ECON - 001A - L02

In a competitive market free of government regulation

price adjusts until quantity demanded equals quantity supplied.

In a market economy, who or what determines who produces each good and how much is produced?

prices

The quantity supplied of a good is the amount that

sellers are willing and able to sell.

If the quantity supplied responds only slightly to changes in price, then

supply is said to be inelastic.

Which of the following would likely be studied by a microeconomist rather than a macroeconomist?

the effect of a sales tax on the cigarette industry

A certain production possibilities frontier shows production possibilities for two goods, jewelry and clothing. Which of the following concepts cannot be illustrated by this model?

the flow of dollars between sellers of jewelry and clothing and buyers of jewelry and clothing

Which of the following areas of study typifies microeconomics as opposed to macroeconomics?

the impact of minimum-wage laws on employment in the fast food industry

Refer to Figure 3-8. If Chile and Colombia each divides its time equally between making coffee and making soybeans, then total production is

14 pounds of coffee and 9 pounds of soybeans.

Approximately what percentage of the world's economies experience scarcity?

100%

Refer to Figure 2-5. The opportunity cost of this economy moving from point A to point B is

20 dryers.

The word "economy" comes from the Greek word oikonomos, which means

"one who manages a household."

Table 3-21 Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. The following table shows the number of coolers or number of radios each country can produce in one day.Refer to Table 3-21. Jamaica's opportunity cost of one cooler is

0.5 radios, and Norway's opportunity cost of one cooler is 0.125

Figure 3-2. Brazil's Production Possibilities Frontier. Refer to Figure 3-2. If the production possibilities frontier shown is for 24 hours of production, then how long does it take Brazil to make one peanut?

3 hours

Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by

40%.

Refer to Figure 3-20. If Canada and Mexico switch from each country dividing its time equally between the production of Good X and Good Y to each country spending all of its time producing the good in which it has a comparative advantage, then total production of Good X will increase by

6 units.

Refer to Figure 3-10. If point A represents Alice's current production and point B represents Betty's current production, under what circumstances can both Alice and Betty benefit from specialization and trade?

Alice produces more lemonade and Betty produces more pizzas.

Refer to Figure 2-2. If households are sellers in the markets represented by Box D of this circular-flow diagram, then

Box D must represent the markets for factors of production. Box C must represent the markets for goods and services. firms are buyers in the markets represented by Box D.

Suppose an economist develops a theory that higher food prices arise from higher gas prices. According to the scientific method, which of the following is the economist's next step?

Collect and analyze data.

Refer to Figure 5-3. Which demand curve is perfectly elastic?

D

According to the circular flow diagram, if Denny is the owner of a landscaping business and he just received $50 for mowing Mrs. Pendleton's lawn,

Denny acts as a firm who interacted in the markets for goods and services with Mrs. Pendleton.

How does the concept of elasticity allow us to improve upon our understanding of supply and demand?

Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept.

Economists at the U.S. Department of the Treasury help design U.S. coins and paper money.

False

In general, demand curves for necessities tend to be price elastic.

False

In the circular-flow diagram, firms own the factors of production and use them to produce goods and services.

False

In the markets for the factors of production in the circular-flow diagram, households are buyers and firms are sellers.

False

Necessities tend to have inelastic demands, whereas luxuries tend to have elastic demands.

False

Refer to Figure 2-14. Points B and C represent infeasible outcomes for this economy.

False

Sellers as a group determine the demand for a product, and buyers as a group determine the supply of a product.

False

The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years.

False

Sometimes economists disagree because their values differ. Which of the following instances best reflects this source of disagreement?

One economist advises against increases in sales taxes because she thinks such increases are unfair to low-income people; another economist disputes the idea that increases in sales taxes are unfair to low-income people.

Sometimes economists disagree because their scientific judgments differ. Which of the following instances best reflects this source of disagreement?

One economist believes the government should tax a household's income; another economist believes the government should tax a household's consumption.

A recent news report lamented the plight of corn farmers in Wisconsin due to a severe drought. Which of the following best describes the effect on corn farmers in Minnesota, where sufficient rainfall occurred?

Their revenue increases because price increases and demand is inelastic.

A newspaper's classified ads are an example of a market.

True

Elasticity measures how responsive quantity is to changes in price.

True

In a market economy, supply and demand determine both the quantity of each good produced and the price at which it is sold.

True

Measures of elasticity enhance our ability to study the magnitudes of changes in quantities in response to changes in prices or income.

True

Most markets in the economy are highly competitive.

True

Opportunity cost measures the trade-off between two goods that each producer faces.

True

Prices allocate a market economy's scarce resources.

True

Refer to Figure 2-14. The opportunity cost of moving from point B to point A is zero.

True

The Congressional Budget Office, which is staffed by economists, provides Congress with independent evaluations of policy proposals.

True

The demand for Rice Krispies is more elastic than the demand for cereal in general.

True

The opportunity cost of something is what you give up to get it.

True

The scientific method is the dispassionate development and testing of theories about how the world works.

True

Unemployment causes production levels to be inefficient.

True

Assume that Zimbabwe and Portugal can switch between producing toothbrushes and producing hairbrushes at a constant rate. Refer to Table 3-6. Which of the following represents Zimbabwe's and Portugal's production possibilities frontiers when each country has 60 minutes of machine time available?

