Microeconomics Practice Exam 1

When the price of Apple computers declines, what probably happens to the demand for Windows-based computers?

It decreases, because Apple computers and Windows-based computers are substitutes.

If the price of oil falls, what will happen to the quantity of oil supplied?

It decreases, because some oil deposits are no longer worth tapping.

Olive oil and corn oil are very often considered to be substitute products. When the price of olive oil increases, what probably happens to the demand for corn oil?

It increases, because olive oil and corn oil are substitutes.

When the market price of a good is above the equilibrium price, what does greed (in other words, self-interest) on the part of sellers tend to do to the price?

It pushes the price down.

Bill is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the competition that is pushing the wage down?

Japanese businesses that do not hire translators.

A marginal change is a small incremental adjustment to an existing plan of action.

True

Everyone can benefit from trade through increased specialization, division of knowledge, and productivity.

True

Evaluate the accuracy of the following statement: People search harder for substitutes for oil when the price of oil is high.

True; when oil prices are high, there are greater potential savings from oil substitutes.

When the crime rate falls in the area around a factory, what probably happens to wages at that factory?

Wage rates would fall.

Butter and margarine are substitutes. When the price of margarine increases, what will happen to the demand for butter? Why?

When the price of margarine rises, some people will switch from margarine to butter. Because of this, demand will increase, making butter's demand curve shift up and to the right.

Over the last 10 years, China and India have both become substantially richer. At the same time, oil prices have risen. The change in oil prices is due to:

a rise in demand.

If the price in a market is above the equilibrium price, then the market is experiencing:

a surplus.

One benefit of trade is that it:

allows for increased specialization and mass-production techniques that lower per unit costs of production.

One of the effects of economic growth is:

better sanitation and health outcomes.

For many years it was illegal to color margarine yellow (margarine is naturally white). In some states, margarine manufacturers were even required to color margarine pink! Who do you think supported these laws? (Hint: What color spread would you like to put on your toast?)

both butter manufacturers and dairy farmers

Glass is an input for producing both windows and bottles. However, glass bottles are a less valuable product than glass windows. If the price of glass increases dramatically, what are we likely to see a lot less of: glass windows or glass bottles?

bottles

According to the supply curve, if the price of cars ______ carmakers will produce ______ cars.

falls; fewer

When the price of a good increases, the quantity demanded ______. When the price of a good decreases, the quantity demanded ______.

falls; rises

It makes sense that Martha Stewart hires another person to do her ironing because:

her opportunity cost of ironing is higher than the opportunity cost for the person she hires.

As the United States becomes more productive at manufacturing chemicals and pharmaceutical drugs, the opportunity cost of producing other items such as textiles ________, leading to _____ demand for foreign textiles.

increases; decreased

Petroleum, natural gas, coal, and solar power are all sources used to produce energy, and, therefore, can be considered to be substitutes. When the price of petroleum increases, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______.

increases; increases; increases

Once you graduate from college, get a good job, and experience a rise in income, you will choose to buy fewer ______ goods, such as______.

inferior; Ramen noodles

For most young people, working full-time and going to school are substitutes; you tend to do one or the other. Thus, when it's tough to find a job, this ______ the opportunity cost of going to college and the demand for college ______.

lowers; rises

A pharmaceutical business is ______ likely to hire highly educated workers and use new, experimental research methods when it expects the price of its new drug to be ______.

more; high

A person has a comparative advantage in activity X when that person's:

opportunity cost is lower for him than for other trading partners.

Jon is on eBay bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, with whom is Jon competing?

others who are bidding on the graphic novel

Economists believe that socially good outcomes arise whenever:

self-interest is pursued and it aligns with social interest.

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, four-wheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). Economists would describe these as:

substitutes.

The imposition of an excise tax (production tax) on each unit produced will cause:

supply to decrease.

Self-interest can be aligned with the social interest by:

the enactment of government policies that increase incentives to work and trade.

The opportunity cost of a choice is:

the value of the opportunities lost.

Every day people rely on the work of others to provide us with food, clothing, and shelter. These people work for our benefit because:

they benefit by doing so.

Bill Gates dropped out of college and founded Microsoft. His opportunity cost of continuing to attend college was:

tuition, the cost of books, and the income from his Microsoft pursuits.

The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (http://econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. If the sales tax was 5 percent on this product, how much revenue did the government raise when Bryan bought his arch supports? If the government could have taxed Bryan based on his willingness to pay instead of on how much he actually paid, how much sales tax would Bryan have had to pay?

$0.50; $5,000

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $4, how much producer surplus goes to Vincent?

$1

Your roommate just bought an iPod for $200. She would have been willing to pay $500 for a machine that could store and replay that much music. How much consumer surplus does your roommate enjoy from the iPod?

$300

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $4, how much consumer surplus goes to Jules?

$4

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $7, how much producer surplus goes to Vincent?

$4

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens?

$5

Michael is an economist. He loves being an economist so much that he would do it for a living even if he only earned $30,000 per year. Instead, he earns $80,000 per year. (Note: This is the average salary of new economists with a PhD degree.) How much producer surplus does Michael enjoy?

