Economics Exam #1 -- Professor Sexton Questions
True or False
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The elasticity of supply coefficient for lobster is estimated to be equal to 0.6. It is expected, therefore, that a 10% decrease in price would lead to: a. a 6% decrease in the quantity of lobsters supplied. b. a 6% increase in the quantity of lobsters supplied. c. a 10% decrease in the quantity of lobsters supplied. d. a 10% increase in the quantity of lobsters supplied. e. a 0.6% increase in the quantity of lobsters supplied.
A
Refer to Figure 7-4. The amount of tax revenue after the tax is area: a. a + b + d + f b. b + d c. c + e d. d + e + f
B
Refer to Table 7-2. If the price of shrimp were to decrease from $12 to $10, the increase in consumer surplus would equal: a. $2. b. $6. c. $10. d. $12. e. $22.
B
If there is a surplus, __________ will be frustrated by their inability to exchange at the current price, and they will compete the prices __________ as a result. a. buyers; up. b. buyers; down. c. sellers; up. d. sellers; down.
D
Which of the following reflects the law of supply?
D
Study Guide Questions
Part #2
If the market price is above the equilibrium price, there will be a _______.
Surplus, quantity supplied is greater than quantity demanded.
Since it is difficult to establish and enforce ownership rights over air, people have less incentive to preserve air quality than if its ownership was clearly defined.
T
As the price of downloadable music rises? Quantity demanded will _______.
fall
Economics: a. is a narrowly focused discipline. b. is a broad-ranging, problem-solving discipline. c. concerns itself only with monetary decisions. d. says very little about "everyday life." e. deals strictly with business management decisions.
B
Which of the following is likely to result in a smaller equilibrium quantity exchanged? a. An increase in both demand and supply. b. A decrease in both demand and supply. c. An increase in demand and a decrease in supply. d. A decrease in demand and an increase in supply. e. None of the above.
B
Refer to Figure 7-1. If the market is in equilibrium and then the government imposes a price floor equal to P1, buyers lose consumer surplus equal to area: a. C + D + F. b. B + C + E + F. c. E + F. d. B + E. e. A.
D
As the the price goes up the quantity demanded goes ________ .
Down Because people substitute into other relatively less expensive goods.
If Don paints the outside of his house a horrendous color: a. he probably has lowered the value of his home, but not that of his neighbors' homes. b. he probably has lowered the value of his home and the value of his neighbors' homes. c. he probably has lowered the value of his neighbors' homes but not the value of his own home. d. he is unlikely to bear all the social costs of his actions. e. both b. and d. are true.
E
Elastic or inelastic? Price falls, total revenue rises.
Elastic (arrows opposite direction)
A decrease in price will cause a firm's total revenue to decrease if demand is price inelastic.
T
In the three months before a $1 per pack cigarette tax took effect in Alaska, smokers bought 175 million more cigarettes than during the same period a year earlier. What explains this behavior by consumers?
The increase of $1 per pack is pretty significant given the price of cigarettes. Many smokers may have decided that the best way to save money would be to stockpile cigarettes before the expected tax increase took effect. So an expectation of a price increase in the near future caused the current demand curve for cigarettes to shift to the right (an increase in demand).
Which way to arrows go for complements?
different directions (one increases while the other decreases)
What is it called when a goods demand rises when consumer income rises.
normal good
Which way to arrows go for substitutes?
same direction (either up or down)
Multiple Choice
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Short Answer
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If 400 apple pies are sold at $4 per pie, but 600 apple pies are sold at $3 per pie, we know from the total revenue rule: a. that the demand for pies is elastic over that price range. b. that the demand for pies is inelastic over that price range. c. that the demand for pies is unit elastic over that price range. d. nothing about the elasticity of demand.
A
Which of the following would reduce the supply of microcomputers? a. higher wage rates for the workers that assemble the computers b. a technological improvement that lowers the cost of producing the computers c. a reduction in the price of computer chips used to produce the computers d. All of the above would reduce the supply of computers.
A
In the market for insurance, the moral hazard problem leads: a. those most likely to collect on insurance to buy it. b. those who buy insurance to take fewer precautions to avoid the insured risk. c. those with more prior insurance claims to be charged a higher premium. d. to none of the above.
B
Medical research helps to develop better treatments for neuromuscular disease. Medical researchers are constantly in search of funds. Many in the public, however, are unwilling to contribute money toward neuromuscular disease research until a member of their own family suffers from a neuromuscular ailment. If left strictly to the private market, it is likely that there will be: a. an overallocation of resources to neuromuscular disease research, relative to the efficient level. b. an underallocation of resources to neuromuscular disease research, relative to the efficient level. c. an efficient quantity of resources devoted to neuromuscular disease research. d. zero dollars devoted to neuromuscular disease research.
