econ 1a exam 1
The Law of Demand states that the quantity demanded of a good is inversely related to the price of that good. Therefore, as the price of a good goes: A. down, the quantity demanded goes up. B. up, the quantity demanded goes up. C. down, the quantity demanded goes down. D. up, the quantity demanded does not change.
A The law of demand states that more of a good will be demanded the lower its price, other things constant, and less of a good will be demanded the higher its price, other things constant.
Suppliers will find it in their best interest to raise prices when: A. there is excess supply in the market. B. there is excess demand in the market. C. the market is in equilibrium. D. the demand curve shifts to the left.
B If there is excess demand, suppliers will find they can sell all of their goods rather rapidly, and thus will likely raise their prices. At higher prices, quantity demanded will decrease, and thus prices will rise until quantity supplied equals quantity demanded. None of the curves will shift when prices are the only thing changing. Also, if the demand curve shifted to the left, this would put downward pressure on prices, not upward pressure on prices.
As the price of leather increases, it is most likely that: A. the supply of leather shoes will likely increase. B. the price of leather shoes will likely increase. C. the demand for leather shoes will decrease. D. the price of leather shoes will likely decrease.
B Leather is an input to the production of leather shoes. Therefore, the price of leather will impact the production of leather shoes. A rise in the price of inputs will shift the supply curve back to the left. Other things equal, the equilibrium price of leather shoes will rise and the quantity demanded will decline, NOT demand.
John and Susan are discussing how to divide up household chores of cleaning and cooking. John can do the cleaning in two hours and do the cooking in two hours. Susan can also do the cleaning in two hours. If Susan has a comparative advantage in cooking, can we say anything about how long it takes Susan to cook? A. No. It could be any amount. B. Yes. It must be less than two hours. C. Yes. It must be greater than two hours. D. Yes. It must be equal to two hours.
B Only if Susan takes more than two hours to cook, then John would have a comparative advantage in cooking. On the other hand, only if she takes less than two hours will she have a comparative advantage in cooking.
The opportunity cost of going on a vacation: A. is the dollar cost of the vacation. B. the net benefit you would have obtained if you had not gone on vacation. C. the net benefit of you taking the vacation. D. the cost you avoid by going on vacation.
B Opportunity cost is what you must sacrifice when you choose an activity. By going on vacation, you are sacrificing the net benefit from the activities you would have chosen had you not gone on vacation.
Which of the following is a good example of a public good? A. A Porsche Boxster. B. National Defense. C. A big house in Los Altos Hills, complete with a helicopter pad and a putting green. D. A vacation to Hawaii.
B Please see definition of a public good both in lecture and the text.
Suppose the quantity of apples demanded is less than the quantity of apples supplied. If this is the case, the invisible hand theory would: A. predict an increase in the price of apples. B. predict a decrease in the price of apples. C. predict no change in the price of apples. D. be completely unable to predict what would happen to the price of apples.
B Please see the definition and discussion of the invisible hand theory in the text, along with the concepts of supply and demand.
The three central coordination problems of any economy are: A. for whom to produce, what to produce, and why to produce. B. what to produce, how to produce, and for whom to produce. C. whether to produce, what to produce, and why to produce. D. how to produce, when to produce, and what to produce.
B Please see the definition regarding the three coordination problems both in the text and in lecture.
Which of the following statements is most true? A. Comparative advantages cannot be compared across countries. B. Because technology is more advanced in developed countries, they have a comparative advantage in producing all goods. C. Both developing and developed countries have comparative advantages in different goods. D. Because wages are lower in developed countries, they have a comparative advantage in producing all goods.
C Since all production has not flowed to either developed or developing countries, we know that each has a comparative advantage in different goods. Wages and production costs, by themselves, do not determine opportunity costs. Other costs such as distribution must also be taken into account.
Which of the following statements is true? A. The quantity supplied is directly related to prices, whereas supply is inversely related to price. B. The quantity supplied is inversely related to prices, whereas supply is directly related to price. C. Supply is represented graphically by a curve and quantity supplied as a point on that curve. D. The quantity supplied is represented graphically by a curve and supply as a point on that curve.
C Supply refers to a schedule of quantities that will be sold per unit of time at various prices. It refers to the entire supply curve. Quantity supplied refers to a specific amount that will be supplied per unit of time at a specific price. It refers to a point on a supply curve.
