In this situation, the most likely change in the capital stock of the Roselantia and in the international value of the dollar would be which of the following?
Capital Stock in Roselantia: Increase International Value of the Dollar (C): Increase Capital stock increased because of the increase in gross private investment. This occurred because of the increased investment demand. The resulting higher real interest rate provided an incentive for foreign investors to seek higher real rates of return in the United States. This financial investment, in turn, required foreign exchange. Foreigners had to supply their currency and demand dollars in the foreign exchange market, which resulted in an increase in the international value of the dollar.
Which of the following correctly describes the components of Aggregate Demand?
Consumption expenditures + Investment expenditures + Government expenditures + Exports - Imports AD includes net exports, which subtracts imports from exports and doesn't include savings
The FED increases the federal funds rate, but also increases the discount rate. At the same time, inflation In America is increasing. What happens to the US current account and the value of the currency?
Currency appreciates, CA does not change Decrease in money supply will cause Demand to increase, ex-rate to increase, currency to appreciate. The current account will not be affected because it only responds to changes in real exchange rate which will be diminished by inflation.
The government decides to borrow more money. What curve does this shift, how does this affect interest rates and Aggregate Demand, and what is this phenomenon called?
DLF increases, i-rates increase & AD decreases, "crowding out" When the government borrows money, DFL will increase, that will increase the real interest rate and lower investment spending, which will decrease AD. This effect is known as "crowding out," which will lead to continued inflation.
Assume that the United States economy is currently in a short-run equilibrium with the actual unemployment rate above the natural rate of unemployment. In addition, Japan and the United States are major trading partners. Indicate how the change in real GDP will affect the demand for the Japanese yen in the foreign exchange market. What is the effect of the change in demand on the value of the Japanese yen relative to the United States dollar?
Demand for Japanese Yen increases in the foreign exchange market, demand curve of the yen shifts right, and the dollar price of the yen increases. The United States economy is in a recession, decreasing the amount of US dollars and thus causing the USD to appreciate. With the US dollar appreciating, Americans will seek to buy more Japanese goods, which require Japanese yen, increasing the demand of the yen. The demand for the Japanese Yen increases in the foreign exchange exchange market, which causes the demand curve of the yen to shift right. Since the demand for yen increases, the exchange rate of USD to yen will go up.
Good X and Good Y are complementary goods. If revenue for Good X increases by 3% when the price of Good X increases by 9%, which of the following is true about the demand for Good X?
Demand is highly inelastic If revenue increases as price increases, we know that the price effect is greater than the quantity effect. Therefore, we know that the demand curve is highly inelastic.
Jack Rose is a consultant for an economic advisory service. He currently produces 10 hours per week of consultancy services. The price of an hour of his services is $60 and the market for consultancy services is perfectly competitive. The table below shows his costs associated with producing 10 hours of services. If Jack wants to maximize profit, what is his best course of action in the short run? (see table on #30)
Do not change output Optimal quantity to produce is where MC = MR. At $60/hour, MR=$60/hour and the MC of producing 10 hours is also $60.
Which of the following charts show both players with a strictly dominant strategy? (see answer choices on #84)
E is the right answer. It's the only chart where Player 1 will only choose Down and Player 2 will only choose Middle.
If the demand and supply curve for hamsters with super powers (including X-ray vision, super speed, and super strength) is: D = 100 - 6P, S = 28 + 3P Where P is the price of super powered hamsters, what is the quantity of super powered hamsters bought and sold at equilibrium?
Equilibrium price is 8 and equilibrium quantity is 52 We know that the equilibrium quantity will be where supply meets or equals demand. So first we'll set supply equal to demand: 100 - 6P = 28 + 3P If we rearrange this we get: 72 = 9P Which simplifies to P = 8. Now we know the equilibrium price, we can solve for the equilibrium quantity by simply substituting P = 8 into the supply or the demand equation. For instance, substitute it into the supply equation to get: S = 28 + 3*8 = 28 + 24 = 52. Thus, the equilibrium price is 8, and the equilibrium quantity is 52.
Jack Rose owns a grilled cheese food truck in a perfectly competitive industry. The total cost of producing 100 sandwiches is $300 and the market price for a sandwich is $4. If Jack's firm is representative of a typical firm in the market, which of the following can be inferred?
