Micro Exam 1

1) What is the rationale behind empiricism in economic analysis?

Empiricism refers to the use of data to test theoretical ideas or concepts. Empiricism is important as it enables economists to determine whether economic theories are consistent with actual human behavior. This enables economists to refute faulty theories or modify them such that they would better fit the real world. Empiricism also enables researchers to identify causal relationships between sets of variables.

What will happen to the equilibrium price and quantity of cars if there is an increase in the price of gasoline?

An increase in the price of gasoline will cause a left shift in the demand for cars, keeping supply unchanged. With supply unchanged and a left shift in the demand for cars, both the equilibrium price and quantity of cars will decrease.

1) If a job pays a wage of $50 per hour, but has a non -wage cost valued at $20 per hour, the net benefit of taking the job equals: A) $2.5 per hour. B) $20 per hour. C) $30 per hour. D) $70 per hour.

C

1) If the opportunity cost of time is __________, and an individual spends ____________ commuting every month, his opportunity cost of commute is $100 every month. A) $5 per hour; 10 hours B) $8 per hour; 20 hours C) 10 per hour; 10 hours D) $12 per hour; 5 hours

C

1) In a competitive free market: A) all exchanges take place involuntarily. B) there is only one seller and many buyers. C) the government does not impose price controls. D) there is no provision for the protection of property rights.

C

Which of the following best describes scarce resources? A) Resources that most people cannot afford to buy B) Resources that can only be distributed efficiently by the government C) Resources for which the quantity demanded is the same for all economic agents D) Resources for which the quantity that people want exceeds the quantity that is freely available

D

1) Optimization in levels calculates: A) the total net benefits of different alternatives. B) only the benefits of an alternative and not the costs. C) only the costs of an alternative and not the benefits. D) the change in net benefits resulting from a shift from one alternative to another.

A

1) The market demand is the of the individual demand of all the potential buyers. A) sum B) product C) square of the sum D) square root of the sum

A

1) The term ʺfree ridersʺ refers to people who: A) donʹt contribute but still benefit from othersʹ actions. B) make economic decisions randomly and are not rational. C) selflessly pay for othersʹ consumption of goods and services. D) haggle over the prices of the goods and services that they buy.

A

1) The willingness to pay for a commodity: A) decreases as consumption of the commodity increases. B) increases as consumption of the commodity increases. C) is always less than the market price of the commodity. D) is always greater than the market price of the commodity.

A

1) When optimizing in levels, if the exceeds the , Project A is chosen over Project B. A) net benefits of Project A; net benefits of Project B B) total benefits of Project A; total benefits of Project B C) marginal cost of Project A; marginal costs of Project B D) marginal benefits of Project B; marginal benefits of Project A

A

1) Which of the following is an example of free riding? A) An individual who sneaks inside a music concert B) A consumer who buys his groceries from a nearby store C) A tax payer who exercises in the public park near his house D) A club member who makes voluntary contributions to the club

A

1) economics is analysis that generates objective descriptions or predictions about the world that can be verified with data. A) Positive B) Negative C) Marginal D) Normative

A

1) Which of the following is an example of a topic studied by microeconomists? A) National income calculations B) Price determination by a firm C) Measures to combat inflation D) Interest rate determination

B

1) __________ occurs when the direction of cause and effect is mixed up in a study. A) Adverse causality B) Reverse causality C) Omitted variable bias D) Limited information bias

B

Scenario: A model is based on an assumption that an additional year of education increases a studentʹs future wage by 20%. 1) Refer to the scenario above. Which of the following statements is true of the model? A) The predictions of this model cannot be tested empirically. B) The prediction of the model is accurate and will hold for all individuals. C) The prediction of the model can be applied to unlimited years of additional education. D) The model predicts that two additional years of education is likely to increase future earnings by 60 percent.

C

1) How does microeconomics differ from macroeconomics?

: Microeconomics is the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources, and the well-being of other agents. On the other hand, macroeconomics is the study of the economy as a whole. The scope of macroeconomics extends to the study of economy-wide phenomena, like the growth rate of an economy, the nation-wide unemployment rate, or the inflation rate.

1) A consumer has $40 that he wants to spend. He is faced with four options: a camera that costs $60, a cell phone that costs $150, a book that costs $10, and a Bluetooth speaker that costs $45. Which of the following is a feasible option for the consumer? A) The book B) The camera C) The cell phone D) The Bluetooth speaker

A

1) A free market is a market: A) that operates with little or no government control. B) where almost all exchanges take place involuntarily. C) that has price controls imposed by a ruling authority. D) where determination of equilibrium quantity is free from the forces of demand and supply.

