Microeconomics Midterm Review
Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.
$1,584.19.
If the interest rate is 15%, what is the future of value of $10,000 two years from now?
$13,225
Suppose you manage a convenience mart and are in charge of ordering products but do not set the price. The home office provides the prices. In your area the income elasticity of demand for peanut butter is -2.5. Due to local factory closing, you expect local incomes to decrease by 15% on average in the next month. As a result you should;
Stock 37.5% more peanut butter on the shelves
Ownership of a single corporation is represented by what investment?
Stock.
When an economist says that the demand for a product has increased, this means that:
consumers are now willing to purchase more of this product at each possible price.
Present value is best defined as the:
current worth of a financial asset purchased in the past.
With a downsloping demand curve and an upsloping supply curve for a product, a decrease in resource prices will:
decrease equilibrium price and increase equilibrium quantity.
Which of the following is a type of incentive?
direct
If the current wage for nurses is higher than the equilibrium wage, this will create a
surplus of nurses and downward pressure on wages.
When the price of fresh fish increases 10%, quantity demanded decreases 5%. The price elasticity of demand for fresh fish is ________ and total revenue from fresh fish sales will ________.
inelastic; increase
A market:
is an institution that brings together buyers and sellers.
A public good:
is available to all and cannot be denied to anyone.
Consumer surplus:
is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
Producer surplus:
is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.
If the income elasticity of demand for lard is −3.00, this means that:
lard is an inferior good.
The upward slope of the supply curve reflects the:
law of supply
Scarcity refers to the __________ nature of society's resources.
limited
We would expect the cross elasticity of demand between Pepsi and Coke to be:
positive, indicating substitute goods.
Interest is a reward for
postponing consumption.
The law of demand states that, other things equal:
price and quantity demanded are inversely related.
An increase in the quantity demanded means that:
price has declined and consumers therefore want to purchase more of the product.
The law of supply indicates that, other things equal:
producers will offer more of a product at high prices than at low prices.
Other things equal, if the price of a key resource used to produce product X falls, the:
product supply curve of X will shift to the right.
If the interest rate is 10%, what is the present value of $25,000 received two years from now?
$20,661
$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?
$210.
A surplus of a product will arise when price is:
above equilibrium, with the result that quantity supplied exceeds quantity demanded.
Suppose that burgers and fries are complements in consumption. If the price of fries increases,
overall demand for burgers will decrease.
The basic formula for the price elasticity of demand coefficient is:
percentage change in quantity demanded/percentage change in price.
A demand curve that is parallel to the horizontal axis is:
perfectly elastic
Price elasticity of supply is always positive except when supply is
perfectly inelastic.
Suppose the price elasticity of demand for cheeseburgers equals 0.37. This means the overall demand for cheeseburgers is:
price inelastic
The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is:
price.
The market system does not produce public goods because:
private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
A product has utility if it:
satisfies consumer wants.
In which of the following instances is the effect on equilibrium price dependent on the magnitude of the shifts in supply and demand?
Demand rises and supply rises.
Consider Dirk and Lee. They are both eating pizza. Which of the following statements is true regarding their satisfaction and utility?
Dirk and Lee both receive positive satisfaction from eating pizza.
If a factor of production has no production cost and has a fixed supply, then payments to that factor constitute what economists call:
Economic rent
The term market failure refers to
a market that fails to allocate resources efficiently
Economists use the term "demand" to refer to:
a schedule of various combinations of market prices and amounts/quantities demanded.
Suppose that the equilibrium price of a bike is $250. The government passes a law setting a maximum price of $150 for a bike. As a result of the legislation, there will be
a smaller number of mountain bikes sold than before the legislation.
A production possibilities frontier with constant opportunity cost is
a straight downward-sloping line.
Which of the following is an example of capital as a factor of production?
a wind turbine on a farm
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. Refer to the given information. An increase in the price of a product that is a close substitute for X will:
increase D, increase P, and increase Q.
Suppose the government decides the Big Mac is an American tradition. To recognize the value of the Big Mac, the government passes legislation making it illegal sell a Big Mac for less than $8. The equilibrium price of a Big Mac is $4. As a result of the government legislation, there will be
fewer Big Macs bought and sold than before.