Firms will enter this market in the long run. This firm is earning a profit because its average total cost is $3, and its price is $4. When firms are earning profits, they are operating on the increasing portion of their average total cost curve. When firms profit, it attracts other firms into the industry.
Which of the following would be an example of an intermediate good or service? a. A calculator purchased by a college student for taking exams b. Gasoline purchased by an insurance agent to visit clients at their homes c. A house purchased by a family with four children d. A car purchased by a student's parents and given to the student e. Tuition paid by a student at a state university
Gasoline purchased by an insurance agent to visit clients at their homes An intermediate good is a product used to produce a final good or finished product. Gasoline is the answer because it is used as an input for the product (car/vehicle).
Good Y is a fancy cold cut brand. Good X is a new type of low cost grain. When good X's price decreases, the quantity demanded decreases. At the same time Good Y, which is sold in a different city, starts flying off the shelves and selling like hotcakes. Good X is described as a(n):
Giffen good Giffen goods are a unique type of goods that are usually low cost products that increase in price and increase demand.
A small country named Roseland is run by President Jack Rose. President Rose has neglected the infrastructure of the country, which is now badly in need of repair. If economic growth through investment in the economy's infrastructure is desirable, which of the following policies will most likely achieve this objective?
Granting tax credits for businesses in the construction sector To achieve economic growth through investment, C and D do not apply, as they would hinder economic growth instead of bolstering it. Increasing government borrowing would increase the demand for loanable funds, increasing interest rates. This would cause a decrease in I-spending and decrease GDP and economic growth. Implementing a tax credit will allow for increasing production, similar to increasing the LRAS, resulting in economic growth.
Jack Rose has $10. He loves pizza, but he also loves chicken nuggets. His purchasing possibilities are represented on an Indifference curve. Chicken nuggets are on the Y axis and Pizza is on the X axis. What happens as the moves right on the curve?
He begins to see a diminishing marginal rate substitution As you move to the right or left on the indifference curve the slope begins to flatter or straighten. This results in diminishing rates.
The business cycle is experiencing extreme highs and deep lows, two alternate methods are being proposed: smoothen out the business cycle by buying/ selling bonds or smoothen out the business cycle through financial policy. Which method would Milton Friedman support and why?
He would support the method of using monetary policy because lags implementing fiscal policy can feed into the boom or bust of the business cycle making things worse. Milton Friedman invented monetarism, a big part of monetarist theory is that fiscal policy is not effective because the slow nature of it feeds into recessionary/inflationary gaps
Which of the following would cause a shift in the long-run Phillips curve? I. The discovery of gold in Florida II. A nationwide decrease in the price of inputs III. A simultaneous increase in structural and frictional unemployment IV. The formation of labor unions
I and III The LRPC is shifted when LRAS is shifted. LRAS shifts are caused by changes in the quantity of inputs and the productivity of inputs. Answer I states that resources are discovered - this would increase LRAS, shifting LRPC. LRPC also reacts to changes in the natural rate of unemployment (natural = structural + frictional) so increases in structural and frictional unemployment would shift LRAS, therefore shifting LRPC. LRAS and LRPC don't respond to changes in the cost of inputs, so answer choices II and IV are not applicable.
Which of the following is a positive externality in Production? I. Planting flowers in a front yard II. Construction of a new highway III. Riding a train IV. Providing teachers training in first aid
II and IV I and III are positive externalities in consumption, II and IV are positive externalities in production.
If the government cuts taxes and increases spending, which of the following must be true? I. The economy will experience a recessionary gap. II. The economy will experience an inflationary gap. III. AD will increase. IV. AD will decrease.
III only. We know that cutting taxes and increasing spending will increase AD, but we don't know where the economy began - it's possible that the government's actions were a response to an inflationary gap, therefore restoring long-run equilibrium, not creating an inflationary gap. The question says "must be true", so we can only assume the shift in AD, not the gap in the economy.
Which of the following statements about the relationships between the cost curves is correct?
If marginal cost is below average total cost, then average total cost must be falling. Drawing out the graph, we see that when the marginal cost is below the average total cost, the average total cost is decreasing. The ATC intersects with MC at minATC and ATC increases from the intersection onwards.
Consider a PPC drawn with x on the horizontal axis and y on the vertical axis. Which of the following concepts can be used to explain why this production possibility frontier could be flat at relatively low levels of x and steep at relatively high levels of x?
