Macro Midterm

Identify four shift factors of supply with the correct explanation of how each affects supply

1. The price of inputs changes. As the price of inputs rises, supply decreases 2. Producers expect prices of their products to change in the future. As the price that producers expect to sell their products for increases, supply decreases. 3. When new production technologies are introduced the cost of production falls and supply increases. 4. Change in taxes paid by producers. As the amount of taxes that producers pay increases, supply decreases.

What is a demand curve?

A demand curve represents the maximum price that an individual will pay for various quantities of a good

"It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest." The preceding quote was made by:

Adam Smith

Mary has just stated that normally, as price rises, supply will increase. Her teacher grimaces. Why?

As price rises, quantity supplied will increase

Why is price directly related to quantity supplied?

As price rises, suppliers rearrange their activities to supply more of that good in order to take advantage of the higher price

Why is price inversely related to quantity demanded?

Because as price rises, consumers substitute other goods whose price has not risen.

In what way is the market for public post secondary education an example of a third-party-payer market?

Because students don't pay the entire cost of the education

In the United States, the government regulates business in its role as a "referee." Which of the following is not among the laws regulating the interaction between households and businesses?

Businesses are required to produce certain goods, called public goods, for the government. Businesses are not required to produce public goods for the government; when the government wants public goods, it pays with tax revenues.

How does a market economy solve the how to produce problem?

Businesses decide how to produce guided by what they believe will earn them the largest profit

How does a market economy solve the what to produce problem?

Businesses decide what to produce based on what they think will sell and earn profit for the business

When Coca Cola introduced a new, low-calorie version of Coca Cola called C2, despite a major marketing effort, sales of C2 were weak and many doubted that the product would last. Coke's experience with C2 illustrates the economic concept of:

Consumer sovereignty

Which economist is credited with developing the theory of comparative advantage in support of international trade?

David Ricardo

A medical report implying tea is bad for your health is published.

Demand will decrease, causing a fall in price and a fall in quantity.

Consumers' income falls. (Assume tea is a normal good.)

Demand will decrease, causing a fall in price and a fall in quantity.

Which of the following is not one of the three principal components of a socialist economy?

Entrepreneurs are encouraged by the profit motive, rather than government directive, to satisfy consumer wants in the most efficient manner possible Under socialism, government directives determine what is produced, not individuals.

The ability to organize and meet an objective, such as meeting regulatory and financial requirements to start and run a business, is known as:

Entrepreneurship

Which of the following is not an example of government's role as an actor?

Equal opportunity and labor laws that restrict businesses' freedom to hire and fire whomever they want Such laws directly affect the relationship between businesses and households and exemplify government's role as a referee, not an actor.

Suppose that at the current price consumers would like to purchase 10 million large-screen televisions and 15 million are available. When the market coordinates the demand and supply for large-screen televisions, the price of large-screen televisions will:

Fall If there is an excess supply of large-screen televisions, firms who cannot sell them at the current price will offer a lower price. As the price falls, fewer firms will supply them and more consumers will buy them, so the surplus will shrink.

Feudalism and mercantilism relied on markets to solve the three main coordination problems

False Feudalism solved these problems by relying on tradition while mercantilism relied on government intervention

It has just been reported that eating red meat is bad for your health.

In the market for steak, equilibrium price will fall and equilibrium quantity will fall

What is the expected impact of increased security measures imposed by the federal government on airlines and consumers? What do you predict will happen to airline fares and volume of travel?

Increased security measures imposed by government will increase the cost of providing air travel. This will shift the supply curve to the left. Demand will also decrease because consumers will not like the hassles of increased security and the additional time it takes to travel. Both shifts reduce equilibrium quantity. The effect of the measure on price is uncertain, since the effects of the shifts offset one another.

The Industrial Revolution was important to the history of economic systems because it:

Increased the power of capitalists and eventually led to a revolution instituting capitalism as the dominant economic system

Which two sources of revenue comprise most of federal government revenue?

Individual income tax and social security taxes and contributions

What is the impact of this on total educational expenditures?

It increases total expenditures

d. What would be the effect of raising the price of gasoline in the United States to $5 per gallon?

It will likely decrease the size of cars driven in the United States, increase correct U.S. use of public transportation, and increase the fuel efficiency of cars purchased in the United States.

In the United States, say gasoline costs consumers about $2.50 per gallon. In Italy, say it costs consumers about $6 per gallon. What effect does this price differential likely have on: b. The use of public transportation in the United States compared to Italy?

Italians likely use public transportation more than Americans use it

An economist who is studying the relationship between the money supply, interest rates, and the rate of inflation is engaged in:

Macroeconomic research

What kind of externalities affects the levels of unemployment, inflation, or growth in the economy as a whole?

Macroeconomics

Why are international organizations limited in their effectiveness?

