Unit 2 Economics Test

In the free market, firms meet consumer demand through a price-based system that ensures that land, labor, and capital go to the uses consumers value most highly. This explains why in a free market resources

Are allocated efficiently

If you saw an advertisement for an electric car that boasted 500 miles between battery charges, what form of non-price competition

physical characteristics

In determining the optimal level of output, a firm should aim for the

point of maximum profitability for the company

Juanita has noticed that the price of bagels has gone up. Because of this, she has decided to buy a less expensive yogurt for her breakfast. This is an example of the

substitution effect

If Tino responds to a sharp increase in his transportation costs by buying fewer clothes, he is demonstrating

the income effect

A change in demand for one good will have what effect on its complement?

the same effect

Why do monopolists engage in price discrimination?

they want to maximize their profits

Which of the following is most similar to a purely competitive labor market?

three teenagers who each earn money by raking leaves for different people in the neighborhood

Consider each of these business activities. For which do you think supply would be the most elastic in the short term?

Baking cupcakes

Which of the following describes a way that the minimum wage and rent control are similar?

Both involve government intervention in the marketplace

How has the internet dramatically reduced search costs?

By eliminating the need to travel to stores to shop

A shift in the demand curve had led to a shortage of rice. How can this problem be resolved most quickly?

By increasing the price of rice

How would a bicycle producer most likely react to a shortage of its product?

By raising prices and increasing supply

Which set of markets includes all purely competitive markets?

Children's wood blocks, dry pasta, plain t-shirts

If the 3 largest producers of breakfast cereal agreed to form an organization that produced a limited amount of cereal for the next year in order to inflate the price, what would they be doing?

Creating a cartel

What is the effect of lower input costs?

Decreased marginal cost

In the aftermath of a hurricane, clean water became scarce, and the price of bottled water skyrocketed. This is an example of the role of price in

Distributing scarce resources efficiently

Why do high start-up costs serve as a barrier to market entry?

by limiting potential supplier to those few with large amounts of capital

The increasing age of the American population is an example of how

changing demographics can cause demand shifts

In economics, the concept of demand is defined as the desire to own something

combined with the ability to pay for it

according to the law of demand, when the price of pizza goes up

consumers will buy less pizza

If the three largest producers of breakfast cereal agreed to form an organization that produced a limited amount of cereal for the next year in order to inflate the price, what would they be doing?

creating a cartel

Shana continues to buy a necessary medicine even though prices for the medicine rise sharply. Shana's behavior shows how

demand for necessities is inelastic

In general, it is a bad move for a company to produce more of a good or service if, by doing so

marginal cost exceeds marginal revenue

A new film company's decision to locate its operations in the film-production center of Southern California is most similar to which of the following?

A firm coating close to the inputs of its products

Which factor would shift the supply curve for ethanol in the United States to the right?

A trade agreement with Brazil opening US markets to imported ethanol

Which of these is not a characteristic of pure competition?

Unique products

Marty just finished creating a market demand schedule for his hardware store. Which of the following is he most likely trying to determine?

How many tools are sold to all consumers in the market at various prices

What does a firm's supply schedule show?

How price changes affect supply for a market

"Ceteris paribus" means demand will change when price changes

If other market factors remain constant

If a business owner becomes aware of a shortage in the market for the good or service he or she produces, he or she is likely to

Increase supply more and raise the price

How can collusion be harmful to consumers?

It can make consumers pay too much money for goods or services

What role does the profit incentive play when there is a surplus of a good?

It encourages producers to lower their prices

Which of the following explains what typically happens when a market is thrown into disequilibrium?

It moves toward a new equilibrium point as a results of the laws of supply and demand

In general, a decrease in consumer income will have what effect on demand for normal goods?

It will cause demand to fall

Which of the following is a characteristic of monopolistic competition?

Low barriers to entry

Which of the following typically happens as prices for a good or service rises?

More suppliers enter the market

Which of the following would be an example of a fixed cost on a farm?

Mortgage on the land

Why does demand generally become more elastic over time?

People have time to find substitutes and change behaviors

To increase marginal return, a company might consider

Purchasing more machinery

What action by the government would most likely increase the supply of gasoline in the short term?

Reduced taxes on the refining of gasoline

Which of the following is the best example of substitute for movie tickets?

Rentals of on-demand programming

Which of the following is the best argument against the rationing system used in the United States during WWII?

Some people could still get as much as they wanted through the black market

Do higher prices lead to increased revenues for a company?

Sometimes

What would most likely happen in a purely competitive market if one supplier was significantly more efficient than all others?

Suppliers who could not become more efficient would be driven from the market

The law of supply declares which of the following?

Supply falls as price falls

If the cost of gasoline increases sharply and continues to rise, how does this development affect the demand curve for cars?

The demand curve for gas-guzzlers shifts to the left, and the demand curve for fuel-effificent cars shifts to the right

Suppose the price of a good rises. In general, how does the percentage of your budget you spend on that good affect the elasticity of your demand for goods overall?

The higher the percentage of your budget a good represents, the more elastic your overall demand

What does it mean to say that supply is unitary elastic?

The percentage change in price and in supply are the same

What might happen if a monopolist increased output of its product each week?

The price of the good would eventually fall and so would revenue

Which of the following government actions would increase the supply of cars in the United States?

The removal of car mileage regulations

Which of the following explains why agriculture price supports are inconsistent with free-market principles?

They allow government to influence farmers' decisions about what and how much to produce

How do subsidies help producers?

They increase revenues

Why do monopolies engage in price discrimination?

They want to maximize their profits

Why does the government grant patents to some firms that develop new products?

To encourage firms to research new products that may benefit society

Why does the government usually regulate natural monopolies?

To keep the monopolist from having too much power

Why does the government regulate oligopolies?

To keep them from acting like monopolies

Suppose demand for a product is highly elastic. What will likely happen to a company's total revenue if it raises the price of that product?

Total revenue will fall

In which of the following situations would a business be wise to shut down its factory?

When fixed costs exceed revenue

What happens to the average total cost curve for a company with economies of scale?

When production increases, the cost of production falls