MacroEconomics Exam 1
With trade the price of wagons in this country is
World price = Domestic supply and Domestic Demand $5, with 40 wagons produced in this country and another (90-40)=50 wagons imported
If China were to abandon a no-trade policy in favor of a free-trade policy
a total surplus in the Chinese economy would increase
Justin builds fences for a living. Justin's out-of-pocket expenses (for wood, paint, etc.) plus the value that he places on his own time amount to his
cost of building fences
The size of the deadweight loss generated from a tax is affected by the
elasticities of both supply and demand
In general, elasticity is a measure of
how much buyers and sellers respond to changes in market conditions
Welfare economics is the study of
how the allocation of resources affects economic well-being
Laffer Curve
illustrates a relationship between rates of taxation and the resulting levels of the government's tax revenue.
For any country, if the world price of zinc is lower than the domestic price of zinc without trade, that country should
import since, zinc because another country has a comparative advantage in zinc
Currently you purchase ten frozen pizza per month. You will graduate from college in December, and you will start a new job in January. You have no plans to purchase frozen pizzas in January. For you, frozen pizzas are a(n)
inferior / giffen good
One result of a tax, regardless of whether the tax is placed on the buyers or the sellers, is that the
tax reduces the welfare of both buyers and sellers
absolute advantage
the ability to produce a good using fewer inputs than another producer
If the price of the product is $18 then the total consumer surplus is
50 - 18 x 1 = 32 30 - 18 x 1 = 12 20 - 18 x 1 = 2 32 + 12 + 2 = 46 46 = total consumer surplus
About what percent of total world trade is accounted for by countries that belong to the World Trade Organizations?
97 percent
A legal minimum on the price at which a good can be sold is called a price
floor
Normal Goods
follow the normal laws of supply and demand
If the world price of textiles is higher than Vietnam's domestic price of textiles without trade, then Vietnam
has a comparative advantage in textiles
A country has a comparative advantage in a product if the world price is
higher than that's country's domestic price without trade
If a price ceiling is binding, then
there will be a shortage in the market the equilibrium price is above the price ceiling
If a price floor is binding, then
there will be a surplus in the market the equilibrium price is below the price floor
If a price floor is not binding, then
there will be no effect on the market price or quantity sold. the equilibrium price is above the price floor
If a price ceiling is not binding, then
there will be no effect on the market price or quantity sold. the equilibrium price is below the price ceiling
Economists typically measure efficiency using
total surplus
A sellers opportunity cost measures the
value of everything she must give up to produce a good
Assume, for Canada, that the domestic price of tomatoes without international trade is lower than the world price of tomatoes. This suggests that, in the production of tomatoes,
Canada has comparative advantage over other countries and Canada will export tomatoes.
Demand Shift Taste
Increase in taste, Shift right Decrease in taste, shift left
To fully understand how taxes affect economic well being we much compare the
reduced welfare of buyers and sellers to the revenue raised by the government
When a tax is levied on a good, the buyers and sellers of the good share the burden,
regardless of how the tax is levied
For a college student who wishes to calculate the true costs of going to college, the costs of room and board
should be counted only to the extent that they are more expensive at college than elsewhere
The before-trade domestic price of peaches in the United States is $40 per bushel. The world price of peaches is $52 per bushel. The U.S. is a price-taker in the market for peaches. If trade in peaches is allowed, the price of peaches in the United States
will increase, and this will cause consumer surplus to decrease. 40 -> 52 export
All other things equal
ceteris paribus
Economists view the fact that Florida grows oranges, Texas pumps oil, and California makes wine as
confirmation of the virtues of free trade
Supply shift number of sellers
increase in sellers, shift right decrease in sellers, shift left
buyers consumers
the demand side of the market
Property rights
the legal right to use goods, services, and resources
sellers producers
the supply side of the market
The price of a good that prevails in a world market is called the
world price
Congressman Smith cites the "jobs argument" when he argues in favor of restrictions on trade; he argues that everything can be produced at lower cost in other countries. The likely flaw in Congressman Smith's reasoning is that he ignores the fact that
the gains from trade are based on comparative advantage
If there is only one unit of the good and if the buyers bid against each other for the right to purchase it then the consumer surplus will be
45 - 35 x 1 = 10 45 - 36 x 1 = 9 ... $10 or slightly less
Goods produced abroad and sold domestically are called
imports
With trade, China will
Domestic Supply Quantity - Domestic Demand Quantity 450 - 200 = 250 export 250 pencil sharpeners
Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. Assume Erin is required to pay a tax of $40 when she hires someone to clean her house for a week. Which of the following is correct?