Increasing marginal costs When resources are not perfectly substitutable, the marginal cost increases as production increases.
Suppose that a consumer buys the following quantities of three commodities in 2002 and 2003. (see chart on #81) How did the consumer price index (CPI) change for this individual from 2002 to 2003? If a value is found, round to the nearest whole percentage.
It increased by 26%. To begin, we must identify the base year of the example -- in this case the base year is 2002. We calculate the total cost of the market basket for each individual year (the price x quantity of each good). For 2002, the market basket total is $57 (7x4 + 2x7 + 3x5 = 57) and for 2003 the market basket total is $72 (7x6 + 2x3 + 3x8 = 72). To find the inflation rate between the two years, we subtract the 2003 total from the 2002 total and divide by the 2002 total ((new-old)/old). (72-57)/57 equates to 26.3%. Since this percentage is positive, the CPI increases. Therefore, the correct answer is C.
Assume Jack Rose hires labor for $15 each and sells its products for $3 each. If the marginal product of labor of the third worker is 10, which of the following statements would be the most true?
Jack Rose should hire more labor so that the MRPL will decrease. The marginal revenue product for labor is still greater than the marginal resource cost so Jack can afford to hire more labor to maximize profit
Jack Rose, the president of the Fed in America is lacking some common skills of his own trade and is in need of some help from students in a high school macroeconomic course. Unfortunately, under Jack, the economy has left macroeconomic equilibrium while Jack was on vacation for a couple of weeks and when he returns to his desk after summer break and walks into his office, there is one piece of paper on his desk. On the piece of paper is a Phillips Curve representation of the current state of the American economy. Jack's main takeaway from looking at the graph is that actual unemployment is greater than natural unemployment. If the government, with the help of Jack now that he is taking his job seriously, has a goal of restoring long-run macroeconomic equilibrium, what would be the most efficient way of making this happen?
Jack should lower the federal funds rate. This is the only thing that Jack could do that would be a monetary policy change. All of the other options would be uses of fiscal policy and therefore they would take longer than monetary policy would so it would not be as effective. Because actual unemployment is greater than natural unemployment we know that we are in a recessionary gap so we need to increase the money supply.
Jack Rose works a 30-hour week for a minimum wage of $10 an hour. Suppose that last year is the base year for the Consumer Price Index (CPI).Which of the following is true about Jack Rose's real wage if at the end of this year the CPI is 125 ?
Jack's real wage is $8 per hour at the end of the year. Since the CPI of the base year is 100, we know that there has been an increase in inflation from the base year to the current year, as the current CPI is 125. We need to adjust the wage for the increase in inflation using the equation below: 10 = 1.25 x X = 8
Which of the following is a constraint on collusion in an oligopoly?
Less incentive to behave cooperatively due to an increase in negotiating partners Only D can be the right answer because it correctly points to how a larger number of firms will be a constraint on collusion in an oligopoly. A is incorrect because there should be an increase in firms, B and C are wrong because there should be a higher number of products monitored, and E is wrong because it should be the bargaining power of buyers, not producers.
The U.S. economy had been experiencing a period of economic growth. However, recently the California wildfires burned down acres of farmland. Simultaneously, the U.S. government decides to increase the minimum wage requirements by 2%. How will these changes affect our economy?
Long run aggregate supply decreases and short run aggregate supply decreases Because the farmland was burned down, that is going to decrease the quantity of inputs, therefore shifting both Short run and Long run aggregate supply. Additionally, increased minimum wages will lead to higher UER which would explain an even further decrease in SRAS.
During Jeopardy, Mr. Martinez shows a graph on the board. He asks to explain whether the graph is a depiction of perfect competition and monopolistic competition. What is the difference between the two?
MR = DARP in perfect competition while, MR < DARP in monopolistic competition E is the correct answer as all the other answer choices are blatantly wrong or do not answer the question. A, is wrong as Monopolistic Competition's x-axis looks at the amount of product produced, not the amount of workers that should be hired, and the y-axis is not the price the firm pays to create each product but how much the product created should be sold at. B, is a correct statement but does not answer the question. C, is wrong as you always price at MR=MC. D, again is a true statement but does not answer the question.
Which is not an assumption in a monopoly?
