Econ 102 Exam 1 Ch 1-3
Use the following production possibilities frontier for a country to answer the following questions. Part 2 Which point(s) are unattainable? Briefly explain why.
Point E because it is outside the production possibilities frontier.
Which point(s) are efficient? Briefly explain why.
Points B, C, and D because this is where maximum output is produced with available resources.
What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy?
The country is operating on its production possibilities frontier.
If demand decreases and supply increases, which of the following will definitely occur?
The equilibrium price will decrease.
If demand and supply both increase, which of the following will definitely occur?
The equilibrium quantity will increase.
Suppose the equilibrium price and equilibrium quantity of gold both decrease. Which of the following would produce such a change? Part 2
The market demand curve for gold could have decreased.
Can these two countries gain from trading oil and fish oil?
These countries cannot gain from trade because neither has a comparative advantage producing either good.
Why do entrepreneurs play a key role in a market system?
They bring together factors of production.
Evaluate the following argument: "Adam Smith's analysis is based on a fundamental flaw: He assumes that people are motivated by self-interest. But this isn't true. I'm not selfish, and most people I know aren't selfish."
This statement is based on the misconception that following your self-interest and being selfish are the same thing.
Identify whether each of the following statements describes a change in supply or a change in the quantity supplied.
To take advantage of high prices for snow shovels during a very snowy winter, Alexander Shovels, Inc., decides to increase output. A change in quantity supplied. Part 3 b. The success of Apple's iPod leads more firms to begin producing digital music players. A change in supply. Part 4 c. In the six months following Hurricane Katrina, production of oil in the Gulf of Mexico declined by 25 percent. A change in supply.
The basis for trade is comparative advantage, not absolute advantage.
True
c. What problems might African farmers have because they lack secure property rights?
Without secure property rights, it is harder for farmers to borrow because they cannot use their land as collateral. B. Without secure property rights, farmers in Africa may be reluctant to make the investments in their farms that would raise the farms' productivity. C. Without secure property rights, farmers are not able to obtain funds by selling some of their land. D. ---All of the above.
Which of the following would not shift the demand curve for a good or service?
a change in the price of the good or service
A production possibilities frontier (PPF) is
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
Which of the following is the textbook's definition of a supply curve?
a curve that shows the relationship between the price of a product and the quantity of the product supplied
Suppose that the curves in the figure to the right represent two supply curves for traditional wings (basket of six) at Buffalo Wild Wings. Part 2 The movement from point A to B on S1 is caused by
a decrease in the price of baskets of traditional wings.
Which of the following events would shift the supply of smartphones to the right?
a decrease in the price of inputs used to produce smartphones
An unexpected frost in the orange groves of California would cause
a decrease in the supply of orange juice, increasing the equilibrium price.
A good for which demand increases as income rises is ________, and a good for which demand increases as income falls is ________.
a normal good; an inferior good
Which of the following is the textbook's definition of a supply schedule?
a table that shows the relationship between the price of a product and the quantity of the product supplied
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.
Market price is determined by
both supply and demand.
Economists refer to the necessity of holding all variables other than price constant in constructing a demand curve as the
ceteris paribus condition.
Complete the following statement: "When there is a shortage of a good ___ The process continues until the market is finally in equilibrium."
consumers compete against one another by bidding the price upward.
Refer to the diagram: 1.) Use the line drawing tool to draw a demand curve that shifts to the right. Label this line 'D2'. 2.) Use the line drawing tool to draw a supply curve that shifts to the right by more than the demand line. Label this line 'S2'. 3.) Use the point drawing tool to identify the new point of equilibrium. Label this point. With these shifts, the equilibrium price will decrease.
decrease
Suppose the price of a substitute to LCD televisions falls. What effect will this have on the market equilibrium for LCD TVs? The equilibrium price of LCD TVs will
decrease and the equilibrium quantity will decrease.
After Russia seized what had formerly been the Ukrainian territory of Crimea in February 2014, the United States and many other countries imposed economic sanctions that reduced the ability of Russia to engage in international trade. A columnist writing in the New York Times noted that, "If sanctions push Russia onto a path of greater self-reliance, its manufacturing and service industries will surely grow faster...." Source: Anatole Kaletsky, "Reasons to Welcome a Ukraine Deal," New York Times, September 18, 2014. Part 2 If the columnist is correct about the effect of the sanctions, then, in the long run, the sanctions will
decrease the economic well-being of the average Russian because Russia will have to produce some goods and services at a higher cost than its trading partners.