If the price of steel falls, the law of supply predicts that, other things constant: A. the supply of steel will increase. B. the supply of steel will decrease. C. the quantity supplied of steel will decrease. D. the quantity supplied of steel will increase.
C The law of supply states that a decrease in price will cause a decrease in quantity supplied or a movement along the supply curve, not a shift in the supply curve (increase or decrease in supply).
When an effective price ceiling is removed, we would expect the price of the good to _________________ and the quantity demanded to __________________. A. increase; decrease B. increase; increase C. decrease; decrease D. decrease; increase
A An effective price ceiling is below equilibrium price. Removing a price ceiling would result in movement up in price toward equilibrium. As price rises, quantity demanded will fall and quantity supplied will rise until they are equal at equilibrium price.
When an effective price floor is removed, we would expect the price of the good to _________________ and the quantity demanded to __________________. A. decrease; increase B. decrease; decrease C. increase; decrease D. increase; increase
A An effective price floor is above equilibrium price. Removing a price floor, therefore, would result in movement down in price toward equilibrium. As price falls, quantity demanded will increase and quantity supplied will decrease until they are equal at equilibrium price.
The false assumption that what is true for a part will also be true for the whole is called the: A. fallacy of composition. B. paradox of thrift. C. post hoc fallacy. D. ceteris paribus assumption.
A By definition, the false assumption that what is true for a part will also be true for the whole is called the fallacy of composition.
The distinction between a change in demand and a change in quantity demanded is best made by saying that: A. a change in quantity demanded is caused by a change in price and a change in demand is caused by a change in other factors besides price. B. a change is demand is caused by a change in price and a change in quantity demanded is caused by a change in other factors besides price. C. a change in quantity demanded causes a change in demand. D. a change in both quantity demanded and demand is caused by a change in price.
A Demand refers to a schedule of quantities that will be bought per unit of time at various prices. It refers to the entire demand curve. Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price. It refers to a point on the demand curve. Therefore, a change in quantity demanded is caused by a change in the price of the good in questions, whereas a change in demand is caused by anything other than a change in price for the given good.
Say that when you produce wheat, it is relatively inexpensive to produce initially, but then per unit costs tend to increase as more is produced. The production of wheat exhibits: A. increasing marginal opportunity costs. B. decreasing marginal opportunity costs. C. constant marginal opportunity costs. D. a lower cost of production.
A If the marginal cost of producing additional wheat rises as more wheat is produced, then the opportunity cost rises at an increasing rate, thus exhibits increasing marginal opportunity costs.
In the 1990's, the 76 million U.S. baby boomers began to put more and more savings for retirement in the stock market. The effect on stocks was to: A. raise their price and quantity. B. raise their price but reduce their quantity. C. reduce their price and raise their quantity. D. reduce their price and quantity.
A The aging of the U.S. baby boomers increases the demand for financial assets such as stocks, shifting the demand curve out to the right for stocks, thus increasing the equilibrium price and quantity for stocks.
The Law of Supply states that suppliers supply less of a good when its price declines because: A. a lower price means the opportunity cost of not supplying the good falls. B. the prices of inputs will rise as the price of the good supplied declines. C. the prices of inputs will decline as the price of the good supplied declines. D. a lower price means the opportunity cost of not supplying the good rises.
A The law of supply rests upon the ability of suppliers to substitute toward the production of goods whose prices have not declined. A lower price means a lower opportunity cost of not supplying the good.
Suppose you are earning $12 an hour at the local grocery store. At that wage you have decided to work 20 hours a week. If your wage were to increase to $19 an hour, thinking like an economist using the economic decision rule, you would most likely choose to work: A. more hours because the opportunity cost of leisure has risen. B. fewer hours because the opportunity cost of leisure has fallen. C. fewer hours because the opportunity cost of work has fallen. D. more hours because the opportunity cost of work has risen.
A The opportunity cost of leisure is the foregone benefit of work. Since the wage has risen, the opportunity cost of leisure has increased, and the opportunity cost of work has thus decreased. Therefore, thinking like an economist using the economic decision rule, you would want to work more hours.
