Econ Test 1

Macroeconomic

Is the study of economy wide phenomena, including inflation, unemployment, and economic growth

factors of production

Land, labor, and capital; the three groups of resources that are used to make goods and services

Economics deals primarily with the concept of

Scarcity

In Econ, the cost of something is

What you give up to get it

Law of supply

an increase in price results in an increase in quantity supplied

normative statement

attempt to describe how the world should be, can not be reformed or refuted

positive statement

attempt to describe the world as it is, can be confirmed or refuted

Rational people make decisions at the margin by

comparing marginal costs and marginal benefits

Points above the PPF

not possible

Points on the PPF

possible and efficient

points below PPF

possible but not efficient

Efficiency means that

society is getting the maximum benefits from its scarce resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

When ppfs cross

1. The individuals have a comparative advantage in the good they have absolute advantage in 2. When the individual specialize and trade they produce only the good they have the comparative advantage in and then trade with the other individual that has a comparative advantage in the other good

Two goods are substitutes if a decrease in the price of one good.. a. decreases the demand for the other good. b. decreases the quantity demanded of the other good. c. increases the demand for the other good. d. increases the quantity demanded of the other good.

A

Which of the following events could cause an increase in the supply of ceiling fans? a. The number of sellers of ceiling fans increases. b. There is an increase in the price of air conditioners, and consumers regard air conditioners and ceiling fans as substitutes. c. There is an increase in the price of the motor that powers ceiling fans. d. All of the above are correct.

A

Which of the following is not a determinant of demand? a. the price of a resource that is used to produce the good b. the price of a complementary good c. the price of the good next month d. the price of a substitute good

A

Which of the following sets of events would most likely cause an increase in the price of a new house? a. higher wages for carpenters, higher wood prices, increases in consumer incomes, higher apartment rents, increases in population and expectations of higher house prices in the future b. lower wages for carpenters, lower wood prices, increases in consumer incomes, higher apartment rents, increases in population and expectations of higher house prices in the future c. lower wages for carpenters, higher wood prices, decreases in consumer incomes, higher apartment rents, decreases in population and expectations of higher house prices in the future d. higher wages for carpenters, lower wood prices, decreases in consumer incomes, lower apartment rents, decreases in population and expectations of lower house prices in the future

A

Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has just learned that its leading competitor, Toysorama, is mass-producing an excellent copy and plans to flood the market with their $5 doll in six weeks. Funsters should a. "fight fire with fire" by decreasing supply of its doll for six weeks and then increasing the supply. b. increase the supply of its doll now before the other doll hits the market. c. increase the price of its doll now. d. discontinue its doll

B

If suppliers expect the price of their product to fall in the future, then they will a. decrease supply now. b. increase supply now. c. decrease supply in the future but not now. d. increase supply in the future but not now.

B

In the circular-flow diagram, a. profit flows from households to firms. b. labor flows from households to firms. c. services flow from households to firms. d. All of the above are correct.

B

What will happen to the equilibrium price and quantity of traditional camera film if traditional cameras become less expensive, digital cameras become more expensive, the cost of the resources needed to manufacture traditional film goes up, and fewer firms decide to manufacture traditional film? a. Price will fall, and the effect on quantity is ambiguous. b. Price will rise, and the effect on quantity is ambiguous. c. Quantity will fall, and the effect on price is ambiguous. d. Quantity will rise, and the effect on price is ambiguous

B

Which of the following events would unambiguously cause a decrease in the equilibrium price of cotton shirts? a. an increase in the price of wool shirts and a decrease in the price of raw cotton b. a decrease in the price of wool shirts and a decrease in the price of raw cotton c. an increase in the price of wool shirts and an increase in the price of raw cotton d. a decrease in the price of wool shirts and an increase in the price of raw cotton

B

You love peanut butter. You hear on the news that 50 percent of the peanut crop in the South has been wiped out by drought, and that this will cause the price of peanuts to double by the end of the year. As a result, a. your demand for peanut butter will increase, but not until the end of the year. b. your demand for peanut butter increases today. c. your demand for peanut butter decreases as you look for a substitute good. d. you will wait for the price of jelly to change before altering your demand for peanut butter.

