Midterm #1 (ECON 101-010)

Centrally planned economies allocate resources based on decisions by (households and firms or government) while market economies answer these questions (through decisions made by households and firms or government).

1. Government 2. Households and Firms

A firm operating in a market economy has a strong incentive to be productively efficient and allocatively efficient because the former enables it to (maximize total output or minimize production costs) while the latter ensures it of (public adulation or ample revenues).

1. Minimize production costs 2. Ample revenues

When does allocative efficiency​ occur? A. Allocative efficiency occurs when production is in accordance with consumer preferences. B. Allocative efficiency occurs when an economy achieves equity. C. Allocative efficiency occurs when a good or service is produced at the lowest possible cost. D. Allocative efficiency occurs when an economy no longer relies on voluntary exchange.

A. Allocative efficiency occurs when production is in accordance with consumer preferences.

Which of the following statements is​ correct? A. An innovation is the practical application of an invention. B. The word​ "technology" and the word​ "invention" have the same meaning. C. An invention is the practical application of an innovation. D. The word​ "technology" and the word​ "innovation" have the same meaning.

A. An innovation is the practical application of an invention.

In a market​ system, what determines how goods and services will be​ produced? A. Firms determine how goods and services will be produced. B. The government determines how goods and services will be produced. C. Consumers determine how goods and services will be produced. D. ​Consumers, firms, and the government determine together how goods and services will be produced.

A. Firms determine how goods and services will be produced.

What does increasing marginal opportunity costs​ mean? A. Increasing the production of a good requires larger and larger decreases in the production of another good. B. The economy is unable to produce increasing quantities of goods and services. C. Production is not occurring on the production possibilities frontier. D. Increasing the production of a good requires decreases in the production of another good. E. Increasing the production of a good requires smaller and smaller decreases in the production of another good.

A. Increasing the production of a good requires larger and larger decreases in the production of another good.

Why is the demand curve referred to as a marginal benefit​ curve? A. It shows the willingness of consumers to purchase a product at different prices. B. It shows the willingness of firms to supply a product at different prices. C. It shows the difference between the highest price a consumer is willing to pay and the lowest price a firm would be willing to accept. D. It shows the difference between the highest price a consumer is willing to pay and the marginal benefit of consumption. E. It shows the price consumers actually pay to consume a product.

A. It shows the willingness of consumers to purchase a product at different prices.

Alberto Chong of Georgia State University and several colleagues conducted an experiment to test the efficiency of government postal services around the world. They mailed letters to nonexistent businesses in 159 countries and kept track of how many of the letters were returned. Was this test most relevant to evaluating the productive efficiency or the allocative efficiency of these postal​ services? ​Source: Alberto​ Chong, Rafael La​ Porta, Florencio​ Lopez-de-Silanes, and Andrei​ Shleifer, "Letter Grading Government​ Efficiency," Journal of the European Economic Association​, Vol.​ 12, No.​ 2, April​ 2014, pp.​ 277-299. This test that Albert Chong and his colleagues carried out was most relevant for evaluating the A. allocative efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned. B. productive efficiency of these postal services because the test was designed to measure how much it cost to send and return letters in various countries. C. allocative efficiency of these postal services because the test was designed to measure how much it cost to send and return letters in various countries. D. productive efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned.

A. allocative efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned.

Microeconomics is the study of A. how households and firms make​ choices, how they interact in​ markets, and how the government attempts to influence their choices. B. how individuals make good decisions for themselves but hurt society. C. how individuals and firms act altruistically to better society. D. the economy as a​ whole, including topics such as​ inflation, unemployment, and economic growth.

A. how households and firms make​ choices, how they interact in​ markets, and how the government attempts to influence their choices.

Economic data is used A. to test models. B. to prove that a model is true. C. to take the place of an economic model. D. only if all relevant data is available.

A. to test models.

Which of the following statements is​ correct? A. A business is always larger than a firm. B. Economists use the terms​ firm, company, and business interchangeably. C. A company is owned by one​ person, while a firm is owned by more than one person. D. A business has multiple​ locations, while a company has only a single location.

