Exam 2 Review

What is the basic idea behind comparative advantage?

It is based on the idea of opportunity costs. The person with comparative advantage in something is the person who can do it at the lowest opportunity cost and society as a whole will be able to produce more.

What problem results in markets when the good is a public good and how can the government solve the problem?

Underproduction occurs in the market for public goods. No one wants to buy the good in hopes of being a free rider. Government can solve this problem by taxing the public good and using part of that tax revenue to pay for the public good.

Marginal private cost is:

the cost paid by the seller in producing one additional unit of output

Chin purchases five protein bars at a price of $3 each. The marginal benefit he receives from each bar is $5 for the first bar, $4.50 for the second bar, $4 for the third bar, $3.50 for the fourth bar, and $3 for the fifth bar. The marginal cost of producing the bars is $2.50 each. What is Chin's consumer surplus on the fifth bar?

$5

Suppose that 1 hour of labor in Singapore can produce 20 computers or 40 cellphones. Further, suppose that 1 hour of labor in Ireland can produce 10 computes or 15 cellphones. ____ has a comparative advantage in computers. ____ has a comparative advantage in cell phones.

Ireland, Singapore

What is positive analysis?

It describes what is happening, explains why it is happening, or predicts what will happen.

Explain the function of price as an incentive:

Price acts as an incentive through changes in price. If the price goes up it creates an incentive for buyers to buy less and sellers to produce and sell more. If the price goes down it creates an incentive for buyers to buy more and sellers to produce and sell less.

Explain the function of price as information:

Price aggregates all the information of supply and demand and summarizes the desires of decision makers. It gives insight into how all of these actions come together.

Explain the function of price as a signal:

Prices as signals communicate to buyers and sellers. A change in price alerts buyers that something is going on relating to supply and it alerts sellers that something is going on relating to demand.

Pedro attends a university that requires all students, faculty, and staff to have antivirus software on their computers and provides -- at no cost -- antivirus software for their computers. Why would the university pay for the protection of the personal computers?

This is an example of company rules targeting externalities. If one person gets a virus that can make use of their personal computer more difficult. But if he shares the virus with others this is a negative externality when it impacts others. The university minimizes this risk by paying for antivirus software.

An externality is defined as:

a side-effect of an activity that affects bystanders whose interests are not taken into account

Which of the following is an example of a quota? a. a government limits the amount of a product that can be sold in a market. b. a government sets a minimum or maximum price that can be charged. c. a government sets a limit on how many inputs can be used in the production process. d. a government places a regulation on how many consumers are allowed in a market.

a. a government limits the amount of a product that can be sold in a market.

Price is functioning as a signal when it: a. is a line of communication between buyers and sellers in a market b. creates incentives for changes in production and consumption c. broadcasts useful information d. summarizes all that is happening in the market

a. is a line of communication between buyers and sellers in a market

A binding price ceiling is:

always below the equilibrium price

When looking at a demand and supply graph, if a tax is implemented on a seller, the vertical distance between the old and new supply curves at the new equilibrium quantity will be equivalent to the:

amount of the tax

Marjean walks to work every day along a busy road. As she does so, she breathes in the fumes of many cars, often arriving at work coughing. The economic term for the impact of the cars on Marjean is called:

an externality

Which of the following is MOST likely to be traded internationally? a. land b. hair gel c. bowling alleys d. taxi rides

b. hair gel

The socially optimal amount of an activity is:

based on cost-benefit analysis

The principle of comparative advantage applies to interactions:

between people as well as in business production decisions

Voluntary exchange occurs when:

both the buyer and the seller will gain from the trade

The economic burden of a tax is the:

burden created by the change in after-tax prices faced by buyers and sellers

Which of the following statements is TRUE regarding economic efficiency? a. efficient outcomes will make everyone better off b. efficient outcomes are also equitable c. efficient outcomes rarely make everyone happy d. efficiency is associated with minimizing economic surplus

c. efficient outcomes rarely make everyone happy

Which of the following statements about international trade is true? a. after trade, one country gains and the other is worse off b. if trade occurs, people's welfare will worsen c. producers in different countries should specialize in the production of goods for which their opportunity cost is low d. international trade is based on absolute advantage

c. producers in different countries should specialize in the production of goods for which their opportunity cost is low

In markets, prices act as all of the following except a. incentives b. signals c. productivity d. information

c. productivity

Rent control is an example of a price ____

ceiling

Usury laws on payday loan companies are an example of a price ____

ceiling

What type of good is rival and nonexcludable?

common resources

When goods are allocated in a way that creates the largest economic surplus:

efficient allocation has been achieved

A key difference between equity and efficiency is that equity deals with ____ and efficiency focuses on ____.

fairness maximizing economic surplus

A minimum wage is an example of a price ____

floor

Canadian price regulations on the minimum price of alcohol are an example of a price _____

floor

Markets allocate:

goods, services, and resources

Jane sells bowls of noodles for $6 at her shop. The average price of a bowl of noodles in her city starts rising. In response to this, Jane starts to produce more bowls of noodles and raises her price to $6.50. This is an example of price functioning as a :

incentive

A corrective subsidy:

incentivizes an increase in the output when positive externalities exist

Globalization

is the increasing economic, political, and cultural integration of different countries

From an economic perspective, the outcome that yields the greatest economic surplus is the:

most efficient outcome

Statements about what option should be chosen are ____ statements.

normative

Cap and trade means that each business has:

permits to emit a certain quantity of pollutants and can trade or sell those permits to other companies

How does the accuracy of prediction markets compare to public opinion polls?

prediction markets provide more accurate forecasts

The price of a cup of coffee goes up. This communicates to Stella that coffee has become more valuable. Price is functioning as a:

signal