Comparative advantage arises because: A. some resources are better suited for the production of some goods than others. B. all resources are equally suitable for the production of all goods. C. countries are identical in terms of the resources and technologies they possess. D. specialization and the division of labor do not help markets function more effectively.
A Only if some resources are better adapted (suited) to the production of some goods can comparative advantage exist.
Which of the following is not held constant as you move along the demand curve for beef? A. The price of chicken. B. The price of beef. C. The incomes of consumers. D. The preferences of consumers for beef and chicken.
B A movement along a demand curve shows the effect of a change in the price of that good. Anything else will shift the entire demand curve. Therefore, all of the other choices will cause a shift in the demand curve other than the price of beef itself, which will causes a movement along the existing demand curve for beef.
A Wall Street Journal headline reads: "Cigar Shortage Draws New Brands into Market." The shortage resulted from a renewed interest in smoking cigars. Most likely price for cigars was: A. too low because demand exceeded supply. B. too low because quantity demanded exceeded quantity supplied. C. too high because supply exceeded demand. D. too high because quantity supplied exceeded quantity demanded.
B A shortage results when price is below equilibrium price, thus quantity demanded exceeded quantity supplied. The options "demand exceeded supply" and "supply exceeded demand" are incorrect because demand and supply refer to the entire curve.
The existence of massive corporate advertising implies that: A. consumer sovereignty is completely meaningless. B. attempts to influence consumer sovereignty have most likely succeeded. C. attempts to influence consumer sovereignty have failed. D. consumer sovereignty is no longer important to corporations.
B Advertising by businesses is so massive precisely because businesses believe that advertising does sway the minds of consumers, and thus consumer sovereignty.
A quantity limitation placed on imports is known as a: A. tariff. B. quota. C. regulatory restriction. D. price floor.
B By definition, a quota is a quantity limitation placed on imports.
A market demand curve is constructed from individual demand curves by: A. multiplying the quantities demanded on each individual's demand curve at each price. B. adding quantities demanded at each price for each individual's demand curve. C. taking the maximum quantity of the individuals' demand curves at each price as the market quantity demanded at that price. D. taking the demand curve for the individual that is furthest to the right as the market demand curve.
B The market demand curve is the sum of the individual quantities demanded (individual's demand curves) at each price. In other words, adding the quantities demanded for each consumer in the market at various prices and then getting a "market" quantity demanded at various prices, thus the market demand curve.
The principle of increasing marginal opportunity cost states that initial opportunity costs are _______________ and they ______________________ the more you concentrate on the activity. A. high; decrease B. low; increase C. high; increase D. low; decrease
B The principle of increasing marginal opportunity cost states that in order to get more of something one must give up ever-increasing quantities of something else. This implies that initial opportunity costs are low, but increase the more you concentrate on the activity.
Combining the supply and demand curves, ______________________________ will result in an increase in equilibrium price and a decrease in equilibrium quantity. A. An increase in demand B. A decrease in demand C. An increase in supply D. A decrease in supply
D If supply shifts back to the left (a decrease in supply), equilibrium price rises and equilibrium quantity falls.
Neither equilibrium price or quantity will be affected when: A. the legal price floor is set above the equilibrium price. B. the legal price ceiling is set above the equilibrium price. C. a legal quota is set below equilibrium quantity. D. the legal price ceiling is set below the equilibrium price.
B A price ceiling is a government-imposed limit on how high a price can be charged for a particular good. To be an effective price ceiling it must be set below the equilibrium price. Setting the price ceiling above the equilibrium price will not affect either equilibrium price or quantity.
The production possibility curve represents the concept that a nation must sacrifice the output of some goods to produce other goods during a given period of time unless: A. the nation relies on capital goods production. B. presently resources are efficiently employed. C. presently resources are inefficiently employed. D. presently there is full employment of resources.
C A PPC measures the maximum combination of output that can be obtained from a given number of inputs. It represents the opportunity cost of decisions. Sacrifice is necessary unless one is operating inside the PPC, where resources are currently being underemployed or thus being used inefficiently.
To eliminate a surplus, a/an: A. effective price ceiling could be removed. B. demand curve could be shifted to the left to keep price constant. C. effective price floor could be removed. D. supply curve could be shifted to the right to keep price constant.