B. Economists use the terms​ firm, company, and business interchangeably.

Economists assume that the only reason people take the actions they do is in response to economic incentives. A. True B. False

B. False

From 1979 to​ 2015, China had a policy that allowed couples to have only one child.​ (Since 2016, couples have been allowed to have two​ children.) The​ one-child policy caused a change in the demographics of China. Between 1980 and​ 2015, the share of the population aged 14 and under decreased from 36 percent to 17 percent.​ And, as parents attempted to ensure that the lone child was a​ son, the number of male children relative to female children increased. ​Sources: World​ Bank, World Development Indicators​, April​ 2016; and​ "China New​ 'Two Child' Policy Increases Births by 7.9​ Percent, Government​ Says," cbsnews.com, January​ 23, 2017. How has the​ one-child policy changed the relative demand for goods and services in​ China? A. The sheer number of consumers in​ China, coupled with that​ country's very rapid​ growth, renders relative demand shifts totally insignificant. B. It has undoubtedly shifted away from goods and services appealing to youthful​ buyers, particularly youthful female buyers. C. One would only expect the relative demand for baby related products to be reduced. D. The Chinese economy is still largely a command​ economy; market​ forces, and hence relative​ demands, are insignificant.

B. It has undoubtedly shifted away from goods and services appealing to youthful​ buyers, particularly youthful female buyers. The sharp decline in the share of the population under the age of 14 clearly means that the one-child policy has decreased the relative demand for goods and services that appeal to youthful​ buyers, particularly youthful female buyers.

Which of the following statements about positive analysis is​ correct? A. Positive analysis is concerned with what ought to be. B. Positive analysis is concerned with what is. C. Positive analysis can be used to determine whether policies are good or bad. D. Positive analysis involves value judgments.

B. Positive analysis is concerned with what is.

What is the opportunity cost of spending more money to find a cure for heart​ disease? A. The reduction in future​ health-related costs of heart disease. B. The reduction in funding for research to cure other diseases. C. The cost of the​ Medicare/Medicaid program. D. The monetary value of a human life. E. The total explicit cost of the research to cure heart disease.

B. The reduction in funding for research to cure other diseases.

A market system prevents people from getting as many goods and services as they want due to which of the​ following? A. The government because it allocates the goods and services. B. Their income. C. Both A and B. D. Neither A nor B.

B. Their income.

In a market​ system, how does society decide who will receive the goods and services​ produced? A. Firms determine who receives the goods and services produced. B. Who receives the goods and services produced depends largely on how income is distributed. C. The government determines the goods and services produced. D. Consumers determine who receives the goods and services produced.

B. Who receives the goods and services produced depends largely on how income is distributed.

The grading system plays an important role in student learning. In their book Effective​ Grading: A Tool for Learning and Assessment in College​, Barbara Walvoord and Virginia Anderson state that ​"grading infuses everything that happens in the​ classroom." They also argue that grading​ "needs to be acknowledged and managed from the first moment that an instructor begins planning a​ class." The grading system used by a teacher can affect the incentives of students to learn the course material by A. uniformly weighting all course components. B. altering the payoffs to achieving success on the various components of the course. C. doubling the points assigned to each component of the course. D. none of the above since student performance is based on innate intelligence.

B. altering the payoffs to achieving success on the various components of the course. By altering the payoffs to achieving success on the various components of a​ course, a teacher has the flexibility to affect the incentives students have to learn the course material.

The Food and Drug Administration​ (FDA) is part of federal​ government's Department of Health and Human Services. Among its other​ functions, the FDA evaluates the safety and effectiveness of drugs and medical devices. FDA approval had to be granted before OraSure was allowed to market its home HIV test. In a centrally planned​ economy, the government decides how resources will be allocated. In a market​ economy, the decisions of households and firms interacting in markets allocate resources. The regulation of the production and sale of drugs and medical devices in the United States is an example of how resources are allocated in a A. centrally planned economy because the government controls whether the drug can be used. B. market economy because the drug​ development, and the resources allocated to the​ development, occurs in the market. C. centrally planned economy because the FDA is part of the government and this involves central planning. D. market economy because the FDA is made up of elected officials.

