ECON 202 exam one

If Susan bought nine gallons of gasoline at $1.50 per gallon, the car wash cost $1, but if she bought 10 gallons of gasoline, the car wash was free. Given that Susan is going to get the car wash, the marginal cost of the tenth gallon of gasoline is

$0.50

An airline ticket from Seattle to Miami costs $525. A bus ticket is $325. Traveling by plane will take 5 hours, compared with 25 hours by bus. Thus, the plane costs $200 more but saves 20 hours of time. (Hint: Note how we are "thinking at the margin" here by looking at the changes.) Other things constant, an individual will gain by choosing air travel if, and only if, each hour of her time is valued at more than

$10 per hour

Currently, federal and state gasoline taxes (imposed statutorily on the sellers of gasoline) amount to about $.45 per gallon. Suppose the current price of gasoline is $1.20 per gallon, and that if the tax was not in place, the price would be only $.80.

A $.05 burden is being borne by sellers and $.40 by consumers.

(I) The height of the demand curve for a commodity indicates the maximum amount the consumer would be willing to pay for each unit of the good. (II) The height of the supply curve for a commodity indicates the minimum price the seller would accept for each unit of the good.

Both I and II are true.

Criteria of ideal economic efficiency requires that (I) all actions generating more social benefit than cost be undertaken and (II) no actions generating more social cost than social benefit be undertaken.

Both I and II are true.

Which of the following actions is consistent with the basic economic postulate (the guidepost) that incentives matter?

Consumers buy fewer potatoes when the price of potatoes increases. A politician votes against a pay raise for himself because most of his constituents are strongly opposed to it and would vote against him in the next election. Farmers produce less corn because corn prices have declined. all of the above

a freeze in Florida devastates the orange crop at the same time a new study is released showing the health benefits of vitamin C (leading consumers to want to buy more orange juice). How will the equilibrium price and quantity of orange juice change in response to the combination of these two events?

Equilibrium price will increase, the effect on quantity is ambiguous.

What is an example positive economic statement?

Higher rates of investment lead to higher rates of economic growth.

Economy is the study of how

Individuals. make choices because of scarcity

Which of the following would be the best example of consumer surplus?

Jane pays $30 a month for phone service even though it is worth $70 to her.

Ken values his boat at $5,000, and Monica values it at $8,000. If Monica buys it from Ken for $7,000, which of the following is true?

Ken gains $2,000 of value, and Monica gains $1,000 of value.

In the mid-1940s, the marginal income tax rate in the top income tax bracket was 94 percent. In the 1960s, the top rate was lowered to 70 percent, and in the 1980s, the top rate was again lowered to 28 percent. The data show that as a result of these tax rate reductions, tax revenue (particularly from the rich) increased. This is consistent with the idea illustrated with the

Laffer curve

Which of the following is true?

Poverty implies that some basic level of need has not been attained

In economics, the statement, "There is no such thing as a free lunch," refers to which of the following?

Production of a good requires the use of scarce resources regardless of whether it is supplied free to the consumers.

People make decisions at the margin. Thus, when deciding whether to purchase a second car, they would compare

The additional benefits of the second car with the additional costs of the second car

Which of the following correctly describes an external benefit resulting from an individual's purchase of a winter flu shot?

The flu shot reduces the likelihood of others catching the flu.

If the demand for a good increases, which of the following will generally occur in a market setting?

The quantity supplied will increase.

Which of the following is a true statement regarding the economic impact of a subsidy?

When supply is relatively elastic, the benefits of a subsidy will mainly accrue to buyers.

Which of the following is not one of the basic economic questions that all economies must answer?

Which government agency will set the prices of the goods produced?

"Falling consumer income from the recent recession has hurt automakers in more ways than one. Not only have sales of new cars fallen, but car prices have fallen as well. As a result, the major automakers have announced cutbacks in production and layoffs of workers." Which of the following places these statements in the proper economic terminology within the context of the supply and demand model? [Note: It may help to graph this first.]

a decrease in demand and a decrease in quantity supplied

"The national debt is too large. The government must stop spending so much money." This statement is

a normative statement

Both price floors and price ceilings, when effective, lead to

a reduction in the quantity traded.

if an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market?

a surplus of unskilled labor

Which of the following are ways in which the private market provides consumers with valuable information to help them make better decisions?

a. brand names b. franchising c. private sector certification firms and consumer report magazines d. ALL OF THEE ABOVE

Private property rights exist when property rights are

a. exclusively controlled by the owner or owners. b. transferable to others. c. protected by legal enforcement. d. ALL OF THE ABOVE