C A surplus occurs when price is higher than the equilibrium price. A price floor is such an example. If price were too high, the price ceiling must be above the existing price. Its removal would do nothing. A decrease in demand or an increase in supply would only exacerbate the surplus if price were to remain constant.
The introduction of a tariff will be expected to: A. increase exports. B. reduce the prices of exports but have no effect on the level of imports. C. reduce imports. D. increase the prices of exports but have no effect on the level of imports.
C A tariff shifts the supply curve of the imported good to the left, increasing its price and reducing quantity sold. Thus, imports will decrease.
The price of a ticket to the ballet is set at $50. All tickets for the ballet sell out one hour after they go on sale and there are still 5000 people who want to buy tickets. It follows that: A. the true equilibrium price of tickets to the ballet is less than $50. B. the true equilibrium price of tickets to the ballet is $50. C. the true equilibrium price of tickets to the ballet is more than $50. D. the quantity of tickets demanded is equal to the quantity supplied at the $50 price.
C At $50 per ticket, quantity demanded exceeds quantity supplied (given that 5000 people still wanted to buy tickets), so $50 cannot be the equilibrium price. To eliminate the shortage, price would have to rise to reach equilibrium, and as such, the equilibrium price for a ticket to the ballet is above $50.
In the U.S., the decision of what to produce is generally made by: A. business, based on what was produced in the past. B. government, based on what is most socially beneficial. C. business, based on what they believe will sell. D. government allocation of scarce resources.
C Businesses are motivated by profit. They decide what to produce based primarily upon what they believe they can sell, thus what they think consumers will buy. Past or historical data may partially influence businesses and their decisions on what to produce, but this is minor compared to the issue regarding what businesses feel they can sell and what consumers will likely want to buy. And although what businesses produce might be socially beneficial, it is the invisible hand that guides the market so that what is produced is socially beneficial.
When firms choose what to produce: A. they ignore consumer sovereignty. B. they are guided by government. C. they are guided by consumer sovereignty. D. they are generally not concerned with profitability.
C Businesses are motivated by profit. They will produce what they believe will sell which is determined ultimately by the consumer. That is, firms are guided by consumer sovereignty.
During a morning you can choose to play golf or attend class. Which of the following is true? A. The opportunity cost of playing golf will be zero. B. Attending class that morning is the benefit of playing golf. C. The opportunity cost of playing golf can be measured by what you sacrificed when you missed your class. D. You do not have enough information to say anything about the opportunity cost of playing golf in the morning, mainly because you don't play very well.
C By definition, opportunity cost is the benefit foregone of the activity one decided not to undertake for the option or activity that was chosen. Here, the opportunity cost of playing golf is the benefit foregone from attending class.
The benefit foregone by not undertaking the next-best activity is called: A. the total cost. B. the sunk cost. C. the opportunity cost. D. the marginal cost.
C Opportunity cost is the benefit you forego by not undertaking the next best alternative.
The opposing dynamic forces being considered in a model containing a supply curve and a demand curve cancel each other out when the market: A. is in surplus. B. is controlled by the government. C. is in equilibrium. D. is in shortage.
C Please see the discussion regarding equilibrium both in the text and in lecture.
Scarcity arises primarily because: A. resources are limitless. B. people want what is available, but never any more than that. C. people typically want more than is available. D. people are not altruistic.
C Scarcity is a perceived problem because human desires have always exceeded the human willingness to meet these desires. Scarcity would exist even if resources were unlimited because they would ultimately have to be allocated.
If a production possibility curve representing a tradeoff between two goods has a negative slope, we know that there is: A. a direct relationship between the two goods. B. no relationship between the two goods. C. an inverse relationship between the two goods. D. a totally bogus and bummed out relationship between the two goods, dude.
C The negative slope of the PPC implies that one can get more of one good only by giving up more of the other, so there is an inverse relationship between the two.
If the principle of increasing marginal opportunity cost holds true, then the production possibility curve will be: A. straight (linear) but upward sloping. B. straight (linear) but downward sloping. C. downward sloping and bowed out. D. downward sloping and bowed in.
C When the PPC is bowed out, as you increase production of one good, the slope of the curve becomes steeper. This implies that more and more of the other good must be given up. This follows the principle of increasing marginal opportunity cost.