B. market economy because the drug​ development, and the resources allocated to the​ development, occurs in the market.

Tax incidence indicates A. the burden of a tax on consumers. B. the actual division of the burden of a tax. C. the burden of a tax on producers. D. who is legally required to send a tax payment to the government. E. who is not legally required to send a tax payment to the government.

B. the actual division of the burden of a tax.

The law of demand is the assertion that A. changes in price and changes in quantity demanded move in the same direction. B. the quantity demanded of a product is inversely related to its price. C. the quantity demanded of a product is directly related to its price. D. the demand for a product is negatively related to its price.

B. the quantity demanded of a product is inversely related to its price. The inverse or negative relationship between price and quantity demanded is the law of demand.

In a market​ system, how does society decide what goods and services will be​ produced? A. What goods and services will be produced is determined by a vote of consumers. B. ​Consumers, firms, and the government determine what goods and services will be produced by the choices they make. C. The government decides what goods and services will be produced. D. Firms alone determine what goods and services will be produced.

B. ​Consumers, firms, and the government determine what goods and services will be produced by the choices they make.

Can you think of any reason when it might be appropriate for states to provide expensive new drugs only to the patients who are most ill from a​ disease? A. ​No, it is always inappropriate because the cost of these new drugs gets passed along to others. B. ​Yes, it might be appropriate when other uses of those resources have less value. C. ​Yes, it is appropriate because the sickest patients​ won't die from a disease. D. ​No, it is always inappropriate because this is the​ patient's responsibility.

B. ​Yes, it might be appropriate when other uses of those resources have less value. Views and opinions may vary. Some may believe providing expensive new drugs to the sickest patients is appropriate because the sickest patients might otherwise have a poor quality of life or die. Others may believe patients who are less sick may need the drugs too. Still others may believe this is not the​ government's responsibility or may be concerned that others will have to pay for the cost of these expensive drugs. Another way to evaluate this would be to consider opportunity costs. The opportunity cost of any activity is the​ highest-valued alternative that must be given up to engage in that activity. Perhaps it would be efficient for the state to provide expensive prescription drugs to the sickest patients when other uses of those resources have less value.

In a market​ system, what determines how goods and services will be​ produced? A. ​Consumers, firms, and the government determine together how goods and services will be produced. B. The government determines how goods and services will be produced. C. Firms determine how goods and services will be produced. D. Consumers determine how goods and services will be produced.

C. Firms determine how goods and services will be produced.

What type of economic analysis is concerned with the way things ought to​ be? A. Positive Analysis B. Marginal Analysis C. Normative Analysis D. Rational Behavior

C. Normative Analysis.

Which of the following statements about normative analysis is​ correct? A. Normative analysis is concerned with what is. B. Normative analysis should not involve value judgments. C. Normative analysis is concerned with what ought to be. D. Normative analysis measures the costs and benefits of different courses of action.

C. Normative analysis is concerned with what ought to be.

​ ________ is a problem that occurs when someone concludes that a change in variable X caused a change in variable Y​ when, in​ fact, it is a change in variable Y that caused a change in variable X. A. The omitted variable B. Nonlinear slope C. Reverse causality D. The​ positive-to-negative relationship

C. Reverse causality

The three economic questions that every society must answer are A. What economic system will be​ used, how will it be​ implemented, and who will make market​ decisions? B. What kind of government will the society​ have, how will it be​ run, and who will run​ it? C. What goods will be​ produced, how will they be​ produced, and who will receive the​ goods? D. What are the prices of​ goods, how are they​ determined, and who will pay for​ them?