Marginal revenue equals marginal cost We are looking for something that is NOT an assumption when considering a monopoly. While marginal revenue does equal marginal cost, that is not an assumption when considering a monopoly while the others are.
If the government imposed a Pigouvian tax on a particular market to correct an externality, what can you conclude about the relationship between marginal social cost and marginal social benefit at the social optimal level output?
Marginal social cost and marginal social benefit are equal at the social optimal level output. Pigouvian taxes are imposed to correct negative externalities, where the social optimal level output is greater than the market level output. At the social optimal level, MSC and MSB are equal
Hooters CEO Jack Rose feels as if his company should drastically increase their output to meet the demand of many middle-aged men. If Hooters is experiencing diseconomies of scale, which of the following is true?
Min ATC will increase Experiencing diseconomies of scale, meaning costs will increase as output increases. Therefore, the min ATC must increase.
What transaction is considered a debit entry in the United States current account
Money transferred from a US Citizen to their grandma in Japan This is a transfer payment so it will go in the Current account, and it is a payment to a foreigner, so it will be a debit entry and not a credit entry.
What do two-part tariffs attempt to accomplish?
No consumer surplus Two-part tariffs try to accomplish perfect price discrmination, which converts all consumer surplus to profit. There is no consumer surplus, no allocative inefficiency, but is not productively efficient. B is incorrect because this does not attempt to accomplish perfect competition. C is incorrect because it is not productively efficient. D and E are wrong because both are not the main purpose of two-part tariffs. D might be true but A is the better choice.
Which of the following charts is an example of a prisoner's dilemma? (look at answer choices on #93)
Only answer B shows both Player 1 and Player 2 with dominant strategies. Player 1 will always choose Up and Player 2 will always choose Middle. Both players have an incentive to pick their dominant strategies, regardless of what the other person chooses.
The government has been regulating a natural monopoly to sell at a fair-return price. Recently, all price-related regulations on the firm were lifted. Which of the following changes will occur in this natural monopoly?
Output decreases and costs will increase They will sell at MR=MC meaning output must decrease and cost must decrease
A firm is earning short run profits in a perfectly competitive market for apples. If apples and oranges have a cross price elasticity of -2, and the price of oranges decrease, which of the following is a true statement about the firm?
Output will increase Negative cross price elasticity means that oranges and apples are complements. Decrease in price means the demand for oranges decreases, which means demand for oranges increases. As a complement, demand for apples also increases, raising the price and therefore increases output.
What are the Microeconomic consequences of not having tariffs?
PS < CS and results in larger amounts of imports, No DWL Without tariffs there is no DWL but the imports will be massive. Tariffs allow for domestic companies to compete with firms abroad.
The city council divides a community's residents into three groups: individual young adults, families with children, and older adults. The following table summarizes how much each group is willing to pay for each playground. (see chart on #86) The city council must pay $2,250 to build each playground. Which of the following is a characteristic of playgrounds and what is the optimal number of playgrounds for the township to build?
Playgrounds are rival in consumption, and the optimal number of playgrounds is three Playgrounds are rival in consumption because as more children use it, the less enjoyment each child receives due to overcrowding. The community is willing to pay $3400 for the first playground, $3000 for the second playground, and $2600 for the third playground. Playgrounds cost $2250 to build so the council can build three. The community is only willing to pay $2200 for the fourth playground and less for the fifth, so they should not be built.
The United States is currently in a period of high unemployment where actual unemployment is much larger than natural unemployment. Policy makers decide to take action and fix the economy. What fiscal policy can they put into place and what effect will this have on our AS/AD model as well as our Phillips curve.
Policy Increase in spending, AS/AD Increase in AD, Phillips Curve Movement up SRPC To fix a recession, the government can increase spending to stimulate the economy, which will increase RGDP, because AD will increase to fix the gap. Because RGDP increased, UER will decrease and because AD increased, there will be a movement up the SRPC curve to show how the UER decreased in the short run.
Good X has an income elasticity demand of 2 and is sold in a perfectly competitive market that is currently in long-run equilibrium. How will price, output, and profit change if the consumer's income increases, assuming the perfect competitor is in a constant cost industry?
Price increases; Output increases; Profit increases Income elasticity is positive which is a normal good. Demand increases when income increases, which raises MRDARP. When price increases, marginal revenue increases, so profit-maximizing level of output increases. Increase in price = increase in profit.