General agreement exists that the legitimate economic functions of government include

a. protection against invasions from a foreign power. b. provision of goods that cannot easily be provided through markets. c. the maintenance of a framework of rules within which people can interact peacefully with one another. d. ALL OF THE ABOVE

Which of the following would allow the production possibilities curve for an economy to shift outward?

a. better social organization of economic activity, such as conversion from socialism to capitalism b. an increase in the labor force or resource base c. more investment leading to better technology and more innovation D. ALL IS THE ANSWER

Because illegal drug markets operate outside the legal system,

a. the quality of these drugs has increased. b. the sellers of illegal drugs earn less money. c. there is less violence in these markets than if they were legal. d. NONE OF THE ABOVE

What is not scarce?

air

Economic efficiency requires that

all economic activity generating more benefits than costs be undertaken

When economists use the term ceteris paribus, they indicate

all other factors are assumed to be constant

During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by

allowing the price to rise, so gas was rationed to those willing to pay the most for it.

Over the past 20 years both the quantity of health care provided and health care prices have been rising rapidly. Economic theory would suggest that the observed data could best be explained as

an increase in demand, while supply remained relatively constant.

If cigars and cigarettes are substitute goods, an increase in the price of cigars would result in

an increase in the demand for cigarettes.

A hurricane damaged much of the housing in Miami. Shortly thereafter, the price of plywood rose significantly. The events suggest that

an increase in the demand for plywood caused the price of plywood to rise.

Which of the following would be most likely to cause the demand for Miller beer to increase?

an increase in the price of Budweiser beer

Which of the following activities is least likely to give rise to external costs or benefits?

buying a hamburger and eating it for lunch

A form of economic organization that relies primarily on private ownership of productive assets, freedom of exchange, and market prices to allocate goods and resources is often called

capitalism.

The absence of well-defined and enforceable private property rights often

causes difficulties for society due to externalities.

When collective decision making (the political process) is used to resolve economic questions regarding the allocation of resources,

central planning and political bargaining will replace market forces.

Which of the following would cause the price of automobiles to rise?

consumer income increase

Suppose there is an increase in the excise tax imposed on cigarettes, a good for which the demand is relatively inelastic. The short-run burden of the tax increase will be borne primarily by

consumers, because the increase in market price will be large relative to the increase in the excise tax.

when an economist states a good is scarce, she means that

desire for the good exceeds the amount that is freely available from nature

When resources are being used wastefully or inefficiently, the

economy is operating at a point inside its production possibilities constraint.

The more elastic the supply of a product, the more likely it is that the burden of a tax will

fall on buyers.

The problem created when it is difficult to exclude nonpaying customers is called the

free-rider problem.

an income tax is regressive if

high-income recipients pay a lower percentage of their incomes in taxes than those whose incomes are low.

Which of the following is a guidepost to economic thinking?

incentives matter

"If gasoline were taxed, the price of gasoline would rise. Consequently, the demand for gasoline would fall, causing the price to fall to the original level." This statement is

incorrect--demand and quantity demanded are confused. The price increase would reduce quantity demanded, not demand.

"If income were redistributed in favor of the poor, we would eliminate scarcity." The preceding statement is

incorrect; it confuses the elimination of poverty with the elimination of the constraint imposed by scarcity.

An increase in the demand for a product will cause output to

increase and both the demand for and prices of the resources used to produce the product to increase.

The law of comparative advantage suggests that

individuals, states, and nations can all benefit if they trade with others.

The opportunity cost of choosing an alternative

is the value of the highest valued alternative forgone as the result of the choice.

Driving your automobile in Los Angeles during the rush hour causes externalities because

it adds congestion and pollution from auto exhaust, reducing the welfare of others.

It is difficult for the market process to provide public goods because

it will be difficult to get potential consumers to pay for such goods because there is not a direct link between payment for and receipt of the good.

What is an example that represents a normative statement?

its too hot in this room

A decrease in the supply of a good will

lead to an increase in the price of the good.

Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce too

little of the good that generates external benefits and too much of the good that generates the external cost.

New products provide a classic case of the consumer information problem. However, in some cases consumers partially solve the problem by trusting the "brand name" of the producer of the new product. Because firms spend millions of dollars advertising and maintaining their brand names, the likelihood of a "brand name" firm intentionally selling a dangerous or shoddy new product is

low because the firm with a brand name has a lot to lose if word spreads about bad consumer experiences.

Which of the following would most likely decrease the price of beef?

lower prices of grains used to produce cattle feed

The market pricing system corrects an excess supply by

lowering the product price and decreasing producer profits.