Refer to the diagram to the right: Part 2 Use the line drawing tool to draw a demand curve shifting to the left. Label this line 'D2'. With this shift, equilibrium price will ___. and equilibrium quantity will ___.
decrease, decrease
What role do they play in the working of a market system? Private property rights:
encourage a significant number of people to be willing to risk funds by investing them in business. encourage firms to spend money on research and development.
In economic terminology, the inputs used to
factors of production.
If country ABC can produce a unit of good 1 with fewer resources than can country XYZ, it is correct to say that country ABC
has an absolute advantage in producing good 1.
If a country has a comparative advantage in the production of a good, then that country
has a lower opportunity cost in the production of that good.
Consider the market for chicken, illustrated in the figure to the right. The market is initially in equilibrium at a price of P1 and at a quantity of Q1. Part 2 Suppose the supply curve shifts to the right from S1 to S2 and the demand curve shifts to the right from D1 to D2. Note that in the figure the shift in demand is larger than the shift in supply. Part 3 As a result of these changes, the new equilibrium price will be _____, and the new equilibrium quantity will be _____.
higher, higher
Two key groups participate in markets. A ___ consists of all the individuals in a home. ___are suppliers of goods and services. We can use a simple economic model called the ___ to see how participants in markets are linked.
household, Firms, circular-flow diagram
What is the outcome of enforcing contracts and property rights in a market system?
increased economic activity
In the diagram to the right, when demand ___, a ____ develops at the original price. Equilibrium price will ___ and equilibrium quantity will ___ as a new equilibrium is established.
increases, shortage, rise, rise
Whether carried out by an individual or a country, production beyond the production possibilities frontier
is not physically possible.
As a result of new firms entering the MP3 player market, the new equilibrium price will be _____, and the new equilibrium quantity will be _____.
lower, higher
In economics, the term capital refers to
physical capital, such as machinery, that is used to produce other goods.
Refer to the graph. A change in demand is illustrated by the move from ________, and a change in quantity demanded is illustrated by a movement from ________.
point C to point A; point A to point B
According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity?
prices
The Scottish philosopher Adam Smith argued in 1776 that
prices would do a better job of coordinating the activities of buyers and sellers than guilds could.
Absolute advantage is the ability of an individual, a firm, or a country to
produce more of a good or service than competitors using the same amount of resources.
The difference between a change in supply and a change in the quantity supplied is that the latter is
produced by a change in the product's own price while the former is caused by a variety of variables other than the product's price.
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 ability.
What is the law of demand? The law of demand is the
rule that, holding everything else constant, when the price of a good falls, the quantity demanded will increase, and when the price of a good rises, the quantity demanded will decrease.
In the table below, fill in the missing blanks to complete the summary of the effects of changes in demand and supply on equilibrium price and quantity. Part 2
see table
In the diagram to the right, when the price is $29 per player, the amount of the shortage is 56 million players per month.
shortage, 56. When the quantity supplied is greater than the quantity demanded, there is a surplus in the market. To calulate the surplus, subtract quantity demanded from quantity supplied. When the quantity demanded is greater than the quantity supplied, there is a shortage in the market. To calulate the shortage, subtract quantity supplied from quantity demanded.
The figure to the right illustrates the U.S. market for rugs made in a particular foreign country. Suppose the market price of rugs is $1,000. Part 2 At a price of $1,000, there will be a ___ of rugs. Part 3 To reach an equilibrium, the price of rugs in this market must ___.
shortage, rise
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.
smaller
In the diagram, when supply increases, a _____ develops at the original price. Equilibrium price will _____ and equilibrium quantity will _____ as a new equilibrium is established.
surplus, fall, rise
The production possibilities frontiers depicted in the diagram to the right illustrate
technological advances in the tank industry.
One of the great benefits of trade is
that it makes it possible for society to become better off by increasing its consumption.
When the demand curve shifts to the right,
the equilibrium price and quantity will both increase.
In a free market, the actions people take are largely determined by
the motivation of financial reward.
Suppose instead that the demand curve shifts to the right. Then, relative to the initial market equilibrium,
the new equilibrium price would be higher and the new equilibrium quantity would be higher.
When economists speak of a surplus, they mean a situation in which
the quantity supplied exceeds quantity demanded. B. the market price is above the equilibrium price. C. firms have unsold goods piling up. All of the above
What are private property rights? Private property rights are:
the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property.