C. What goods will be​ produced, how will they be​ produced, and who will receive the​ goods?

Marginal benefit is A. a legally determined maximum price that sellers may charge. B. the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. C. the additional benefit from consuming one more unit. D. the additional cost of producing one more unit.

C. the additional benefit from consuming one more unit.

This percentage change in real GDP is also known as A. marginal analysis. B. profit. C. the economic growth rate. D. revenue.

C. the economic growth rate. The percentage change in real GDP from one year to the next is the​ economy's growth rate.

In a market​ system, how does society decide what goods and services will be​ produced? A. The government decides what goods and services will be produced. B. Firms alone determine what goods and services will be produced. C. ​Consumers, firms, and the government determine what goods and services will be produced by the choices they make. D. What goods and services will be produced is determined by a vote of consumers.

C. ​Consumers, firms, and the government determine what goods and services will be produced by the choices they make.

*Understand this Concept*

Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays. When the price is not​ zero, consumer surplus is the area below the demand curve and above the market price. ​[(($3.90minus​$3.68) times ​10,000) times ​0.5] ​= $1,100. The the total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price. Producer surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. ​[(($3.68minus​$3.32) times ​10,000) times ​0.5] ​= $1,800.

*Understand this Concept*

Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays. When the price is not​ zero, consumer surplus is the area below the demand curve and above the market price. ​[(($3.90minus​$3.82) times ​4,000) times ​0.5] ​+ ​[($3.82minus​$3.46) times ​4,000] ​= $1,600. The the total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price. Producer surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. ​[(($3.46minus​$3.32) times ​4,000) times ​0.5] ​= $280.

Jay Bhattacharya and M. Kate Bundorf of Stanford University have found evidence that people who are obese and work for firms that have​ employer-provided health insurance receive lower wages than people working at those firms who are not obese. At firms that do not provide health​ insurance, obese workers do not receive lower wages than workers who are not obese. Firms that provide workers with health insurance may pay a lower wage to obese workers than to workers who are not obese because the former tend to be less healthy and consequently A. less productive at work. B. experience higher rates of absenteeism and early retirement. C. more costly to insure and therefore employ due to their higher claim submission rate. D. all of the above. E. A and B only.

D. All of the above

Government policymakers use economic principles to make​ decisions, such as A. whether to raise interest rates to reduce the threat of inflation. B. whether to allocate additional funds to research on cancer or to research on heart disease. C. whether to raise taxes on cigarettes to discourage teenage smoking. D. All of the above.

D. All of the above.

Which of the following events would create economic​ growth, that​ is, shift the production possibilities frontier​ outward? A. An increase in the available natural resources. B. An increase in the available labor. C. An increase in technology that affects the production of both goods. D. All of the above.

D. All of the above.

Which of the following statements about an economic variable is​ correct? A. An economic variable is always measured in dollars. B. An economic variable must always be a positive number. C. An economic variable must either be the price of a good or service or the quantity of a good or service. D. An economic variable is something measurable that can have different values.

D. An economic variable is something measurable that can have different values.

Why are models based on​ assumptions? A. Because models are not intended to analyze​ real-world events. B. Because models are only concerned about questions of​ equity, not question of efficiency. C. Because models are very different from theories. D. Because models have to be simplified to be useful.

D. Because models have to be simplified to be useful.

Why are models based on​ assumptions? A. Because models are only concerned about questions of​ equity, not question of efficiency. B. Because models are very different from theories. C. Because models are not intended to analyze​ real-world events. D. Because models have to be simplified to be useful.

D. Because models have to be simplified to be useful.

Which of the following is a correct statement about a mixed​ economy? A. In a mixed​ economy, all economic decisions are made in markets. B. In a mixed​ economy, the government makes all economic decisions. C. In a mixed​ economy, most economic decisions are made by the government but markets plays a significant role in the allocation of resources. D. In a mixed​ economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.

D. In a mixed​ economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.

Which of the following is not a step that economists use in developing a useful economic​ model? A. Revise the model if it does not explain the data well. B. Decide on the assumptions to be used in developing the model. C. Formulate a testable hypothesis. D. Make a value judgement about the merits of the hypothesis. E. Use economic data to test the hypothesis.