$50,000

The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (http://econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. How much consumer surplus did Bryan enjoy from this purchase?

$99,990

If the price for a 50-inch plasma TV is $2,010 and Newhart is willing to pay $3,000, what is Newhart's consumer surplus?

$990

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the market for snow shovels?

It causes an increase in demand for snow shovels.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the supply side of the market for snow shovels?

It causes an increase in the quantity supplied of snow shovels.

If the price of margarine decreases, what happens to the demand for butter? What happens to the equilibrium quantity and price for butter?

Demand for butter decreases and the equilibrium price and quantity of butter decrease.

What should happen to the demand for speed (measured by the average speed on highways) once airbags are included on cars?

Demand for speed will rise because people feel they would be safer if an accident occurs.

If everyone believes that the price of tomatoes will increase next week, what is likely to happen to demand for tomatoes today?

Demand will increase as people buy more tomatoes now, hoping to beat the price rise.

If everyone thinks that the price of gasoline will increase next week, what is likely to happen to the demand for gasoline today?

Demand will increase, mostly because owners of gas stations will want to fill up their storage tanks before the price increases.

When demand decreases what happens to price and quantity in equilibrium?

Equilibrium price decreases and equilibrium quantity decreases.

When supply increases what happens to price and quantity in equilibrium?

Equilibrium price decreases and equilibrium quantity increases.

When supply decreases what happens to price and quantity in equilibrium?

Equilibrium price increases and equilibrium quantity decreases.

When demand increases what happens to price and quantity in equilibrium?

Equilibrium price increases and equilibrium quantity increases.

While trade has many benefits, the division of knowledge is a negative outcome of trade.

False

The government decides that it wants to increase the quantity of solar panels in use, so it offers a $20 subsidy per panel to producers. What happens to the supply curve of solar panels?

For each quantity along the supply curve, the price will shift down by $20.

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. Assuming the market works as predicted and moves to equilibrium, will the buyer who values the good at $1 be able to purchase? Why or why not?

No, in equilibrium the price will be higher than this buyer is willing to pay so they won't get the good.

Recall Chapter 1's opening story about the British sea captains and the convicted felons. In what way were incentives used to solve the problem of the high mortality rate on board the ships?

Payment (to ship captains) was made dependent on the survival rate of prisoners.

Economists often say that prices are a "rationing mechanism." If the supply of a good decreases, how do prices "ration" these now-scarce goods in a competitive market?

Prices allocate goods to the people with the highest willingness to pay.

When supply falls, what happens to quantity demanded in equilibrium?

Quantity demanded decreases.

When oil companies expect the price of oil to be higher next year, what happens to the volume of oil produced today?

Supply decreases.

Imagine that a technological innovation reduces the costs of producing high-quality steel. What happens to the supply curve for steel?

Supply increases and the supply curve shifts down and to the right.

If oil executives read in the newspaper that new solar-power technologies have been discovered, but that these technologies won't become useful for another 10 years, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today?

Supply will increase, equilibrium price will decrease, and equilibrium quantity will increase.

If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean, but that these supplies won't be useful until 10 years from now, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today?

Supply will increase, price will decrease, and quantity will increase.

Cars and gasoline are complements. What will happen to the demand curve for gasoline if the price of cars decreases?

The demand curve for gasoline will shift upward and to the right.

What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East?

There was a fall in supply and a rise in market demand.

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, four-wheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). If new research makes it easier to produce safe cars and the price of safe cars falls, how does this affect the market for dangerous cars?

The demand for dangerous cars will decrease.

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens to the equilibrium price and quantity of toys made in China? Are Chinese toymakers made better or worse off by such news?

The equilibrium price and quantity of toys falls and Chinese toymakers are worse off.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the equilibrium price and quantity of snow shovels?

The equilibrium price and quantity would both rise.

Fluctuations in graduate school enrollment correlate positively with fluctuations in unemployment. What is the most likely reason why?

The opportunity cost of going to graduate school is low when jobs are hard to find.

In recent years, the Paleo diet, which emphasizes eating more meat and fewer grains, became very popular. What do you suppose that did to the price and quantity of bread?

The price and quantity of bread fell.

The book describes Vernon Smith's experiment with supply and demand models. What happened in Vernon Smith's lab?

The price and quantity were close to equilibrium and gains from trade were close to the maximum.

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. At a price of $3.50 how many units are demanded? How many units are supplied?

The quantity demanded is 2 and the quantity supplied is 3.

The industrial areas in northeast Washington, D.C., were relatively dangerous in the 1980s. Over the last two decades, the area has become a safer place to work (although there are still seven times more violent crimes per person in these areas than in a nearby neighborhood called Georgetown). When an area becomes a safer place to work, what likely happens to the supply of labor in that area?

The supply of labor increases.

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, four-wheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). If new research makes it easier to produce safe cars, what happens to the supply of safe cars? What will happen to the equilibrium price of safe cars?

The supply of safe cars will rise and the equilibrium price of safe cars will fall.

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens in the market for toys made in China?

There is a decrease in market demand.