In the financial capital market savers and investors interact through
financial intermediaries.
A normal good is one:
for which the consumption varies directly with income.
A price floor means that:
government is imposing a minimum legal price that is typically above the equilibrium price.
A perfectly inelastic demand curve:
graphs as a line parallel to the vertical axis.
In the case of negative externalities, social costs are ____________ internal costs.
greater than
The larger the positive cross elasticity coefficient of demand between products X and Y, the:
greater their substitutability.
Unlike a private good, a public good:
has benefits available to all, including nonpayers.
Suppose that government officials want to increase the population, so they offer a $1,000 payment to the parents of each child born. Which of the five foundations of economics best describes the thinking of these government officials?
incentives
Economics is the study of how people allocate their ________ resources to satisfy their nearly _________ wants.
limited; unlimited
Bonds represent:
loans to governments and corporations
Suppose that Marie is buying bananas. She decides that she would like to purchase three bananas at the price of $0.25/banana but not a fourth banana. Which of the five foundations of economics best describes Marie's thinking?
marginal thinking
To maximize utility, a consumer should allocate money income so that the:
marginal utility obtained from the last dollar spent on each product is the same.
A price ceiling is a legally imposed ___________ price.
maximum
If consumer incomes increase, the demand for product X:
may shift either to the right or left.
The price elasticity of demand
measures the responsiveness of quantity demanded to
A price floor is a legally imposed ___________ price.
minimum
According to the concept of the time-value of money:
money is more valuable to a person the sooner it is received.
At the equilibrium price:
there are no pressures on price to either rise or fall.
If two goods are complements:
a decrease in the price of one will increase the demand for the other.
Which of the following is an example of a public good?
A weather warning system.
Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity?
An increase in supply.
Which of the following interest rates is usually the highest?
Consumer credit-card rate
Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences:
a consumer surplus of $9 and Nathan experiences a producer surplus of $3.
Microeconomics is concerned with:
a detailed examination of specific economic units that make up the economic system.
Rent control is an example of
a price ceiling
The law of diminishing marginal utility states that:
beyond some point, additional units of a product will yield less and less extra satisfaction to a consumer.
For which of the following goods is supply the most responsive to a change in price?
hot dog vendor
With a downsloping demand curve and an upsloping supply curve for a product, placing an excise tax on this product will:
increase equilibrium price and decrease equilibrium quantity.
When consumers get the "biggest bang for the buck," we say they
reached a consumer optimum.
The owners of preferred stock
receive preferential treatment in the payment of dividends
In a market economy, the government's power to coerce can:
reduce private-sector risk and increase economic efficiency.
The term "quantity demanded":
refers to the amount of a product that will be purchased at some specific price.
The price elasticity of supply measures how:
responsive the quantity supplied of X is to changes in the price of X.
If the demand for labor increases and wages do not immediately adjust, there will be a
shortage of workers, and the equilibrium wage will eventually rise.
A positive externality or spillover benefit occurs when:
the benefits associated with a product exceed those accruing to people who consume it.
A negative externality or spillover cost occurs when:
the total cost of producing a good exceeds the costs borne by the producer.
Nonexcludability describes a condition where:
there is no effective way to keep people from using a good once it comes into being.
Suppose your friend can obtain concert tickets for $100 but you can't get them for less than $300. Your friend sells the tickets to you for $200. Which of the five foundations of economics best describes this activity?
trade creates value
Public goods are ___________ in the market.
underproduced
The ability of a good or service to satisfy wants is called:
utility.
A perfectly price-inelastic demand curve is
vertical
The supply curve for land is ordinarily
vertical.
The maximum amount of money that company shareholders can lose on their investment in the corporation is:
whatever they paid for the shares in the company.
A product market is in equilibrium:
where the demand and supply curves intersect.
The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of the third Pepsi is:
8 units of utility.
By choosing to consume at the consumer optimum, consumers will
maximize their total utility.
Which of the following is a difference between stocks and bonds?
Bonds make interest payments; stocks pay dividends.
If the interest rate is 5%, what is the future value of $5,000 three years from now?
$5,788
$500 invested at an annual interest rate of 8 percent will be worth how much at the end of one year?
$540.