According to the law of supply,
there is a positive relationship between price and quantity supplied. as the price of a product increases, firms will supply more of it to the market.
Why are independent courts important for a well-functioning economy? Independence is necessary for courts:
to make their decisions free of influence from other parts of the government. B. to make their decisions free of intimidation by criminal gangs. C. to make their decisions free of influence from people with powerful political connections. D. to make their decisions based on the law. E. ---all of the above.
What is the role of an entrepreneur?
to operate a business that produces a good or service B. to take risks C. to bring together the factors of production—labor, capital, and natural resources D. ---All of the above.
In the diagram to the right, point G indicates an
unattainable result.
In discussing dividing up household chores, Emily Oster, an economist at the University of Chicago, advises that: "No, you shouldn't always unload the dishwasher because you're better at it." Source: Emily Oster, "The Wrong Person Is Probably Doing the Dishes in Your Home," Slate, November 21, 2012. Part 2 Even if you are better at unloading the dishwasher than your spouse, you shouldn't always be the one to unload it because
you may be even better at some other household task and must consider the opportunity cost.
A perfectly competitive market 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.
With respect to consumption, individuals and countries
can, through trade, consume beyond their production possibilities frontiers.
A free market is a market with ________ government restrictions on how a good or service can be produced or sold and with ________ government restrictions on how a factor of production can be employed.
few; few
Goods and services that can be used for the same purpose are ________, and goods and services that are used together are ________.
substitutes; complements
In a competitive market, firms can dictate what the equilibrium price of a good or a service will be.
False
What are the two main categories of participants in markets?
Firms and households.
According to Adam Smith, which of the following is necessary for the proper functioning of the market system?
For markets to work, people must be free to pursue their self-interest.
Identify whether each of the following transactions will take place in the factor market or in the product market and whether households or firms are supplying the good or service or demanding the good or service.
George buys a Tesla Model S. Part 3 This takes place in the product market. Part 4 The household demands the good and the firm supplies the good. Part 5 Tesla increases employment at its Fremont plant. Part 6 This takes place in the factor market. Part 7 The households supply the labor and the firm demands the labor. Part 8 George works 20 hours per week at McDonald's. Part 9 This takes place in the factor market. Part 10 The household supplies the labor and the firm demands the labor. Part 11 George sells land he owns to McDonald's so it can build a new restaurant. Part 12 This takes place in the factor market. Part 13 The household supplies the factor of production and the firm demands the factor of production.
Which participants are of greatest importance in determining what goods and services are produced?
Households.
Suppose the United Kingdom and Norway both produce oil and fish oil, which are sold for the same prices in both countries. The following table shows combinations of both goods that each country can produce in a day, measured in thousands of barrels, using the same amounts of capital and labor: Who has the comparative advantage in producing oil?
Neither country has a comparative advantage producing oil because their opportunity costs of producing oil are equal.
Does either country have an absolute advantage in producing both goods?
Neither country has an absolute advantage in both goods because the United States can produce more boots but Canada can produce more shirts.
Which point(s) are inefficient? Briefly explain why.
Point A because production there is not using all available resources.
At which point is the country's future growth rate likely to be the highest? Briefly explain why.
Point B because it is where the most resources are used to produce capital goods.
Tom's lawn service specializes in mowing lawns and trimming bushes. Tom has 4 hours to devote to lawn services. In 1 hour, he can mow 2 lawns or trim 5 bushes. Part 2 Use the line drawing tool to graph Tom's production possibilities frontier given he has 4 hours to devote to lawn services. Properly label this line. Tom's opportunity cost of mowing lawns in terms of trimming bushes is ____ trimmed bushes per mowed lawn.
2.50
Refer to the graph. What is the opportunity cost of moving from point B to point C?
20 sedans
Assume the figure to the right illustrates the market for houses for sale in a small city. Part 2 Suppose the market price of houses is $200,000. How large will the resulting surplus be? Part 3 At a price of $200,000, there will be 400 surplus houses. (Enter your response as a whole number.) Part 4 What is the equilibrium price of houses? The equilibrium price is $150000. (Enter your response as a whole number.)
400, 150000
Consider the market for gasoline, illustrated in the figure to the right. Part 2 The equilibrium quantity of gasoline is ___ million gallons (enter a numeric response using a real number rounded to two decimal places) and the equilibrium price is $___ per gallon. Part 3 If instead the market price were $3.25, then there would be a ___ of ___ million gallons.