A

1) Among a set of alternatives with the same benefits, an individual is said to optimize if she chooses an alternative that: A) has the lowest total cost. B) has the highest total cost. C) has the highest indirect cost. D) has the lowest opportunity cost.

A

1) Empiricism refers to using to analyze the world. A) data B) beliefs C) traditions D) value judgments

A

1) Feasible options are options: A) that are available and affordable. B) that are available but not affordable. C) that are affordable but not available. D) that are optimal for an economic agent.

A

1) If an individualʹs opportunity cost of commute is $300 per month and his monthly commuting time is 60 hours, his opportunity cost of time is: A) $5 per hour. B) $10 per hour. C) $30 per hour. D) $60 per hour.

A

1) In a perfectly competitive market, the market clearing price: A) is always equal to the equilibrium price. B) is unrelated to the equilibrium price. C) is always lower than the equilibrium price. D) is always higher than the equilibrium price.

A

1) Differentiate between a change in demand and a change in quantity demanded.

A change in demand refers to the change in the quantity of a good purchased due to changes in any factors other than price. These factors may include a change in income, tastes and preferences, future expectations, or a change in the number and scale of buyers. A change in demand is graphically represented by a shift of the demand curve. On the other hand, a change in quantity demanded refers to a change in the quantity of a good purchased due to a change in the goodʹs price, other things remaining the same. Graphically, a change in quantity demanded is represented by a movement along the same demand curve.

1) What is meant by the term ʺomitted variableʺ in correlation analysis? Explain with an example.

An omitted variable is something that has been left out of a study which, if included, would explain why two variables are correlated. For example, it is seen that the rate of employees quitting is lower in firms that pay higher wages. Thus, a conclusion can be drawn that higher wages result in lower quit rates. But there are many other variables that might influence the quit rates apart from wages such as employee benefits provided by the firm, age of employees, work-life balance, etc. These variables that have been left out are omitted variables and if included in the study would better explain the quit rates of firms.

1) A consumer has $20 that he wants to spend on two goods: pens priced at $2 each, and pencils priced at $1 each. Which of the following correctly represents his budget constraint? A) $20 = ($2/Quantity of pens) + ($1/Quantity of pencils) B) $20 = ($2 × Quantity of pens) + ($1 × Quantity of pencils) C) $20 = ($3/Quantity of pens + Quantity of pencils) D) $20 = $3 × (Quantity of pens - Quantity of pencils)

B

1) A consumer has $50 to spend. He has to decide between buying two goods: magazines priced at $5 each and DVDs priced at $10 each. Which of the following combinations of the two goods will exactly satisfy his budget constraint? A) 3 magazines and 4 DVDs B) 2 magazines and 4 DVDs C) 6 magazines and 1 DVD D) 2 magazines and 2 DVDs

B

1) An increase in the demand for a good is represented by: A) a left shift to a new demand curve. B) a right shift to a new demand curve. C) a leftward movement along the demand curve. D) a rightward movement along the demand curve.

B

1) If Project A has a cost of $2, and provides a benefit of $3, and Project B has a cost of $ 5 and provides a benefit of $8, which of the following statements is true? A) The net benefit of Project A is $5. B) An individual can optimize by choosing Project B. C) Project A has a higher net benefit than Project B. D) A shift from Project A to Project B increases the net benefit by $1.

B

1) If Project A has a cost of $5, and a provides a benefit of $10, and Project B has a cost of $2, and provides benefit of $4, then switching from Project A to Project B: A) increases the net benefit by $3. B) decreases the net benefit by $3. C) increases the net benefit by $6. D) decreases the net benefit by $6.

B

1) If an alternative provides a benefit of $8 to an individual at a cost of $6, the net benefits of the alternative equal: A) $0.75. B) $2. C) $14. D) $48.

B

1) If the total cost incurred in hiring ten workers by a firm is $45, and the total cost incurred when the eleventh worker is hired is $60, the marginal cost of hiring the eleventh worker is: A) $1.33. B) $15. C) $20. D) $105.

B

1) Optimization can be achieved using either of two techniques of cost-benefit analysis. Which of the following correctly identifies the techniques? A) Optimization in levels and optimization in programs B) Optimization in levels and optimization in differences C) Optimization in programs and optimization in frames D) Optimization in differences and optimization in frames

B

1) Other things remaining same, a left shift in the demand curve will lead to: A) an increase in the equilibrium price and the equilibrium quantity. B) a decrease in the equilibrium price and the equilibrium quantity. C) a decrease in the equilibrium price and an increase in the equilibrium quantity. D) an increase in the equilibrium price and a decrease in the equilibrium quantity.