B
Which of the following statements is false? a. Rational people will gather information as long as the expected marginal benefits of information gathering are greater than the expected marginal costs. b. Gathering more information is always advisable. c. Gathering information can be very costly. d. Government-provided information can be a good and efficient mechanism for reducing market failure from information costs.
B
Are markets always in equilibrium? a. Yes, they are always at the equilibrium point, or very close to it. b. Yes, because very few things tend to alter supply and demand. c. No, but if there is no outside interference, they tend to move toward equilibrium. d. No, they never "settle down" into a stable price and quantity. e. It is uncertain; economic theory has no answer to this question.
C
If the amount of a particular good desired exceeds what is freely available, a. it is rare. b. it is not possible to produce any more of the good. c. that good is scarce d. people want to buy more of the good at the current price.
C
If the elasticity of supply coefficient for a good is 6, we know: a. that for every 1% increase in quantity, there will be a 6% increase in price. b. that for every 1% increase in quantity, there will be a 6% decrease in price. c. that for every 6% increase in quantity, there will be a 1% increase in price. d. that for every 6% increase in quantity, there will be a 1% decrease in price.
C
Refer to Figure 7-4. The deadweight loss of a tax is area: a. - (a + b + c) b. - (d + e + f) c. - (c + e) d. - (a + b + d + f)
C
Refer to Figure 8-2. Suppose that education provides spillover benefits to the community as illustrated in the diagram. Based on this information, we can say that: a. the market would fall short of the desirable level of education, Q0. b. education is overproduced by Q1 minus Q0 units. c. the socially optimal quantity of education is Q1 units. d. the socially optimal quantity of education is Q0 units.
C
Which of the following is correct? a. "Theory" and "hypothesis" are interchangeable terms meaning the same thing. b. A hypothesis may result from a tested and confirmed theory. c. A theory may result from a tested and confirmed hypothesis. d. A hypothesis is a theory whose formulation relies on mathematics.
C
Which of the following serve as the language of the market system? a. Monetary and fiscal policies b. Volatility c. Market prices d. Governments
C
An economy's production possibility curve will be a straight line if: a. resources are not equally substitutable among productive tasks. b. the economy experiences significant unemployment. c. the opportunity cost of production of a good decreases as more of it is produced. d. the opportunity cost of production of a good is constant as more of it is produced. e. the opportunity cost of production of a good increases as more of it is produced.
D
Ceteris paribus,if the market demand for a product decreases, then equilibrium quantity will (be) __________ and equilibrium price will (be) __________. a. increase; increase b. indeterminate; decrease c. indeterminate; increase d. decrease; decrease
D
You notice that the price of orange juice at your local grocery store has increased. Which of the following statements is not a possible explanation for the rise in the price of orange juice? a. Frosty weather destroys oranges causing the price of oranges to increase. b. As a result of an increase in income, consumers wish to purchase more orange juice at every price level. c. A recent scientific study is reported in the press that suggests that apple juice may be contaminated with pesticides. d. Due to the bioengineering of orange trees, the domestic supply of oranges increases. e. The supply curve for grapefruits shifts to the left.
D
All of the following are intangible except: a. health. b. love. c. computer programming expertise. d. power. e. All of the above are intangible goods.
E
The quantity of a good demanded tends to increase as its price falls because: a. a decrease in price shifts the demand curve to the right. b. a decrease in price shifts the demand curve to the left. c. a decrease in price shifts the supply curve to the right. d. at lower prices, suppliers are willing to supply a greater quantity to the market. e. a decrease in price leads consumers to substitute toward this now relatively cheaper product.
E
Two parties can capture gains from specialization and trade whenever: a. One party is twice as good as producing all goods as the other. b. The opportunity cost of producing each good are the same for both parties. c. Both parties can produce equal amounts of both goods. d. a. or b. is true e. None of the above are true.
E
Revealed v. declared preference, which one do economists like more?
Economists like revealed preferences
A cost that spills over onto individuals not directly involved in an activity is called a positive externality.
F
Thanksgiving, bountiful harvest, good for the farmers?
Good if demand is elastic, not inelastic.
What distinguishes public goods from private goods?
Public goods are both nonrival in consumption (one person's consumption does not diminish another's) and nonexclusive (you cannot prevent nonpaying individuals from benefiting from the good). Private goods are both rivalrous and exclusive. One's consumption of such a good does diminish another's, and you can keep nonpaying individuals from consuming the good or service.