Assume an economy is in long-run equilibrium and the central bank engages in an expansionary monetary policy for a prolonged time period. If the velocity of money is constant, which of the following is true according to the quantity theory of money?
Price level will increase at the same rate as the money supply. Expansionary policy MS up, velocity of money pq=mv, so P must move up
Which of the following is an effect of a change in the money supply in the long run?
Proportional change in aggregate price level The long run effects of a money supply change is a proportional change in aggregate price level
Jack Rose decides to bring the graph shown above of a monopolistically competitive firm to his economics class for "show and tell." The class loved it! Brent Ladin interrupted Jack in the middle of the "show and tell" presentation with a question. Brent asked where the allocatively efficient quantity of output is on the graph. Mr. Martinez raised his hand, and once called on by Jack Rose, answered the question correctly. What quantity would Mr. Martinez have to have answered in order to be correct? (see graph on #34)
Q3 The answer is B because Q3 corresponds to the point where marginal cost intersects with demand. The definition of allocative efficiency is when MC=D.
A handsome young economics student named Jack Rose is reviewing practice problems for his upcoming test. Jack comes across a problem that states: "Suppose the nominal GDP is $25 million, the price level is 1.25, and the central bank has set the money supply at $10 million. What is the real GDP and the velocity of money according to the quantity theory of money?" Which answer should Jack choose?
Real GDP is $20 million, and the velocity of money is 2.5 The quantity theory of money equation is as follows: money supply x velocity of money = price level x rGDP. We are given the price level and nominal GDP -- to find the real GDP, we need to adjust for inflation by setting up the equation below: $25 million = 1.25x X = 20 million After solving for x, we can determine that the rGDP is $20 million. Since we have all values except the velocity of money, we can use simple algebra to isolate the velocity of money variable and solve. ($10 million)(velocity of money) = (1.25)(20 million) Velocity of money = 2.5 Therefore, the answer is D.
Mr. Martinez is teaching a lesson to Jack Rose about Monopolies. Jack raises the question about the efficiency of monopolies. Mr. Martinez responds correctly, "Generally, monopolies are considered inefficient because they _____"
Result in an underallocation of resources in the affected market. The answer is D because the basic model of a monopoly has the monopoly at equilibrium where the quantity of resources is less than what it would be in a competitive industry. This is because the equilibrium quantity is given by where MR=MC, but demand for a monopoly is not equal to MR (whereas in a competitive industry it is).
Tesla Motors starts at the left of the vertex of LRATC and Elon Musk starts increasing supply chain technologies to increase production of tesla cars. What happens to SRATC as a result of this?
SRATC decreases to the right Since fixed costs are variable costs in the long run, higher production capabilities would reduce the ATC causing the SRATC to shift to the right as costs to produce cars decrease with time
We begin at long-run equilibrium. Oil prices increase, creating a change in the economy. Which of the following shows the results on the Phillips curve and AS/AD model, and provides the most likely solution to return the economy to long-run equilibrium?
SRPC Increases, LRAS No change, SRAS Decreases, Prices Increase, Solution: Stimulus Oil prices increasing is a change in cost of inputs, causing SRAS to decrease. That causes SRPC to increase. Changes to cost of inputs doesn't affect LRAS. Since SRAS shifts, the economy won't self-correct, and we have a recessionary gap - increase spending and cut taxes to boost AD - B is correct.
There is a shortage of USD. What three things can the government do to keep USD from rising in value, and fix the exchange rate?
Sell USD and buy a quote currency, enact expansionary monetary policy, and remove controls that limit foreigners' ability to buy USD To keep USD from rising in value, the government can increase the supply of USD, as this would decrease the exchange rate relative to other currencies, therefore decreasing the value of USD. We could also decrease the interest rate by increasing the money supply -- this lower interest rate relative to other countries' rate of return would decrease the demand for USD. This shift in demand would decrease the exchange rate, therefore devaluing USD. Removing controls that limit foreigners' ability to buy USD would increase the supply of USD, therefore decreasing the exchange rate and devaluing the currency.
Thanks to a change in leadership, business outlook in the U.S. improves. How will this affect the Phillips curve?
Shift left along SRPC. Increased outlook causes an increase in AD, which causes UER to decrease and price levels to increase - changes in AD cause a shift along SRPC - so it shifts left along SRPC.