B

1) The Law of Supply states that: A) supply creates its own demand. B) the quantity supplied of a good rises when the price rises. C) at the equilibrium price, there is always some excess supply in the market. D) the quantity supplied of a good will always equal the quantity of the good demanded.

B

1) The demand curve for most goods is normally: A) upward sloping. B) downward sloping. C) parallel to the vertical axis. D) parallel to the horizontal axis.

B

1) The relationship between the unemployment rate and inflation is studied under: A) microeconomics. B) macroeconomics. C) behavioral economics. D) international economics.

B

1) The scientific method refers to the process by which economists and other scientists: A) collect data for further use in research. B) develop models of the world and test those models with data. C) develop models to explain the past but not to predict the future. D) plot graphs to illustrate relationships between different economic variables.

B

1) Which of the following correctly defines the term ʺequilibriumʺ? A) It refers to analysis that uses data to arrive at conclusions. B) It refers to a situation where all agents are simultaneously optimizing. C) It refers to an optimizing decision made by an individual economic agent. D) It refers to government intervention that efficiently allocates scarce resources.

B

1) Which of the following examples best describes the Law of Supply? A) When the cost of production of cotton fell, the market price of cotton also fell. B) When the market price of pens increased, sellers started supplying more pens. C) When the market price of pens increased, sellers started supplying fewer pens. D) When the cost of production of cotton increased, all suppliersʹ willingness to accept decreased

B

1) Which of the following factors is expected to cause the demand curve for coffee to shift to the right? A) A fall in the manufacturing cost of coffee B) A higher tax on the sale of tea, a substitute for coffee C) A higher personal tax on the income of all consumers D) An increase in the supply of coffee due to better weather

B

1) Which of the following is an example of a positive economic statement? A) The government should ideally work as a welfare state. B) An increase in income causes an increase in savings. C) Economics is the most useful social science. D) Eliminating poverty is more important than reducing inflation.

B

1) Which of the following relationships is likely to exhibit negative correlation? A) The relationship between amount saved with a bank and the interest earned B) The relationship between level of professional training and unemployment C) The relationship between inflation in the U.S. and traffic congestion in China D) The relationship between the amount of precipitation in a year and the number of umbrellas sold

B

1) Which of the following will hold true if the market for cameras is in equilibrium at a price of $40? A) Sellers of cameras will have an incentive to charge a price higher than $40. B) The quantity of cameras produced will equal the quantity of cameras bought in the market. C) Buyers of cameras will want to buy fewer cameras than they are purchasing at equilibrium. D) If the cost of producing cameras falls below $40 per camera, all sellers will stop supplying cameras.

B

1) Zero correlation between two variables implies that: A) both variables move in the same direction. B) the variables are not related to each other. C) both variables move in the opposite direction. D) change in one variable causes the other to change.

B

Scenario: A model is based on an assumption that an additional year of education increases a studentʹs future wage by 20%. 1) Refer to the scenario above. The hypothesis of the model is that: A) college graduates will earn 80 percent more than high school graduates. B) college graduates will earn 107 percent more than high school graduates. C) college graduates will earn 200 percent more than high school graduates. D) college graduates will earn 275 percent more than high school graduates.

B

The following table shows the monthly wages of five different individuals. Individual Monthly Wage ($) 1 200 2 450 3 640 4 700 5 800 1) Refer to the table above. What is the average monthly wage? A) $450 B) $558 C) $612 D) $650

B

1) A correlation between two variables implies that: A) there is a cause-effect relationship between the two variables. B) it is impossible to measure one variable without measuring the other. C) there is a mutual relationship between both the variables. D) when one variable changes, the other variable always changes by exactly the same amount.

C

1) At a price of $1 per table, the quantity supplied of tables is 100 units whereas the quantity demanded is 70 units. Given this information, which of the following statements is true? A) $1 per table is the equilibrium price. B) $1 per table is the market clearing price. C) At $1 per table, there is a surplus in the market. D) At $1 per table, there is a shortage in the market.

C

1) Causation occurs when: A) two variables tend to move in the same direction. B) two variables tend to move in opposite directions. C) change in one variable is the reason for the change in another variable. D) change in one variable does not cause any change in another variable.

C

1) Other things remaining the same, a right shift in the supply curve will lead to: A) an increase in the equilibrium price and the equilibrium quantity. B) a decrease in the equilibrium price and the equilibrium quantity. C) a decrease in the equilibrium price and an increase in the equilibrium quantity. D) an increase in the equilibrium price and a decrease in the equilibrium quantity.