Erin will now clean her own house
Demand Shift Number of Buyers
Increase in Buyers, Shift right Decrease in Buyers, Shift left
Supply shift expectations about future
Increase in price, shift left Decrease in price, shift right
Demand Shift Expectations about the future
Increase in price/income, shift right Decrease in price/income, shift left
Demand Shift Income Inferior / Giffen good
Increase income, Shift left Decrease income, Shift right
Demand Shift Income Normal Good
Increase income, Shift right Decrease income, Shift left
Demand Shift Related Goods Compliments
Increase price, Shift left Decrease price, Shift right
Supply Shift Input prices
Increase price, shift left Decrease price, shift right
Demand Shift Related Goods Substitute
Increase price, shift right Decrease price, Shift left
Supply shift technology
Increase technology, shift right decrease technology, shift left
Suppose Jim and Tom can both produce two goods: baseball bats and hockey sticks. Which of the following is not possible?
Jim has a comparative advantage in the production of baseball bats and in the production of hockey sticks.
If the price of the product is $22 then who would be willing to purchase the product?
Lori - $50 Audrey - $30
The economy has the ability to produce at which points?
Points on the curve - most efficient points in the curve - inefficient but can still do
FACTORS OF PRODCUTION land labor capital entreprenuership
RELATED PAYMENTS rent wages interest profits/loss
Which of the following statements is not correct?
The invisible hand can remedy all types of market failures.
"Owners of firms in young industries should be willing to incur temporary losses if they believe that those firms will be profitable in the long run." This observation helps to explain why many economists are skeptical about the
infant - industry argument
Which is the most accurate statement about trade?
Trade can make every nation better off.
Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will
lower both price and total revenues
comparative advantage
ability to produce a good at a lower opportunity cost than another producer
In the simple circular flow diagram, firms
are the buyers of inputs
Inferior / Giffen goods
as the price increases, so does the quantity demanded. as the price decreases, so does the quantity demanded.
A legal maximum on the price at which a good can be sold is called a price
ceiling
If the government passes a law requiring sellers of mopeds to send $200 to the government for every moped they sell, then
none of the above
The opportunity cost of obtaining 20 additional lamps by moving from point W to point V is
none of the above; the economy cannot move from point W to point V (V is outside of the curve)
Comparative advantage is related most closely to which of the following
opportunity cost
What you give up to obtain an item is called your
opportunity cost
Assume, for Canada, that the domestic price of tomatoes without international trade is higher than the world price of tomatoes. This suggests that, in the production of tomatoes,
other countries have a comparative advantage over Canada and Canada will import tomatoes.
In the simple circular flow diagram, housholds
own the factors of productions are not the only decision makers
A likely example of compliment goods for most people would be
peanut butter and jelly tennis balls and tennis rackets televisions and subscriptions to cable television services
When supply and demand both increase, equilibrium
price may increase, decrease, or remain unchanged
Equilibrium price
the price at which the quantity demanded equals the quantity supplied
A logical starting point from which the study of international trade begins is
the principle of comparative advantage
The historical rise in living standards of American workers is primarily a result of
the rise in American productivity.
the deadweight loss from a $3 tax will be largest in a market with
elastic supply and elastic demand
For any country, if the world price of zinc is higher than the domestic price of zinc without trade, that country should
export zinc, since that country has a comparative advantage in zinc
Goods produced domestically and sold abroad are called
exports
If there is only one unit of the good and if the buyer's bid against each other for the right to purchase it, then the good will sell for
$35 or slightly more, most someone will pay is $45
Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. If Erin pays Ernesto $80 to clean her house, Ernesto's producer surplus is
(80 - 70) = 10 $10
Five arguments of restricting trade
1. Jobs Argument 2. National Security Argument 3. Infant Industry Argument 4. Unfair - Competition Argument 5. Protection - as - a - bargaining - chip Argument
The famous observation that households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desirable market outcomes comes from whose 1776 book?
Adam Smith
Who experiences the largest loss of consumer surplus when the price of the good increases from $20 to $22?
All the buyers experience the same loss of consumer surplus
Which of the following statements is correct concerning the burden of a tax imposed on take-out food?
Buyers and sellers share the burden of the tax.
Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that
Mike has an absolute advantage in chairs
Total Surplus
consumer surplus + producer surplus OR value to buyers - cost to sellers
Market power and externalities are examples of
market failure
market failure
markets produce to much or too little of an item
Elasticity
measure of the responsiveness of quantity demanded or quantity supplied
Consumer surplus
measures the benefit buyers receive from participating in a market
A likely example of substitute goods for most people would be
pencils and pens
Unemployment would cause an economy to
produce inside its production possibilities frontier
Economics deals primarily with the concept of
scarcity
Which of the following will cause no change in producer surplus?
the imposition of nonbinding prince ceiling in the market
The bowed shape of the production possibilities frontier can be explained by the fact that
the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing.
When tires are taxed and sellers of tires are required to pay the tax to the government,
the quantity of tires bought and sold in the market is reduced the price paid by buyers of tires increases there is a movement upward on the supply curve for tires
The maximum price that a buyer will pay for a good is called the
willingness to pay