B

Why might the PPF be bow-shaped?

PPF becomes steeper, opportunity cost of x axis increases

Firms in diagrams

Buy/ hire factors of production use them to produce goods and services (sell goods and services)

. Equilibrium price must decrease when demand a. increases and supply does not change, when demand does not change and supply decreases, and when demand decreases and supply increases simultaneously. b. increases and supply does not change, when demand does not change and supply decreases, and when demand increases and supply decreases simultaneously. c. decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously. d. decreases and supply does not change, when demand does not change and supply increases, and when demand increases and supply decreases simultaneously

C

Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are... a. a substitute good. b. a normal good. c. an inferior good. d. a law-of-demand good.

C

Which of the following events could shift the demand curve for gasoline to the left? a. Income of gasoline buyers rises, and gasoline is a normal good. b. Income of gasoline buyers falls, and gasoline is an inferior good. c. Public service announcements are run on television, encouraging people to walk or ride bicycles instead of driving cars. d. The price of gasoline rises.

C

Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, a. the two countries' combined output of both goods will be higher than it would be in the absence of trade. b. Greece will produce more fish than it would produce in the absence of trade. c. Germany will produce more cars than it would produce in the absence of trade. d. All of the above are correct.

D

What would happen to the equilibrium price and quantity of lattés if the cost to produce steamed milk, which is used to make lattés, increased, and scientists discovered that lattés cause heart attacks? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would decrease, and the effect on equilibrium quantity would be ambiguous. d. The equilibrium quantity would decrease, and the effect on equilibrium price would be ambiguous

D

Which of the following events would cause a movement upward and to the right along the supply curve for tomatoes? a. The number of sellers of tomatoes increases. b. There is an advance in technology that reduces the cost of producing tomatoes. c. The price of fertilizer decreases, and fertilizer is an input in the production of tomatoes. d. The price of tomatoes rises.

D

Which of the following is not a characteristic of a perfectly competitive market? a. Different sellers sell identical products. b. There are many sellers. c. Sellers must accept the price the market determines. d. All of the above are characteristics of a perfectly competitive market.

D

A typical society strives to get the most it can from its scarce resources. At the same time this society at times to distribute the benefits of those resources to the members of the society in a fair manner. Other words the society faces a trade off between

Efficiency and equity

Which of the following is not a positive statement: higher gas prices will reduce gas consumption. Equity is more important than efficiency. Trade restrictions lower our standard of living. Prices rise when the government prints too much money.

Equity is more important than efficiency

Less steep PPF means

Lower opportunity cost on the X axis

A donut shop sells fresh baked donuts from 5 a.m. until 3 p.m. every day. The shop does not sell day-old donuts, so all unsold donuts are thrown away at 3 p.m. each day. The cost of making and selling a dozen donuts is $1.50; there are no costs associated with throwing donuts away. If the manager has 10 dozen donuts left at 2:30 p.m. on a particular day, which of the following alternatives is most attractive?

Lower the price of the remaining donuts even if the price falls below 1.50 per dozen

Households in diagrams

Own the factors of production, sell/rent them to firms for income ( buy and consume goods and services)

A production possibilities frontier that is a straight line shows

That resources can be shifted easily and seamlessly from the production of one good to the production of a different good

production possibilities frontier

a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

circular flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

law of demand

conditional on all else being equal, as the price of a good increases, quantity demanded decreases; conversely, as the price of a good decreases, quantity demanded increases

A change in prices moves

demand curve

Scarcity

refers to the limited nature of society's resources

Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that

the nation is not using all available resources or is using inferior technology or both.

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of this decision is

the value to Maurice of the option he would have chosen had Option B not been available.

opportunity cost

whatever must be given up to obtain some item (slope of PPF tells you the opportunity cost of one good in terms of the other)