Membership is voluntary and there is no world government to enforce the laws

More than 10,000 people waited in line for more than two hours to see a titan arum (a rare flower) at Cambridge's Botanic Garden. An economist would conclude that:

People felt they got great benefit from seeing the flower

Which of the following is most likely an action that supports competition?

Preventing two dominant firms in the same market from merging

Which of the following is a characteristic of a market economy?

Private property: A market economy is an economic system based on private property and the market. It gives private property rights to individuals and relies on market forces to coordinate economic activity

Identify four shift factors of demand with the correct explanation of how each affects demand

Shift factors of demand are income, price of other goods, tastes, expectations, and taxes and subsidies to consumers. As income rises, demand increases. As the prices of other substitute goods rise, demand increases. As tastes change to favor a particular good, the demand for that good increases. If people expect the price of a good to fall in the future, demand will fall now. Taxes reduce demand, while subsidies increase it

Nepalese villagers sell their kidneys as a way to earn much-needed money. Unfortunately, although the demand for such kidneys in developed economies is high and the medical facilities are available to conduct kidney transplants, the selling and buying of organs is illegal. What idea from Chapter 1 of the text does this situation best illustrate?

Social and political forces sometimes rein in market forces

Calculating market demand

Summing individual demand curves gives you a good sense where market demand curves come from.

Bad weather wreaks havoc with the tea crop.

Supply will decrease, causing a rise in price and a fall in quantity.

A technological innovation lowers the cost of producing tea.

Supply will increase correct, causing a fall in price and a rise in quantity.

OPEC announces it will increase oil production by 20 percent. What is the effect of this action on the price of oil now?

Supply will increase, causing the price of oil to fall

In the United States, say gasoline costs consumers about $2.50 per gallon. In Italy, say it costs consumers about $6 per gallon. What effect does this price differential likely have on: c. The fuel efficiency of cars in the United States compared to Italy?

The cars in Italy are most likely more fuel efficient than in the United States

In the United States, say gasoline costs consumers about $2.50 per gallon. In Italy, say it costs consumers about $6 per gallon. What effect does this price differential likely have on: a. The size of cars in the United States compared to Italy?

The cars in Italy are most likely much smaller than in the United States

Explain what a sudden popularity of "Economics Professor" brand casual wear would likely do to prices of that brand

The increase in demand would lead to excess demand, which will lead to higher prices. The net result is a higher equilibrium price and quantity.

State the law of demand

The law of demand states that quantity demanded rises as price falls, other things constant or that quantity demanded falls as price rises, other things constant.

State the law of supply

The law of supply states that quantity supplied rises as price increases, other things constant. Quantity supplied falls as price decreases, other things constant.

In a market economy, what is the central coordinating mechanism?

The price mechanism

Markets coordinate economic activity through:

The price mechanism

In most developing countries, there are long lines of taxis at airports, and these taxis often wait two or three hours for a customer. a. What does this tell you about the price in that market?

The price must be greater than the equilibrium price, causing excess supply

Assuming the retailer pays the sales tax, why does sales volume rise during weeks when states suspend taxes on sales by retailers?

The reduction in taxes will cause the price to demanders to fall and hence equilibrium quantity demanded will rise

why rent controls at, say P2, might increase the total payment that new renters pay for an apartment.

The rent control causes a shortage in the market. The impact of this rent control is that individuals are willing to pay far more than the controlled price. This key money is represented by P1 - P2

Assume that Argentina imposes a 20 percent tax on natural gas exports. What does it likely do to the price of natural gas in Argentina?

The tax will likely reduce the price of natural gas in Argentina as more gas is diverted to the domestic market

Say that the equilibrium price and quantity both rose. What would you say was the most likely cause?

There was an increase in demand and no change in supply

Which of the following was a Marxist prediction?

There would be significant differentiation between workers and owners of factories. - Marx correctly predicted that firms would become larger and larger as competition among capitalists fell, and that capitalists and workers would become increasingly differentiated

How does a market economy solve the for whom to produce problem?

Those who are willing to pay for the goods and services at the market-determined prices will get them

effective price ceiling

To have an effective price ceiling, the price ceiling must be below correct the equilibrium price. An effective price ceiling causes a shortage correct in the market.

Effective price floor

To have an effective price floor, the price floor must be above the equilibrium price. An effective price floor causes a surplus in the market.

The largest source of household income in the United States is:

Wages and salaries

Which of the following cannot be determined by using a production possibility table?

What combination of outputs is best A production possibility table indicates what combinations of goods can be produced, not what combination is best.

Marginal analysis suggests that you will engage in more of an activity if the:

additional benefit from the activity exceeds the additional cost The economic decision rule is to do more of something if the marginal benefit exceeds the marginal cost.

The Neolithic Revolution was characterized by:

adoption of agriculture and domestication of animals

Private property rights:

are essential elements of a market economy Private property rights give individuals control over private property. Without this control, incentives to produce and sell goods would be too limited to support markets.