D. Make a value judgement about the merits of the hypothesis.

Today, which of the following countries has a centrally planned​ economy? A. Canada B. United States C. Germany D. North Korea

D. North Korea

Which of the following statements is​ correct? A. The relationship between two variables is nonlinear whether it is represented by a straight line or by a curved line. B. The relationship between two variables is linear whether it is represented by a straight line or by a curved line. C. The relationship between two variables is linear when it is represented by a curved line and nonlinear when it is represented by a straight line. D. The relationship between two variables is linear when it is represented by a straight line and nonlinear when it is represented by a curved line.

D. The relationship between two variables is linear when it is represented by a straight line and nonlinear when it is represented by a curved line.

Warren Buffet is the Chief Executive Officer of the investment firm Berkshire Hathaway and one of the wealthiest people in the world. In an editorial in the Wall Street Journal​, Buffet argued that economic policies in the United States should be designed so that people who are willing to work receive enough income to live a​ "decent lifestyle." He argued that an expansion of the Earned Income Tax Credit​ (EITC) would be superior to an increase in the minimum wage as a means to reach this goal. The EITC is a program under which the federal government makes payments to​ low-income workers. ​Source: Warren​ Buffet, "Better Than Raising the Minimum​ Wage," Wall Street Journal​, May​ 21, 2015. Is Buffet correct that it is the role of the federal government to make sure people who work will have enough income to live a​ "decent lifestyle"? A. He is correct because only the government can make sure people who work will have enough income to live a​ "decent lifestyle." B. This is a positive economic​ question, so the answer is a matter of the norms or values of the person answering. C. He is incorrect because if the government​ provides, people will not have an incentive to support themselves. D. This is a normative economic​ question, so the answer is a matter of the norms or values of the person answering.

D. This is a normative economic​ question, so the answer is a matter of the norms or values of the person answering. The answer involves normative economic​ analysis, which is based on the values of each person. Positive economic analysis can show the consequences of a particular​ policy, but it cannot tell us whether the policy is​ "good" or​ "bad."

On a shopping​ trip, Melanie decided to buy a light blue coat made from woven fabric. A tag on the coat stated that the price was​ $79.95. When she brought the coat to the​ store's sales​ clerk, Melanie was told that the coat was on​ sale, and she would pay 20 percent less than the price on the tag. After the discount was​ applied, Melanie paid​ $63.96, $15.99 less than the original price. The value of​ Melanie's consumer surplus from this purchase is A. exactly​ $15.99 since this is the difference between the maximum price Melanie is willing to pay for the coat and the actual price she pays. B. ​$63.96 since this is the actual price she pays. C. ​$79.95 since this is the price she is willing to pay. D. at least​ $15.99 since this is the difference between the price Melanie is willing to pay for the coat and the actual price she​ pays, but she could have be willing to pay more than​ $79.95 for the coat.

D. at least​ $15.99 since this is the difference between the price Melanie is willing to pay for the coat and the actual price she​ pays, but she could have be willing to pay more than​ $79.95 for the coat.

Relative to a market​ economy, a​ centrally-planned economy would be expected to be A. better at both productive efficiency and allocative efficiency because entrepreneurial greed​ doesn't exist there. B. better at allocative efficiency but not productive efficiency because consumers can be forced to buy in government shops but firm managers can be wasteful because there is no profit motive. C. better at productive efficiency but not allocative efficiency because costs can be controlled by the government but consumer tastes cannot. D. better at neither productive efficiency nor allocative efficiency because the absence of​ market-imposed competition negates the need of firms to satisfy consumer wants or produce using the​ lowest-cost methods.

D. better at neither productive efficiency nor allocative efficiency because the absence of​ market-imposed competition negates the need of firms to satisfy consumer wants or produce using the​ lowest-cost methods.