Which of the following best describes a perfectly competitive firm in the short run and the long run?
Short run: allocatively efficient; long run: allocatively efficient and productively efficient Allocative efficiency is when a firm produces the quantity where MB = MC. A perfectly competitive firm always produces the allocatively efficient quantity because the good's price reflects its MB, and a perfectly competitive firm always produces where P = MR = MC. Productive efficiency occurs when a firm produces the quantity where ATC is minimized, and a perfectly competitive firm produces this quantity in the long run.
The market is currently in long run equilibrium. Jack Rose decides that he wants to write an autobiography about his life. To produce this book, he will need to import the paper from South America. However, when he meets with the production company, he severely pisses off the CEO, who then refuses to produce his paper. Now, Jack Rose must produce with a different company who has half the amount of workers who are all much lazier than those at the original company. How do these changes affect the AS/AD model in the short run?
Stagflation occurs As worker productivity decreases, the supply of goods in the short run will also decrease. AD won't change and LRAS also won't change. Because we are looking at short run effects, so we will experience stagflation because PL is increasing while RGDP is decreasing and UER is increasing.
Jack Rose's firm sells attack squirrels. There is a world war Z and the societal need for attack squirrels increases. The market for attack squirrels is perfectly competitive and the slope of the long run supply curve is positive and the firm ends up making 0 economic profit. What happens to the MC and ATC in the long run?
The MC and ATC shift upwards Because demand for the product increases, the cost increases and increases economic profit. This increases the number of entrants into the market and supply shifts to the right. Since it is an increasing cost industry, the MC and ATC must increase
Jack Rose spends all of his income on cigarettes and avocados and is looking to find the optimal consumption bundle. If the marginal utility of the last avocado in his bundle was 17, and the marginal utility of the last pack of cigarettes was 18, what can Jack do to optimize his consumption?
The answer cannot be determined Because we don't know the price of avocados or cigarettes, we cannot determine the optimal consumption bundle.
Jack Rose frequently smokes at a hookah shop, and he produces more smoke than the neighboring coal factory. The people of the city are furious and begin rioting down the streets threatening to physically barge into his apartment if the government does nothing. How does the government stop Jack from continuing to smoke at the same velocity?
The city government imposes a pigouvian tax on Jack to try and hopes he becomes high enough to not notice This is a negative externality as Jack Rose's hookah smoking problem is affecting the townsfolk. A pigouvian tax puts a tax onto the consumer and raises the price in general. All the other taxes have nothing to do with the consumption of goods. A hidden tax is applied to the salary. A social tax takes money away from the Social Security program. The integral tax is something I made up. Lastly, a keynesian tax is to try and confuse the answer with hearing the word keynesian but not knowing the definition.
Billy Bob is running a chocolate bunny factory and is earning economic profit. There is an increase in wages due to labor unions. What happens to the profit in the short run?
The firm incurs losses due to increase in ATC, MC, and VC Due to the increase in wages, the variable costs of the company must increase, which also impacts the MC and ATC and as a result, the firm incurs higher losses due to the higher costs
Beginning at long-run equilibrium, which of the following changes would cause the actual unemployment rate to be greater than the natural unemployment rate, assuming MPC = 0.2?
The government increases taxes by $6,000,000 and increases spending by $1,000,000. Actual > natural in a recession, so we can eliminate B, C, and D. Option E causes LRAS and SRAS to decrease, which means that there would just be a new long-run equilibrium and natural unemployment still equals actual, so it's A.
Jack Rose asked Mr. Martinez, "In a monopsony, what does the government do to entice producers to price at the competitive equilibrium?" Mr. Martinez scoffed and said:
The government provides a subsidy A government will provide a subsidy for the producers. All other answers are just wrong.
Which statement is true about the circular flow diagram of an economy a. The market for goods and services connects household spending to government spending. b. The market for factors of production connects household spending to goods produced by firms. c. The market for factors of production connects spending by firms to household income. d. The market for goods and services connects labor income to firms as employers. e. The market for goods and services connects labor income to household spending.
The market for factors of production connects spending by firms to household income. The circular flow model shows how money moves through society. In this model, it shows that the money spent by firms connects directly to household income.
Jack Rose is the king of a small island called Jackmaica. He spends money aggressively in an attempt to stimulate the economy. However, the amount of taxes he collects are not enough to cover all of his spending. If tax revenues are less than the total of government spending plus government transfer payments, which of the following will happen?