Sunk costs:

are irrelevant to economic decisions Sunk costs are costs that already have been incurred and cannot be recaptured. They are in essence "water under the bridge," and as such, they do not influence economic decisions.

In principle, households ultimately control:

both businesses and the government

in a market economy:

businesses design their plans to maximize their profit and the market is relied upon to see that individual self-interest is consistent with society's interest Capitalism solves the how to problem by allowing businesspeople to decide how to produce efficiently guided by their desire to make a profit.

in the goods market:

businesses produce goods and services and sells them to households and government

In the former USSR, state planners decided what was to be produced. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. This is an example of (a):

command economy

Which of the following is NOT a characteristic of the Industrial Revolution?

decline of the middle class

Businesses do all of the following except:

demand goods and services from households in the goods market. Businesses produce the goods and services that households and the government demand.

When a government bans prostitutions, it may do so because it considers prostitution to be a:

demerit good

Using illegal drugs is an example of a

demerit good or activity

In the United States, government performs all of the following functions except:

determining production levels Businesses, not government, determine production levels

Most economies today are:

differentiated primarily by the degree to which they depend on markets

Because you can get more of one good only by giving up some of another good, the shape of a production possibility curve is:

downward-sloping

One advantage of a sole proprietorship over a corporation is:

ease of formation

When there are market externalities, the market allocation of resources will be optimal

false: When externalities arise, mutually beneficial transactions between buyers and sellers give rise to third party effects not accounted for by buyers or sellers. Because decision makers ignore these effects, there is no guarantee that their decisions will be in society's best interest

Influenza vaccination is an example of a

good or an activity that involves a negative or positive externality.

When the Sarbanes-Oxley Act that established new accounting rules was passed, analysts suggested that the new rules would not improve protections for the investing public, but it would result in more work for accountants. If the professors are right, these regulations are an example of:

government failure Government failure occurs when the government, in an effort to correct a problem, makes the situation worse.

One advantage of a corporation over a sole proprietorship is:

greater ability to obtain funds

Which of the following is a disadvantage of setting up a business as a corporation?

limited control by owners

Governments can make trading easier and more beneficial by:

limiting private restrictions on trade

What is market demand?

market demand is the horizontal sum of all individual demand curves

Eating fresh fruits and vegetables is an example of a

merit good or activity

In principle, socialism is:

more concerned about fairness than capitalism Socialism is in principle based on the idea that the needs of each individual should be met. In contrast, capitalism is based on the idea that "them that works, gets; them that don't, starve."

A change in the price of a good causes a ___________ the demand curve. A ____________ the demand curve means that the quantities will be different at all prices.

movement along, shift of

Waste produced by a power plant that harms local fishing industries is an example of a:

negative externality

When my neighbors benefit from my cleaning up of my yard, they are experiencing a:

positive externality

Quotas are quantity restrictions on imported goods. Demonstrate the effect of a quota on the price of imported goods.

price will rise, quantity will decline

Market economies are based upon:

private property and individual planning

For a market to exist:

private property rights must be allocated and defended by government

McDonald's Corporation lost a battle to keep a Singapore firm, Future Enterprises, from selling goods under the labels MacNoodles, MacTea, and MacChocolate. In this case, the court system in Singapore was defining:

property rights Trademarks, which were in dispute in this case, are a form of intellectual property rights

National defense is an example of a

public good

Suppose that at the current price producers of CDs offer 5 million CDs for sale but consumers want to buy 6 million. When the market coordinates the demand and supply for CDs, the price of CDs will:

rise If CDs are in short supply, some consumers who cannot buy them will begin to offer a higher price. As the price rises, fewer consumers will purchase them and more producers will supply them, so the shortage will diminish.

Adam Smith advocated laissez-faire because he believed it was in the interest of:

society as a whole Smith believed that markets allowed individuals to pursue their own self-interest and that this would benefit society as a whole through the invisible hand

Households are on the:

supply side of factor markets and the demand side of goods markets

In feudalism, serfdom was maintained primarily through:

tradition

In a feudalist society, in comparison with mercantilism:

tradition plays a more important role than the government

In a market economy, society relies on the self-interest of individuals to determine what, how, and for whom to produce.

true In a market economy, individuals decide how, what, and for whom to produce based on self-interest.

Private property rights are essential to market economies.

true Market economies rely on market forces, which themselves are dependent upon the existence of property rights.

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 factor market.

true The factor market is the market in which inputs are supplied by households and demanded by businesses.

Businesses produce goods and services and sell them to households and governments. The market where this interaction takes place is called the goods market.

true The goods market is the market in which goods and services are supplied by businesses and demanded by households and governments.

Adam Smith believed that the division of labor

was forced upon workers by a deistic God and was a force that would make workers "as stupid and ignorant as it is possible for a human creature to become."

A partnership is a business:

with two or more owners, with each owner liable for every other owner's actions