The production possibilities frontier will shift outward A. if technology declines. B. if resources are used to produce consumption goods. C. if resources are not used in production. D. if resources are used to produce capital goods. E. if production occurs outside the production possibilities frontier.

D. if resources are used to produce capital goods. The production possibilities frontier will shift outward with technological advances or if more capital goods are​ produced, because capital goods can be used to produce other goods.

Explain how a state highway department could use marginal analysis to decide whether to increase the speed limit on a highway from 55 miles per hour to 65 miles per hour. Increasing the speed limit by 10 miles per hour will reduce travel times for people and freightlong dashso there will be a marginal benefitlong dashbut will likely also increase the number of accidents and the damage from those accidents. The state highway department should A. increase the speed limit if the estimated amount of time saved exceeds the estimated increase in the number of fatalities. B. not increase the speed limit if it is estimated to result in additional accidents. C. not increase the speed limit if the estimated number of deaths would be higher. D. increase the speed limit if the estimated dollar value of the marginal benefit exceeds the marginal cost.

D. increase the speed limit if the estimated dollar value of the marginal benefit exceeds the marginal cost.

The law of demand is the assertion that A. the demand for a product is negatively related to its price. B. the quantity demanded of a product is directly related to its price. C. changes in price and changes in quantity demanded move in the same direction. D. the quantity demanded of a product is inversely related to its price.

D. the quantity demanded of a product is inversely related to its price.

How should policymakers determine the amount of money that should be allocated for research curing heart​ disease? They should base their decision on A. the value of the total benefit of research on curing other diseases. B. the number of people who die from heart disease compared to the number of people who die from other diseases. C. the value of the total benefit of the research on heart disease. D. whether the last dollar devoted to research on heart disease results in more benefit than the last dollar spent on research for curing other diseases. E. the number of people who have heart disease compared to the number of people who have other diseases.

D. whether the last dollar devoted to research on heart disease results in more benefit than the last dollar spent on research for curing other diseases.

Which of the following is not scarce according to the economic​ definition? A. Capital. B. Gas. C. Houses. D. Time. E. None of the above.

E. None of the above.

Complete the following​ statement: ​"When there is a shortage LOADING... of a good A. producers react to shortages by lowering prices. B. as prices​ increase, consumer demand more of a particular good. C. as prices​ increase, producers are driven to produce less. D. decreasing prices lead to a change in demand. E. consumers compete against one another by bidding the price upward.

E. consumers compete against one another by bidding the price upward.

Late in the​ semester, a friend tells​ you, ​"I was going to drop my psychology course so I could concentrate on my other​ courses, but I had already put so much time into the course I decided not to drop​ it." Is your​ friend's reasoning correct or​ incorrect? Your​ friend's reasoning is correct or incorrect

Incorrect.

Equity means that goods are distributed in a way that... -maximizes benefits to society -is fair -is quick

Is fair

*Understand this Concept*

The figure to the right illustrates the market for apples in which the government has imposed a price floor of ​$14 per crate. At a price of ​$14​, consumers are willing to purchase 14 million crates of apples. ​However, at the price​ floor, producers are willing to supply 32 million crates of apples. ​(Enter a numeric response using an​ integer.) ​Consequently, there will be a surplus of 18 million crates of apples​ (from 32 million crates supplied minus 14 million crates​ demanded). Before the price​ floor, producer surplus is the red shaded area below the equilibrium price and above the supply​ curve, as indicated to the right. With the price​ floor, producer surplus is the red shaded area below the price floor and above the supply curve for units sold. Apple producers who are able to sell their apples at the ​$14 price per crate will benefit. ​However, every individual apple producer is not necessarily better off with the price floor than at the competitive​ equilibrium: Apple producers who are not able to sell their apples will not benefit. ​Furthermore, notice that total revenue for apple producers as a group will decrease from ​$220 million to ​$196 million.

Productive Efficiency means that...

a good or service is produced at the lowest possible cost.

Allocative efficiency means that...

every good or service is produced up to the point where marginal benefit is equal to marginal cost.