A country has a comparative advantage in producing a good if it can produce that good: A. using resources that are less abundant in that country than they are in another country. B. using more resources than the production of that good requires in another country. C. at a higher opportunity cost than another country can. D. at a lower opportunity cost than another country can.
D A country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost than another country can.
Which of the following would not be expected to cause the supply of wool to decrease? A. An increase in wages paid to workers in the wool industry. B. A decrease in the number of wool producers. C. An increase in the cost of raising sheep. D. A decrease in the price of wool.
D A decrease in the price of wool causes the quantity supplied to decrease, corresponding to a movement along the supply curve and not a shift in supply (ie. cause a decrease/increase in supply).
Which of the following is least likely to change the supply of personal computers? A. A decrease in the wage paid to electrical engineers. B. An increase in the price of plastic used to produce personal computers. C. A technological breakthrough that makes it much less costly to produce computer chips. D. An increase in the number of consumers in the personal computer market.
D An increase in the number of consumers in the PC market will shift the demand curve for personal computers, not the supply curve. All the other options clearly shift the supply curve for personal computers.
Which of the following statements is true? A. Economists generally favor trade restrictions because they reduce foreign competition and boost the profits of domestic firms. B. Economists generally favor trade restrictions because they directly benefit U.S. producers. C. Economists generally oppose trade restrictions because they benefit U.S. producers. D. Economists generally oppose trade restrictions because they reduce specialization and hamper the division of labor, which leads to less efficiency
D Economists generally oppose trade restrictions because they reduce specialization and impede the division of labor (comparative advantages). The result is lower efficiency and lower global production and consumption.
Economic reasoning is based on the premise that: A. all decisions or actions are costless. B. only non-economic decisions or actions have a cost associated with them. C. only economic decisions or actions have a cost associated with them. D. all decisions and/or actions have a cost associated with them.
D Economists make decisions or take actions based on the costs associated with these decisions or actions regardless of their nature.
If you move from a point on the production possibility curve to a point inside the production possibility curve, it follows that: A. efficiency is increased because more of each good is produced. B. efficiency is increased because more of one good is produced. C. efficiency is increased even if there is less of each good is produced. D. efficiency is reduced.
D Efficiency is decreased when the economy moves from a point on the PPC to a point inside the PPC. This is because resources are allocated less effectively as a result of this movement, thus producing less output than could be produced if they were used more effectively.
If you choose to answer this question, an economist is likely to infer that: A. your opportunity cost of answering the question is zero. B. your opportunity cost of answering the question is too high. C. your opportunity cost of not answering the question is too low. D. your opportunity cost of not answering the question is too high.
D If you choose to answer the question, then you believe that the benefit from answering the question exceeds the benefit from not answering the question. Thus the opportunity cost of not answering the question must therefore be too high.
An increase in equilibrium price and decrease in equilibrium quantity is most likely caused by ____________________ shift in demand and __________________ shift in supply. A. a leftward; a leftward B. a rightward; a rightward C. a leftward; no D. no; a leftward
D Only a leftward shift in supply and no shift in demand will result in an increase in equilibrium price and a decrease in equilibrium quantity with certainty (most likely). A leftward shift or a rightward shift in supply and demand will cause quantity to decrease and increase respectively, but not impact equilibrium price per se. Also a leftward shift in demand will cause price and quantity to decrease.
When the wage rate paid to labor is below equilibrium: A. the supply of labor increases. B. the supply of labor decreases. C. the number of workers seeking jobs exceeds the number of jobs available. D. the number of jobs available exceeds the number of workers seeking jobs.
D Supply and demand curves for labor do not shift when price changes (in this case wages). If the current wage rate is below the equilibrium wage rate in the labor market, there will likely be a shortage of workers willing to work at those below equilibrium wages, and as a result, there will be a greater number of jobs available given the amount of workers available, and thus more jobs than workers(demand curve representing firms demanding labor and the supply curve representing workers willing to supply their labor to the labor market).
The existence of a market shortage implies: A. price is above equilibrium and must fall to restore equilibrium. B. price is above equilibrium and must rise to restore equilibrium. C. price is below equilibrium and must fall to restore equilibrium. D. price is below equilibrium and must rise to restore equilibrium.
D The first dynamic law of supply and demand states that whenever there is a shortage (price below equilibrium) or when quantity demanded exceeds quantity supplied, prices tend to rise.