The basic difference between macroeconomics and microeconomics is that

macro focuses on the aggregate economy while micro focuses on small components of that economy

When economists say an individual displays economizing behavior, they simply mean that the individual is

making choices to gain the maximum benefit at the least possible cost.

Which of the following "goods" is the best example of a pure public good?

national defense

Competitive Behavior

occurs as a reaction to scarcity.

When the price of a good is legally set below the equilibrium level, a shortage often results. This shortage

occurs because the price ceiling prevents the market mechanism from establishing an equilibrium price.

The highest valued alternative that must be given up in order to choose an action is called its

opportunity cost

In the absence of government intervention, goods with external costs tend to be

overproduced

The English philosopher John Locke argued that

people own themselves as well as the fruits of their labor and thus the role of government is to protect these natural rights of individuals.

Positive economics differs from normative economics in that

positive economic statements are testable, and normative statements are not.

A legal minimum wage is an example of

price floor

If there was an increase in the excise tax on beer, what would be the effect on the equilibrium price and quantity of beer?

price increases, quantity decreases

If the demand for beer increased, what would be the effect on the equilibrium price and quantity of beer?

price increases, quantity increases

John advertises his used car for $3,000 in the newspaper. He would be willing to sell his used car for as low as $2,000. He is offered $2,600 for it from a buyer and accepts it. In this trade, John receives

producer surplus of $600.

Which one of the following would reduce the efficiency of the market process?

protecting consumers by imposing legally mandated price ceilings

Which of the following would be a protective function of government?

providing national defense

Which of the following are the four major factors that may undermine the ability of the invisible hand to produce market efficiency?

public goods, externalities, lack of competition, poorly informed buyers or sellers

Keri decided to sleep in today rather than attend her 9 a.m. economics class. According to economic analysis, her choice was

rational if Keri values sleep more highly than the benefit she expects to receive from attending the class.

Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls

reduce the future supply of rental housing.

When an economy is operating efficiently, the production of more of one good will result in the production of less of some other good because

resources are limited (scarce) and efficiency implies that all are already in use.

A decrease in the price of flour will shift the supply curve for donuts

rightward, causing the equilibrium price to decrease and equilibrium quantity to increase.

According to the law of supply, as the price of a good decreases

sellers will produce less of the good.

All things constant, a decrease in bus, train, and airplane fares will

shift the demand curve for automobiles to the left.

Middlemen, such as grocers, stockbrokers, and Realtors,

specialize in reducing transactions costs.

When Benjamin Franklin wrote, "Remember that time is money!" he understood

the concept of opportunity cost.

if coffee and cream are complements, a decrease in the price of coffee will cause

the demand for cream to increase.

Which of the following would most likely cause the current demand for DVD players to fall?

the expectation that the price of DVD players will decrease sharply during the next six months

The deadweight loss resulting from levying a tax on an economic activity is

the loss of potential gains from trade from activities forgone because of the tax.

The opportunity cost to the United States of placing a man on the moon was

the loss of utility from the highest valued bundle of products that had to be forgone because of the moon mission.

With a price ceiling above the equilibrium price,

the market would be in equilibrium.

If the price of tickets to the World Series were set below the equilibrium price,

the number of persons seeking to obtain tickets to World Series games would be greater than the number of tickets available

"If I didn't have a date tonight, I would save $10 and spend the evening playing tennis." The opportunity cost of the date is

the other things that could be purchased with the $10 plus the forgone value of a night of tennis.

If the market price is above the equilibrium price, there will be a tendency for price to decrease, causing

the quantity demanded to increase and the quantity supplied to decrease until they are equal.

Which of the following is a transaction cost?

time spent standing in line to buy the ticket

Which of the following best describes the implications of the law of comparative advantage? If each person sells goods for which he or she has the greatest comparative advantage in production and buys those for which his or her comparative advantage is least, the

total output available to each person can be expanded by specialization and exchange.

The major distinction between private and public goods is that

unlike private goods, public goods are nonexcludable--it is difficult or impossible to prevent nonpaying customers from receiving the good. c. unlike private goods, public goods are nonrival in consumption--the consumption of a unit by one person does not detract from the amount available to others.

The owners of private property will

use their property in ways that others value because the market will generally reward them with profits (or a higher selling price) if they do so.

In economics, the benefit (or satisfaction) that an individual gets from an activity is called

utility

When Adam Smith said economic activity was directed by an "invisible hand," he was referring to the fact that

when economic activity is directed by competitive markets, the actions of self-interested individuals will generally serve the public interest.

The Laffer curve illustrates the principle that

when tax rates are quite high, reducing tax rates will increase tax revenue.