Indicate whether each of the following is a positive or normative economic statement: I. The imposition of a price ceiling below equilibrium price will lead to a shortage of housing. II. The local government should control the rate of increase in rents so that low-income residents are not forced to move from the area.
Statement I is a positive economic statement because it is testable. Statement II is a normative economic statement because it reflects a value judgement.
What if the price of bagels rose and the demand for muffins rose? What kind of goods are those?
Substitute goods or substitutes are at least two products that could be used for the same purpose by the same consumers. If the price of one of the products rises or falls, then demand for the substitute goods or substitute good (if there is just one other) is likely to increase or decline.
Price floors get their name from the fact that they represent a minimum price below which the legal price cannot fall.
T
Tractors, shovels, copy machines, and computer programming expertise are all examples of scarce resources.
T
When Mom buys more Jell-O(tm) because the price of pudding has risen, it is an example of the substitution effect.
T
How does the deadweight loss occur in a deficiency payment program?
The deadweight loss occurs because the program increases the output beyond the efficient level of output. From the efficient level of output to the new level of output, the marginal cost to sellers for producing the good is greater than the marginal benefit to consumers.
The law of increasing opportunity cost implies that a graph will be ....
bowed out, or concave, in shape
What is it called when a goods demand decreases when consumer income rises (or demand increases when consumer income decreases).
inferior good
The difference between positive and normative analysis
o Positive is testable o Normative are subjective statements (should, ought)
An increase in the expected future price of a good may act to increase the present price of the good.
T
Economists presume that when making a decision, individuals consider both the current action and the future consequences of that action.
T
If the market for Rolex watches is in equilibrium, the quantity of Rolex watches demanded will equal the quantity of Rolex watches supplied.
T
Other things being constant, an economy must give up some consumer goods and services today to produce more capital goods in order to grow.
T
We have an increase in the supply (shifts right) at the original price, what will happen?
There will be a surplus
How do taxes distort the incentives of buyers and sellers in a market?
A tax drives a "wedge" between the price paid by buyers and that received by sellers. In general, a tax will both increase the price paid by buyers and decrease the price received by sellers, causing both the quantity of output demanded and the quantity supplied to decrease.
Lumber prices fall in Providence, Rhode Island, because new forests are opened for harvesting in nearby Maine. As a result, in the Providence housing industry, you might expect to find that: a. more wood is being used in the construction of new homes. b. steel frames for houses are replacing wood frames because wood is considered a cheap substitute. c. less wood is being used by everyone. d. less labor will be used to construct homes as wages fall relative to the price of lumber.
A
Refer to Figure 5-3. Starting with initial demand curves D0and S0, a movement from __________ is consistent with an increase in both demand and supply. a. Point A to Point I b. Point A to Point C c. Point A to Point F d. Point A to Point E e. Point A to Point D
A
Refer to Table 5-3. Suppose the supply schedule for Good A changes from S1to S2because the price of Good B increases. We can say that: a. Goods A and B are likely substitutes in production. b. Goods A and B are likely complements in consumption. c. Goods A and B are likely substitutes in consumption. d. Good B is not related to Good A.
A
In a recent fare war, America West reduced the price of its roundtrip airfare from Charlotte, North Carolina, to New York City from $198 to $138 to match American Airlines. America West matched the fare reluctantly, saying it would cost the company millions of dollars in revenue for those tickets to be sold for less. American, on the other hand, believed the fare cut would increase its revenue even if rival airlines matched the lower fares. What different assumptions about the underlying price elasticity of demand for airline tickets on that route did each airline believe true?
America West must have believed demand in this price range to be inelastic, so that a fare cut would lead to a relatively small increase in quantity demanded. American must have believed the opposite: that the fare cut would stimulate a more than proportional, or elastic, consumer response.
If you were an employer, what are some ways that you might help your employees invest in human capital? How does investment in human capital benefit an employer?
An employer might provide on-site training, subsidized healthcare, or tuition assistance for post-secondary educational programs. The healthcare would help reduce employee illness and provide additional motivation for employee retention. Educational programs can assist employees to improve their skills and abilities and thereby increase worker productivity.
A surplus currently exists in the market for video game players. Which of the following statements is correct? a. The current market price is below the equilibrium price. b. The current market price is above the equilibrium price. c. The quantity of video game players demanded exceeds the quantity supplied at the market price. d. Both a. and c. are correct. e. Both b. and c. are correct.