C

1) The plots the relationship between prices and the quantity that buyers are willing to purchase. A) isoquant B) supply curve C) demand curve D) indifference curve

C

1) Two goods are said to be substitutes when a fall in the price of one good: A) leads to a rise in the price of the other good. B) doesnʹt affect the demand for the other good. C) leads to a left shift in the demand for the other good. D) leads to a right shift in the demand for the other good.

C

1) Which of the following is an example of a natural experiment? A) A laboratory research on the effectiveness of solar power as an alternative source of fuel B) A research on the effectiveness of a new medicine among some voluntary participants C) A research on the effect of air pollution on lung disorders by observing the health conditions of people who stay close to industrial areas and those who stay away from industries D) A study on the benefits of regular exercise by paying for the membership fees at fitness clubs for one-half of the participants

C

1) Which of the following statements identifies a difference between optimization in levels and optimization in differences? A) Optimization in levels compares only the costs of different alternatives, whereas optimization in differences compares only the benefits of different alternatives. B) Optimization in levels compares only the benefits from different alternatives, whereas optimization in differences compares only the costs of different alternatives. C) Optimization in levels calculates the net benefits of different alternatives, whereas optimization in differences calculates the change in net benefits when switching from one alternative to another. D) Optimization in levels calculates the change in net benefits when switching from one alternative to another, whereas optimization in differences calculates the net benefits of different alternatives.

C

1) Which of the following statements is true? A) All rational economic agents attempt to maximize their income. B) A rational consumer makes his decisions depending on what the majority chooses. C) A budget constraint is an economic tool that quantifies the trade‐off between consumption of two goods. D) A trade‐off refers to the exchange of goods between economic agents through a barter system or mutual exchange.

C

Which of the following statements is true? A) All economic agents are necessarily individuals. B) A worker who shirks work is not an economic agent. C) A government is an example of an economic agent. D) A street gang is not an economic agent

C

1) What is cost-benefit analysis? What are the steps involved in using cost-benefit analysis to make the optimal choice?

Cost-benefit analysis is a calculation that adds up the costs and benefits of a particular choice using a common unit of measurement. It involves the conversion of all costs and benefits into a common unit of measurement so that they can be compared. The difference between the benefits and costs of choosing an alternative is referred to as the net benefit of the alternative. The alternative with the highest net benefit is the optimal choice.

1) A variable is a factor that: A) cannot be measured. B) is not affected by changes in other factors. C) is independent and cannot be determined. D) takes different values at different points of time.

D

1) An individual pays $100 every month as rent for an apartment, and his monthly opportunity cost of commuting from the apartment to his place of work is $40. Which of the following statements is then true? A) The direct cost of renting the apartment is $140. B) The indirect cost of renting the apartment is $140. C) The direct cost of renting the apartment is $40, whereas the indirect cost of renting the apartment is $100. D) The direct cost of renting the apartment is$100, whereas the indirect cost of renting the apartment is $40.

D

1) An omitted variable is a variable that: A) is purposely left out as it does not aid an economic analysis. B) does not cause other variables in a study to change when it changes. C) is removed from a study as it can lead to the problem of reverse causality. D) has been left out, and if included, would explain why the variables considered in a study are correlated.

D

1) At the competitive equilibrium: A) the demand curve is tangential to the supply curve. B) the quantity demanded exceeds the quantity supplied of a good. C) the quantity supplied exceeds the quantity demanded of a good. D) the quantity demanded is equal to the quantity supplied of a good.

D

1) Economics is primarily the study of: A) the mental functions and behavior of individuals and groups. B) the state, nation, government, and politics and policies of governments. C) the problems related to existence and evolution of society. D) how agents choose to allocate scarce resources and how the choices affect society

D

1) In choosing between apartments in two different locations, the marginal commuting cost is given by: A) the sum of the commuting cost from each apartment to the destination. B) the commuting cost from the apartment located closer to the destination. C) the commuting cost from the apartment located farther away from the destination. D) the difference between the commuting cost from two different apartments to the destination.

D

1) Randomization is the assignment of subjects by to a . A) chance, rather than by choice; treatment group or into a test group. B) choice, rather than by chance; treatment group or into a test group. C) choice, rather than by chance; treatment group or into a control group. D) chance, rather than by choice; treatment group or into a control group.