The national debt will increase. Surplus = taxes - gov spending - transfer payments. Low taxes and high gov spending and transfer payment, so negative deficits, positive surplus, debt will increase.
Assume the economy is operating at long-run macroeconomic equilibrium. An expert analyst for the government is asked to write a report on unemployment in the United States. Given this information, which of the following information would be the best for the analyst to include?
The natural unemployment rate is equal to the frictional unemployment rate. None of the answers are great, but d is the only one that could be correct. There is always some unemployment, so option a is incorrect. Option b is incorrect because we're in equilibrium, so actual = natural. Option E is incorrect because it uses the word "must" when it's not necessarily true. Since natural unemployment = frictional + structural, we're left with either frictional = 0 (option C) or structural = 0 (option D). Frictional can never equal zero, so option C is incorrect, and option D is best.
Which of the following would be the initial impact on a firm if wages were to increase to more than more than the marginal revenue product of labor?
The short-run aggregate supply curve would shift to the left, increasing the price level. Wages increase = price of inputs increase, so SRAS shifts left
What is happening to "mainstays in the industry like Abercrombie & Fitch, American Eagle Outfitters and Aéropostale, which dominated teenage closets for years" that have been hit hard with sales down by 6.4%? There have been a number of factors including the rise of internet shopping and the appearance of "so-called fast-fashion companies, like Forever 21 and H&M, which sell trendy clothes at low prices, have muscled into the space, while some department stores and discount retailers like T. J. Maxx now cater to teenagers, as well." How would you show these "shocks" on the market for companies like Abercrombie & Fitch, American Eagle Outfitters and Aéropostale? If these graphs represent the market for these three firms, which diagram above best captures the essence of the story? (see graphs on #45)
The story is one of declining demand for the stores, which we show with graph C.
During the summer, Jack Rose runs a lawn mowing service, and lawn mowing is a perfectly competitive industry. In the short run, he will shut down rather than continue with it if:
The total revenue can't cover the total variable costs MRDARP curve is below the ATC and AVC so the company can't cover the total variable costs. Only if MRDARP is between the ATC and AVC the company would produce in the short run.
While studying for this review test, Brent and Jack Rose are a bit confused about monopolies. Brent and Jack go to the smartest person they know, Preston Gerard, for help. Brent and Jack ask Preston that if the price elasticity of demand is greater than 1, how would this affect a monopoly. Preston answers them cunningly, stating correctly that:
The total revenue for the monopoly would increase when the firm lowers its price. The answer is A because if the price elasticity of demand is greater than 1, a rise in price would cause a decrease in revenue for a firm, and thus accordingly a decrease in price would result in an increase in revenue for a firm.
Jack Rose has several indifference curves representing the utility he will get from goods A and B. What happens at the point of intersection between two utility functions?
The two utility curves would never intersect Utility curves never intersect because they all share the same shape and vary in distance from the origin. As individual consumers we are supposed to know our ordered preference.
Jack Rose owns a barber shop in the small town of Wichita, Kansas. His business is a monopolistically competitive firm in Wichita, Kansas. His demand curve will be least elastic if: a. There are a large number of rival barber shops producing very similar products. b. There are a large number of rival barber shops producing more differentiated products. c. There are a small number of rival barber shops producing very similar products. d. A monopolistically competitive barber shop's demand curve is perfectly elastic. e. There are a small number of rival barber shops producing more differentiated products.
There are a small number of rival barber shops producing more differentiated products. The answer is E because a smaller number of rivals and more differentiated products make it more difficult for consumers to be responsive to price changes (thus a less elastic demand).
Victor Le just founded a new country, Leeconomics, and is doing his best to speed up the economic growth of his country as much as possible. As of now, Victor is a pretty strong leader, so politically the country is surviving and getting by in peace with foreign financial capital. However, Victor's eyes become a little to charge for his pockets in terms of the economy in his country, and Leeconomics quickly finds themselves in debt. So, as a result, they increase borrowing from Kwoneconomics, who of course is flourishing great economically and doing very well. How will this exchange between Kwoneconomics and Leeconomics affect the loanable funds market in Leeconomics?
There will be an increase in demand for loanable funds. The demand for loanable funds will increase because of the increase in borrowing by Leeconomics. This is a general rule/assumption for a shifter of the demand in the loanable funds market.