B
A perfectly elastic supply curve is: a. upward sloping to the right. b. downward sloping to the left. c. horizontal. d. vertical. e. any of the above.
C
Scarcity implies that: a. consumers are too poor to afford the goods and services available. b. at the current market price, consumers are willing to purchase more of a good than suppliers are willing to produce. c. it is impossible to completely fulfill the unlimited human desire for goods and services with the limited resources available. d. consumers would be willing to purchase the same quantity of a good at a higher price.
C
Several political leaders have proposed that parents be granted a substantially larger reduction in their annual personal income taxes for each child that they parent. The economic way of thinking indicates that legislation of this type would: a. make it more expensive for parents to provide for their children. b. reduce the value of children to their parents and therefore lead to a reduction in the birth rate. c. reduce the after-tax cost of raising children and therefore increase the birth rate. d. exert no impact on either the cost of raising children or the birth rate since parenting children is a non-economic activity.
C
An economist would be most likely to argue that U.S. national defense should be funded through tax revenues because: a. U.S. citizens are not very patriotic. b. the government is always a more efficient provider of goods than the private market. c. the government always seeks to act benevolently on behalf of its citizens. d. individuals who refuse to contribute to a national defense fund cannot be excluded from benefiting from national defense.
D
Economics is a social science that primarily explores how: a. businesses market products under competitive conditions. b. stock and bond prices fluctuate when there are changes in demand or supply. c. the government allocates its budget among competing political interests. d. goods and services are produced and distributed in a world with limited resources. e. high employment and low inflation levels can be maintained.
D
Good A has an income elasticity equal to 1.0 and a cross price elasticity with respect to Good B of -0.6. Then: a. Good A is an inferior good and Goods A and B are substitutes. b. Good A is an inferior good and Goods A and B are complements. c. Good A is a normal good and Goods A and B are substitutes. d. Good A is a normal good and Goods A and B are complements. e. none of the above are correct.
D
Individuals: a. respond to incentives in predictable ways. b. decrease the level of an activity in response to negative incentives. c. respond to positive incentives by increasing the level of activity. d. do all of the above.
D
Referring to Exhibit 1-1, which point on the demand curve represents the maximum number of CDs purchased? a. A b. B c. C d. D e. E
E
When economic growth occurs it will: a. eventually eliminate scarcity. b. shift the production possibilities curve to the left. c. be a product of luck. d. likely be determined by uncontrollable factors such as the climate. e. often result from improved technology.
E
An increase in the price of ice cream would cause a decrease in the demand for ice cream and an increase in the demand for frozen yogurt, a substitute.
F
As we move down along a straight-line demand curve, demand becomes increasingly price elastic.
F
Demand is relatively inelastic when the percentage change in the quantity demanded exceeds the percentage change in the price of a good.
F
Economics has much in common with sociology because it is concerned with how societies organize themselves. However, economics shares little in common with political science, psychology or anthropology.
F
The main purpose of government price controls is to keep prices from rising above their equilibrium levels.
F
True or False? If the price of ice cream rises, it causes a decrease in the demand of ice cream, which causes an increase in the demand for the substitute frozen yogurt.
FALSE the quantity demanded falls
Arrange the following goods from least to most elastic, explaining your ordering: gasoline, Shell gasoline, and Shell gasoline at a particular gas station.
Gasoline is least elastic, since there are few substitutes for it available to power automobiles. Shell gas at a particular station is most elastic, since one can substitute other Shell stations or other brands of gas.
What does a price floor below the equilibrium price do?
Nothing?
Professor Review Questions and Study Guide
Section #1
If the market price is below the equilibrium price, there will be a ______.
Shortage, quantity supplied is less than quantity demanded,
Refer to Figure3-15. Why is the opportunity cost of producing a mountain bike different when moving from Point A to Point B than when moving from Point C to Point D along the production possibilities curve?
Some resources are more substitutable across productive tasks than are others. In moving from Point A to Point B, resources that are useful for producing bikes but less useful for producing shirts can be reallocated from shirt manufacturing toward bike manufacturing. Further increases in mountain bike production, such as the movement from Point C to Point D, can be obtained only by reallocating resources that are less well suited for bike production away from the production of shirts. As a result, the opportunity cost (in terms of the number of shirts sacrificed. increases as mountain bike production increases.
There is a safety concern with SUVS, what will happen to demand? Price of steal rises, suppliers input prices will go up, shifting supply curve to the left.
o Decrease in demand o Demand decrease goes to left. Supply also causes it to go to left. o Quantity will fall and price is in-determinant
The only thing that moves the curve is ________________________.
price demanded