D

1) Refer to the scenario above. What is the total cost involved if Maria chooses to travel by train? A) $60 B) $400 C) $420 D) $460

D

1) Which of the following factors will NOT cause a shift in the demand for a good? A) A change in consumer incomes B) A change in tastes and preferences C) A change in the number of consumers D) A change in the market price of the good

D

1) Which of the following is NOT a key principle of economics? A) Optimization B) Equilibrium C) Empiricism D) Substitution

D

1) Which of the following is a feature of a good theory? A) A good theory does not rely on data. B) A good theory cannot be tested with data. C) A good theory is free from approximations. D) A good theory closely predicts actual behavior.

D

1) Which of the following statements is true of equilibrium? A) Economic agents have an incentive to divert from equilibrium. B) Each economic agent can reach equilibrium irrespective of the actions of others. C) In equilibrium, the opportunity cost of the choices made by each economic agent is zero. D) In equilibrium, all economic agents are choosing the best feasible option simultaneously.

D

1) Which of the following statements is true? A) Microeconomics is the study of an economy as a whole. B) Macroeconomics studies how individuals make choices. C) The study of the inflation rate is covered under microeconomics. D) The study of the unemployment rate is covered under macroeconomics.

D

1) Which of the following statements is true? A) Models that economists use are perfect replicas of reality. B) The scientific method used by economists is based on idealism and not empiricism. C) Models help economists to explain the past, but do not help in predicting the future. D) Testing with data enables economists to distinguish between good models and bad models.

D

1) Z is a normal good. The equilibrium price and quantity of Z in the year 2011 was $25 and 60 units, respectively. In 2014, the equilibrium price of Z had increased to $35 and the equilibrium quantity had increased to 70 units. Other things remaining the same, which of the following could explain this change? A) Shift of the supply curve of Z to the left B) Shift of the supply curve of Z to the right C) Shift of the demand curve for Z to the left D) Shift of the demand curve for Z to the right

D

1) _________ is the study of an economy as a whole. A) Microeconomics B) Game theory C) Behavioral economics D) Macroeconomics

D

If there is excess demand in a perfectly competitive market, does the government need to intervene to restore the equilibrium price and quantity?

No, in a perfectly competitive market, no government intervention is required to restore equilibrium as equilibrium is automatically restored. A situation of excess demand occurs when the market price is below the equilibrium price. Because quantity demanded exceeds quantity supplied in the market, some consumers will be willing to pay higher prices to buy goods. This will act as an incentive for suppliers to supply more, eliminating the shortage in the market.

1) An economic model suggests that for every additional year of education, the future wages increase by 5 percent. If Richard, with 12 years of education, earns $20 per hour, how much will he earn per hour if he decides to undertake four additional years of education?

The model suggests that if Richard earns $20 per hour, an additional year of education will increase his hourly wages to 1.05 × $20. Therefore, four additional years of education will increase his hourly wage to 1.05 × 1.05 × 1.05 × 1.05 × $20 or $24.31 per hour.

1) Why do trade‐offs occur? How are budget constraints related to trade‐offs?

Trade‐offs occur because of scarcity: economic agents need to satisfy their wants with limited resources. Therefore, in most cases, some benefits have to be given up in order to gain some other benefits. Budget constraints quantify the relevant trade‐offs that an economic agent faces. Once trade‐offs are quantified, rational decision making becomes easier allowing the individual to make an optimal decision.

1) The following table displays the marks obtained by three students on an economics test. Student Marks Obtained (out of 100) Mary 78 Charles 83 Tony 65 a) Calculate the mean marks obtained by the three students.

a) The mean, or average, is the sum of the observations in a data set divided by the number of observations. In this case sum of the marks of the three students is 78 + 83 + 65, or 226. Therefore, the average score of the ten students is 226/3, or 75.33.

1) The following table displays the marks obtained by three students on an economics test. Student Marks Obtained (out of 100) Mary 78 Charles 83 Tony 65 b) Suppose one of the scores was reported incorrectly. Charles scored 38 instead of 83. How will the mean change if the correction is incorporated?

b) Because one of the scores was wrongly reported, there would be a change in the sum of the scores. If the correct score is considered, the new sum of marks is 226 - 83 + 38, or 181. Hence, the corrected average score is 181/3, or 60.33.

1) The following table displays the marks obtained by three students on an economics test. Student Marks Obtained (out of 100) Mary 78 Charles 83 Tony 65 a) How does the amount of data used affect the accuracy of a model?

b) The amount of data used plays an important role in determining the accuracy of a model. A key strength in economic analysis is the amount of data used. Using lots of data, or observations, strengthens the force of an empirical argument and allows the researcher to make more precise statements.