President Jack Rose makes a rash decision and tells the Fed to increase the federal funds rate in the United States. Who of the following is most likely to suffer?
Those who lend at a fixed interest rate. Increasing the federal funds rate would decrease the money supply, therefore increasing interest rates and decreasing investment spending. The decrease in investment spending would decrease aggregate demand, resulting in an decrease in inflation. When the current inflation rate is higher than the anticipated inflation rate, the borrower is benefitting because they are repaying the "cheap" money for the use of "expensive" $. On the other hand, the lender is experiencing a detriment, as they receive "cheap" $ for lending "expensive" $. Therefore, answer choice a is correct.
Jack Rose, a known class clown in the senior class of greenhill high school, is looking for flight tickets to the Bahamas. Jack Rose finds that the price of a flight ticket is typically lower if a customer buys the ticket several weeks before the departure date rather than on the day of departure. This pricing strategy is based on the assumption that:
Travelers' demand becomes less elastic as the departure date approaches. This is a basic assumption for airlines utilizing price discrimination for tickets. As the departure date approaches, the airlines are able to jack up prices because the demand for tickets becomes less elastic (meaning customers are willing to pay more because of urgency/suddenness of their trip, and airlines take advantage of this by increasing prices).
The United States Government just came out with an announcement about a new project they are pursuing and that by the end of 2023, there will be an ATM machine at the end of each residential neighborhood street. How will this new government policy affect the unemployment rate, interest rate, and the long run Phillips curve in 2023?
UER Increases, Interest rates Increases, LRPC No Change The money demand curve shifts up because of the technological process of the country. Therefore, the real interest rate increases and so AD decreases because investment spending goes down. Therefore, the unemployment rate increases. This has no effect on the long run phillips curve it just moves the point that we are at on the SRPC.
PP. J. Rosepickle Industries 830 LLC. , is a major producer of badgers sweatshirts. Note: badger sweatshirts from Rosepickle Industries have no substitutes. Distribution power of Rosepickle Industries 830 LLC. is heavily controlled by the Sinaloa Cartel. Be careful. Trust no one. Which area represents deadweight loss in this market? (see graph on #66)
c, b, d Triangle c, b, d shows DWL because there is no consumer or producer surplus. Deadweight loss is the wedge between the actual quantity and the efficient quantity between marginal benefit and marginal cost. In this case, marginal benefit is the marginal revenue product of labor (MRPL) and the marginal factor cost (MFC)
Suppose a factory added $5,000 worth of output this year. Incidentally, the waste from this factory caused $1,000 worth of loss to the neighboring waterways. As a result, gross domestic product will ___.
increase by $5,000. Environmental changes won't affect GDP so neighboring waterways being polluted by the waste of the factory wouldn't change GDP. GDP still increases by $5,000 from the increase in output from the factory.
The price of tea increases. At the same time, robots are developed which prove to lower the cost of production of coffee . In the market for coffee, we should expect to see curves shift. The supply curve will ___ and the demand curve will ___. The cross price elasticity between tea and coffee is 2.
increase, increase When the price of tea (a substitute for coffee) increases, the demand for coffee will increase as some tea drinkers switch to coffee. The demand curve shifts rightwards. At the same time, robotic coffee pickers lower the cost of production of coffee, so the supply curve shifts down and to the right. Option D describes the curves shifting.
Suppose new drilling techniques increase the world oil supply. In the long run, output will ___ and the price level will ___.
increase; decrease More inputs = more outputs. More production means SRAS increases and price level will decrease.
Suppose that you have the following information about the economy, where all figures are in millions of dollars: Full employment output = $2,000 Consumption = $1,200 Investment = $400 Government spending = $500 Net exports = −$200 Because short-run output is ___ full employment output, in the long run we would expect the price level to ___.
less than; fall RGDP = C + I + G + net exports; 2000> 1900. In the long run prices fall with a lower RGDP.
The price of gasoline falls and consumer incomes generally increase. In the market for bus rides, we should expect to see a curve or curves shift. The supply curve will ___ and the demand curve will ___.
shift down - shift to the left Falling gas prices reduce the cost of production of bus rides and shift supply down and to the right. Consumer incomes rise, reducing the demand for bus rides. Option B describes the shifts.
