PDF Homework Questions & Answers - Macro Exam One

How does consumer surplus change as the equilibrium price of a good rises or falls? As the price of a good rises, consumer surplus (1)___________________ and as the price of a good falls, consumer surplus (2)_______________

(1) Decreases & (2)Increases

A perfectly competitive is a market that meets the conditions of

(1) many buyers and sellers (2) all firms selling identical products and (3) no barriers to new firms entering the market

How can a country gain from specialization and trade

A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods or services

Productive Efficiency

A good or service is produced at the lowest possible costs

Productive efficiency means

A good or service is produced at the lowest possible costs

Economic Efficiency is

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum

If a surplus exists in a market, we know that the actual price is

Above the equilibrium price, and the quantity supplied is great than the quantity demanded

Which of the following would cause a shift in the demand curve from point A to point B

An increase in income (normal good) AND a decrease in income (inferior good) AND an increase in the price of a substitute good

Which of the following illustrates the law of supply

An increase in price causes an increase in the quantity supplied, and a decrease in price causes a decrease in the quantity supplied

Refer to the graph to the right. Which of the following represents the deadweight loss when the price of tea is $2.20 per cup?

Area C&E

If a shortage exists in a market, we know that the actual price is

Below the equilibrium price, and the quantity demanded is greater than the quantity supplied

Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the diagram to the right, deadweight loss is equal to the area(s):

C&E

What is the basis for trade

Comparative advantagw

The Toyota Prius is a gasoline-electric hybrid car that gets 54 miles to the gallon. An article in the Wall Street Journal notes that sales of the Prius have been hurt by low gasoline prices and that: "Americans are now more likely to trade in a hybrid or an electric vehicle for an SUV...." Does the article indicate that gasoline-powered cars and gasoline are substitutes or complements? Briefly explain.

Complements, because they are used together

Complete the following statement: When there is a shortage of a good

Consumers compete against one another by bidding the price upward

This indicated that more ______________ can be produced

Cotton

What is an entrepreneur?

Entrepreneurs operate businesses that produce goods and services

Scarcity is central to the study of economics because it implies that

Every choice involves an opportunity cost

Allocative Efficiency

Every good or service is produced to the point where marginal benefit is equal to marginal cost

Allocative efficiency means that

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

What do economist mean by the word "marginal"?

Extra or additional

In a simple circular flow model, there are flows of __________ and flows of ___________

Factors of production; goods and services AND funds received from the sale of f of p; spending on final goods and services

An increase in demand causes and increase in the equilibrium price. The increase in equilibrium price will then cause an increase in supply

False

Centrally planned economies allocate resources based on decisions by

Government

Market economies answer these questions through decisions made by

Households and Firms

Which of the following are two key groups of participants in the circular flow of income?

Households and Firms

On the diagram, movement along the curve form A to B to C illustrates

Increasing marginal opportunity cost

On the diagram, the movement along the curve from points A to B to C illustrates

Increasing marginal opportunity costs

Which of the following is NOT a step that economist use in developing a useful economic model?

Make a value judgment about the merits of the hypothesis

A primary difference between macro and microeconomics is

Micro examines individual markets while macro examines the economy as a whole

Any Model is based on making assumptions becuase

Models have to be simplified to be useful AND we cannot analyze an economic issue unless we reduce its complexity

What type of economic analysis is concerned with the way things ought to be

Normative analysis

When economists develop models designed to explain the choices people make, they generally assume that

People are rational

The primary difference between product markets and factor markets is that

Product markets are markets for goods, while factor markets are markets for factors of production - labor, capital, natural resources, and entrepreneurial abiltiy

One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls

Scarcity

Consider the PPF that shoes the trade off between the production of cotton (y-axis) and the production of soybeans (x-axis) -- suppose the genetic modification that makes cotton resistant to insects, allowing yields to increase -- if a genetic modification makes cotton resistant to insects, the the PPF will

Shift out along the cotton axis

Additionally, the supply curve will

Shift to the left, because supplying childcare becomes more expensive

Proposals have been made to increase government regulation of childcare businesses by, for instance, setting education requirements for childcare workers. Suppose that these regulations increase the quality of childcare and cause the demand for childcare services to increase. At the same time, assume that complying with the new government regulations increases the costs of childcare businesses. -- Given these developments, the demand curve will

Shift to the right, because the quality of childcare increases

Does it indicate that gasoline-powered cars and hybrids are substitutes or complements?

Substitutes, because the more consumers buy of one good, the less they will buy of the other good

Opportunity Cost

The Highest valued alternative that must be given up to engage in an activity

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than other producers

What is comparative advantage?

The ability to produce a good or service at a lower opportunity cost than other producers

Absolute Advantage

The ability to produce more of a good or service than competitors using the same amount of resources

What is absolute advantage

The ability to produce more of a good or service than competitors using the same amount of resources

Refer to the graph to the right. After the government imposes a price of $3.50 in this market, area A represents

The consumer surplus transferred to producers

A variable that will cause the supply curve to shift

The cost of raw materials

When a competitive market is in equilibrium, what is the economically efficient level of output?

The output level where marginal cost is equal to marginal benefit

The Law of Demand is the assertion that

The quantity demanded of a product is inversely related to its price

According to the law of supply

There is a positive relationship between the price and quantity supplied AND as the price of a product increase, firms will supply more of it to the market

Why do entrepreneurs play a key role in a market system?

They bring together factors of production

During the 1928 presidential election campaign, Herbert Hoover, the republican candidate, argued that the United States should only import those products that could not be produced here. Do you believe that this would be a good policy?

This is not a good policy because it does not necessarily result in countries producing those goods for which they have a comparative advantage

What is the role of an entrepreneur

To bring together the factors of production & to take risks & to operate a business that produces a good or service

Which of the following best describes scarcity?

Unlimited wants exceed the limited resources available

The Three economic questions that every society must answer are

What goods will be produced How will they be produced Who will receive the goods

Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good

Will have a comparative advantage if it has a lower opportunity cost of producing that good

Given these changes, the net effect on equilibrium price is

an increase

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

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.

The primary difference between product markets and factor markets is that

product markets are markets for goods, while factor markets for factors of production - labor, capital, natural resources, and entrepreneurial ability

When the government imposes price floors or price ceilings

some people win, some people lose, and there is a loss of economic efficiency

One of the great benefits of trade is

that it makes it possible for society to become better off by increasing its consumption

Consumer surplus is

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays

Opportunity cost is

the highest valued alternative that must be given up to engage in an activity

Economists believe that an activity should be continued up to the point where

the marginal benefit from the activity is equal to the marginal cost

An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically

the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers' purchasing power

Economist assume that people are rational in the sense that

they use all available info as they take actions intended to achieve their goals

and the effect on equilibrium quantity is

uncertain