The Law of Demand states that, other things constant, quantity demanded and: A. income are positively related. B. price are directly related. C. sales are positively related. D. price are inversely related.
D The law of demand states that more of a good will be demanded the lower its price, other things constant, and less of a good will be demanded the higher its price, other things constant. There is an inverse relationship between quantity demanded and price.
Which statement is inconsistent with the Law of Supply? A. More of a good will be supplied the higher its price, other things constant. B. Less of a good will be supplied the lower its price, other things constant. C. Quantity supplied of a good is directly related to the good's price. D. More of a good will be supplied the lower its price, other things constant.
D The law of supply states that, other things equal, as the price of a good goes up, the quantity supplied goes up and as the price of a good goes down, the quantity supplied goes down. Price and quantity supplied are directly related.
Households supply factors of production to business and are paid by business for doing so. The market where this interaction takes place is called the goods market. True False
False The factor market is the market in which inputs are supplied by households and demanded by businesses.
By comparing the production possibility curves of two individuals for the same two goods, it is completely impossible to determine who has the comparative advantage in which good. True False
False. The production possibility curve reflects the tradeoff between the production of two goods. Comparing two production possibility curves will tell one the difference in the tradeoffs and thus the comparative advantage of each individual. Please see the text regarding the discussion between the two students assisting each other on their assignments for further proof.
A change in the price of a good will cause a shift in the demand curve of that good. True False
False. A change in the price of a good will cause a movement along a demand curve, not a shift in the demand curve. Please see the discussion regarding the law of demand given in both the text and in lecture.
If the principle of increasing marginal opportunity cost holds true, then the opportunity cost of producing each additional unit of a good should fall as production of the good increases. True False
False. As we produce more of one good, we typically have to give up ever larger quantities of some other good. As such, if the principle of increasing marginal opportunity cost hold true, then the opportunity cost of producing an additional unit of a good will rise, not fall. Please see the definition and discussion of the principle of increasing marginal opportunity cost both in the text and in lecture for further information.
When price is below equilibrium price, most consumers will be able to buy all the goods they want at that price and there will be a surplus. True False
False. Equilibrium price is where quantity demanded equals quantity supplied. Below equilibrium price, there will be excess demand and thus consumers will not get to consume all that they want and there will be thus a shortage.
Businesses produce goods and services and sell them to households and government. The market where this interaction takes place is called the factor market. True False
False. The goods market is the market in which goods and services are supplied by businesses and demanded by households and government.
Cavier prices doubled from 1994 to 1996, while sales of cavier rose 20% (i.e., consumers purchased more cavier). According to the Law of Demand, this is completely and utterly impossible. True False
False. The law of demand states the higher the price, the less of a good will be demanded, other things constant. Although this example does not confirm the law of demand, it does not refute it. One must remember the "other things constant." A shift out in demand from 1994 to 1996 resulted in both rising prices and sales for cavier. Demand in this case was still downward sloping, which in essence still relates to the law of demand.
An economy that operates inside of its production possibility curve is much more efficient than it would be if it were operating on its production possibility curve. True False
False. The production possibility curve represents the most output we can get with a given level of inputs. Operating inside that curve we are using resources inefficiently. Therefore, being inside the PPC illustrates an inefficient level of production, much more inefficient than being on the PPC.
Scarcity exists because economies always provide individuals with incentives to solve the three coordination problems. True False
False. Scarcity exists because what people desire exceeds what they are willing and/or able to produce.
An effective price ceiling causes excess demand, resulting in the need to ration. True False
True. An effective price ceiling is a price below the equilibrium price so that quantity demanded exceeds quantity supplied (excess demand), and there will be a need to ration the good without relying on a higher price for the good to do the rationing per se.
An improvement in the technology for producing a good will shift the supply curve for that good to the right. True False
True. An improvement in the technology used for producing a good will lower the cost of production. Suppliers would be willing to supply more of that good at every price, thus shifting the supply curve for that good out to the right.
he opportunity cost of undertaking an activity depends on the value of the next-best activity which must be foregone. True False
True. Please see the discussion regarding opportunity cost and its definition given both in the text and in lecture.
According to the Law of Demand, the price of a good influences the amount people will choose to purchase. True False
True. This statement rephrases the law of demand, but essentially captures the law of demand.