5, 2.50, surplus, 3
The production possibilities frontiers in the figure to the right show how many bananas and coconuts you (Y) and your neighbor (N) can consume without trade. Suppose you are initially consuming 5 bananas and 4 coconuts and your neighbor is initially consuming 5 bananas and 5 coconuts. Part 2 Now, suppose you and your neighbor specialize by each only producing the good for which you have a comparative advantage. Part 3 You give your neighbor half of your production for half of what he produces. (Enter all responses as integers.) If you trade with your neighbor, then you will have _____ additional coconut(s) after the trade and _____additional banana(s). Part 4 At the same time, your neighbor will be able to consume _____additional banana(s) and will be _____ as a result of trade. ...
8, 10, 10, better off
Indicate which of the following would cause a movement from point A to C. (Check all that apply.)
A decrease in worker productivity. An increase in input prices.
From the PPFs shown above it can be determined that the opportunity cost of oil is lower in country ___. Part 3 Given the comparative opportunity costs as revealed by the PPFs shown above, the comparative advantage for country B lies in ____. Part 4 After these two countries specialize and trade with each other, country A will be importing ____.
A, corn, corn
Which of the following would cause a shift in the demand curve from point A to point B?
An increase in income (normal good). B. An increase in the price of a substitute good. C. A decrease in income (inferior 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.
Which of the following events would create economic growth, that is, shift the production possibilities frontier outward?
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.
Which of the following events would cause the supply curve to decrease from S1 to S2?
An increase in the price of inputs.
b. Which of the following statements is true?
By protecting private property rights, governments make it more likely that investments will be made in businesses that provide jobs and income for workers.
What is an entrepreneur?
Entrepreneurs operate businesses that produce goods and services.
An increase in demand causes an increase in the equilibrium price. The increase in equilibrium price will then cause an increase in supply.
False
If you and your neighbor both grow oranges and grapefruits and you are better than your neighbor at picking both oranges and grapefruits, there can be no advantage to you in specializing in growing only one type of fruit and trading with your neighbor for the other.
False
According to an article in the Economist magazine: "In all rich countries, property rights are secure...Legally recognising land ownership has boosted farmers' income and productivity in Latin America and Asia...More than two-thirds of Africa's land is still under customary tenure, with rights to land rooted in communities and typically neither written down nor legally recognized." Source: "Title to Come: Property Rights Are Still Wretchedly Insecure in Africa," Economist, July 16, 2016. Part 2 a. Which of the following statements regarding secure property rights is true?
Property rights provide incentives for people to maintain and increase the value of the property they own.
Suppose initially that the United States is consuming 18 boots and 2 shirts and Canada is consuming 4 boots and 12 shirts, as indicated in the figure. Then, suppose the United States and Canada specialize by each only producing the good for which they have a comparative advantage and then trade. In particular, suppose the United States trades Canada half of its production for half of what Canada produces.
The United States will have ___16____ additional shirt(s) after the trade (enter a numeric response using an integer) and __0__ additional boot(s). Part 8 At the same time, Canada will be able to consume __6__ additional shirt(s) as a result of the trade and __14__ additional boot(s).
Using the same amount of resources, the United States and Canada can both produce lumberjack shirts and lumberjack boots, as shown in the production possibilities frontiers in the figure to the right. Part 2 ____ has a comparative advantage in producing lumberjack boots. Part 3 ____ has a comparative advantage in producing lumberjack shirts.
The United States, Canada
Following below are four graphs and four market scenarios, each of which would cause either a movement along the supply curve for premium bottled water or a shift of the supply curve. Match each scenario with the appropriate diagram.
a. A decrease in the supply of sports drinks: 4. Part 3 b. A drop in the average household income in the United States from $56,000 to $52,000: 3. Part 4 c. An improvement in the bottling technology for premium bottled water: 2. Part 5 d. An increase in the prices of electrolytes used in premium bottled water: 1.
Below are four supply curve diagrams, each of which represents a change in supply or a change in quantity supplied.
a. To take advantage of high prices for snow shovels during a snowy winter, Alexander Shovels, Inc., decides to increase output. 4. Part 3 b. The success of Nike and Adidas athletic shoes leads more firms to begin producing athletic shoes. 3. Part 4 c. In the six months following the Japanese earthquake and tsunami in 2011, production of automobiles in Japan declined by 20 percent. 1.
If a surplus exists in a market, we know that the actual price is
above the equilibrium price, and the quantity supplied is greater than the quantity demanded.
The primary difference between absolute and comparative advantage is
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
an independent court system