Zimbabwe Portugal

Refer to Figure 2-12. Which of the following would most likely have caused the production possibilities frontier to shift outward from A to B?

a general technological advance

The dictionary defines equilibrium as a situation in which forces

are in balance.

Suppose buyers of coffee and sugar regard the two goods as complements. Then an increase in the price of coffee will cause a(n)

decrease in the demand for sugar and a decrease in the quantity supplied of sugar.

A decrease in the price of a good will

decrease quantity supplied.

Holding all other things constant, a higher price for ski lift tickets would

decrease the number of skis sold.

Suppose you are in charge of setting prices at a local ice cream shop. The business needs to increase its total revenue, and your job is on the line. You evaluate the data and determine that the price elasticity of demand for ice cream at your shop is 1.8. You should

decrease the price of ice cream.

If the government removes a tax on a good, then the price paid by buyers will

decrease, and the price received by sellers will increase.

Two goods are substitutes when a decrease in the price of one good

decreases the demand for the other good.

If the quantity demanded of a certain good responds only slightly to a change in the price of the good, then the

demand for the good is said to be inelastic.

The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an increase in total revenue if the

demand for wheat is elastic.

In the circular-flow diagram, which of the following items flows from households to firms through the markets for goods and services?

dollars spent on goods and services

Macroeconomics is the study of

economy-wide phenomena.

When small changes in price lead to infinite changes in quantity demanded, demand is perfectly

elastic, and the demand curve will be horizontal.

Which of the following concepts cannot be illustrated by the production possibilities frontier?

equality

Economics is the study of how society allocates its unlimited resources.

false

Equality means distributing society's resources in the most efficient manner.

false

Inflation is the primary determinant of a country's living standards.

false

The fact that people are willing to pay much more for a diamond, which is not needed for survival, than they are willing to pay for a cup of water, which is needed for survival, is an example of irrational behavior.

false

Tuition is the single-largest cost of attending college for most students.

false

a rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit

false

Joe and Fred are economists. Joe thinks that the wealthiest 10% of the US population should be taxed a rate higher than the rest of society because they can better afford it. Fred thinks that everyone should be taxed at the same rate because that is the fairest scenario and the wealthy should not be penalized for their success. In this example, Joe and Fred

have different normative views about tax policy.

The market for ice cream is a

highly competitive market.

In general, elasticity is a measure of

how much buyers and sellers respond to changes in market conditions.

Refer to Figure 5-11. If price increases from $10 to $20, total revenue will

increase by $120, so demand must be inelastic in this price range.

A movement downward and to the right along a demand curve is called a(n)

increase in quantity demanded.

When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good

increases as more of the good is produced.

Kara receives a promotion at work, which increases her income. We would expect Kara's demand for

inferior goods to decrease.

A statement describing how the world should be

is a normative statement.

The difference between slope and elasticity is that slope

is a ratio of two changes, and elasticity is a ratio of two percentage changes.

President Truman once said he wanted to find a one-armed economist because when he asked his economists for advice, they always answered, "On the one hand, ... On the other hand, ..." Truman's observation that economists' advice is not always straightforward

is rooted in the principle that people face tradeoffs.indicates that economists recognize that there are opportunity costs associated with policy decisions.confirms that economists are not suited to be presidential advisers.

A group of buyers and sellers of a particular good or service is called a(n)

market.

It is possible for an economy to increase its production of both goods if the economy

moves from a situation of inefficient production to a situation of efficient production.

"Ensuring that Social Security is financially sound for future generations is an important use of taxpayer dollars" is an example of a

normative economic statement.

Frequently, in the short run, the quantity supplied of a good is

not very responsive to price changes.

Production is efficient if the economy is producing at a point

on the production possibilities frontier.

If the price of a good is low,

the quantity supplied of the good could be zero.

The price elasticity of supply measures how much

the quantity supplied responds to changes in the price of the good.

Refer to Figure 2-15. Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of each car is

the slope of the production possibilities frontier. 3/2 sofas.

When two countries trade with one another, it is most likely because

the two countries wish to take advantage of the principle of comparative advantage.

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

true

An individual deciding how to allocate her limited time is dealing with both scarcity and trade-offs.

true

Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff.

true

Economists study how people make decisions.

true

Economists try to address their subject with a scientist's objectivity.

true

Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie.

true

In the short-run, society faces a tradeoff between inflation and unemployment.

true

One of the effects of gas prices rising from about $2 to about $4 per gallon was airlines ordering new, fuel-efficient aircraft.

true

The classic tradeoff between "guns and butter" states that when a society spends more on national defense, it has less to spend on consumer goods to raise the standard of living.

true

The government can potentially improve market outcomes if market inequalities or market failure exists.

true

Trade with any nation can be mutually beneficial.

true

Because it is difficult for economists to use experiments to generate data, they generally must

use whatever data the world gives them.

The circular-flow diagram is a

visual model of the economy.

An economy's production possibilities frontier is also its consumption possibilities frontier

when the economy is self-sufficient.

The quantity demanded of a good is the amount that buyers are

willing and able to purchase.