Sam has two options this weekend. He could work at his job and earn $9/hour for three hours, or he could go to a show at the theater for that three hours. A ticket to the theater costs $30. What is the opportunity cost of going to the theater?
$57
If the interest rate is 5%, what is the present value of $10,000 received three years from now?
$8,638
If the interest rate is 6% per year what is the present value of $1,000 that you will receive two years from now?
$889.99
Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is:
1.2
Suppose the price of IBM computers falls from $2,500 to $2,000 and the quantity demanded increases from 10,000 to 20,000. Calculate the price elasticity of demand.
-3
Blossom, Inc. sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Blossom to raise price to $9, and the firm only manages to sell 460 bottles of perfume. The price elasticity of demand is:
0.33 and inelastic
Suppose that demand for automobiles increases by 25% when consumers' income increases by 20%. What is the income elasticity of demand for automobiles?
1.25
The Cozy Chair Company believes it can sell 200 chairs at $200 per chair, or 300 chairs at $150 per chair. Using the midpoint formula, calculate the price elasticity of demand for Cozy Chairs:
1.4
When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. The price-elasticity of demand coefficient for this product is:
1.5
The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a:
20 percent reduction in price.
Suppose the cross price elasticity between Burger King and McDonald burgers is 1.4. If McDonald's increases the price of their burgers by 20% then
Burger King will sell 28% more burgers
Information problems create inefficient outcomes in:
both the private and the public sectors.
Which of the following is a key difference between the economic activities of government and those of private firms?
Government has the legal right to force people to do things; private firms do not.
As a consequence of the problem of scarcity:
Individuals have to make choices from among alternatives
The price paid for the use of money is called:
Interest
According to the law of demand, what is the relationship between price and quantity demanded?
Inverse
A consumer is in equilibrium when consuming two goods when which of the following holds?
MUa/ Pa = MUb/ Pb
Suppose two workers can harvest $46 and three workers can harvest $60 worth of apples per day. On the basis of this information we can say that the:
Marginal revenue product of the third worker is $14
If the payment to an input is pure economic rent, then reducing that payment will:
Not influence the availability of the input
Flour is a factor of production of cupcakes. How will an increase in the price of flour affect the market for cupcakes?
Overall supply will decrease.
Which of the following statements is correct?
Price floors and price ceilings are typically imposed by the government.
What must happen to the market price in order for a shortage to be eliminated?
Price must rise.
In which of the following instances will total revenue decline?
Price rises and demand is elastic.
The opportunity cost to a consumer who smokes cigarettes consists of the:
Products that the consumer could have bought instead of cigarettes
A movement from one point to another along the production possibilities curve would imply that:
Society is producing a different combination of outputs
Which of the following is a positive economic statement?
Stock prices rose to a new record last month for the fourth month in a row
Which of the following is a source of government failure?
The enormous size and scope of government.
Which of the following is a normative economic statement?
The government needs to revamp the Social Security program to make it sustainable
Which of the following is a common solution to the free-rider problem?
The government provides the good and then pays for its production through taxation.
A change in which of the following will cause a change in the quantity demanded of coffee?
The price of coffee
A change in which of the following will cause a change in the quantity supplied of coffee?
The price of coffee
Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:
above the supply curve and above the actual price.
A perfectly inelastic demand schedule:
can be represented by a line parallel to the vertical axis.
Black markets are associated with:
ceiling prices and the resulting product shortages.
Marginal utility is the:
change in total utility obtained by consuming another unit of a good divided by the change in the price of that good.
Demand for a good is elastic if quantity demanded ________________ in response to a small price change.
changes significantly
The cross price elasticity of sugar with respect to coffee has been estimated as being equal to -.5; This implies that
coffee and sugar are complements
The true owners of a corporation are
common stockholders
Cost-benefit analysis attempts to:
compare the benefits and costs associated with any economic project or activity.
The basic difference between consumer goods and capital goods is that:
consumer goods satisfy wants directly while capital goods satisfy wants indirectly.
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. Refer to the given information. An increase in the price of a product that is a complement to X will:
decrease D, decrease P, and decrease Q.
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. Refer to the given information. An increase in the prices of resources used to produce X will:
decrease S, decrease P, and decrease Q.
The ABC Computer Company wants to increase the quantity of computers it sells by 5%. If the price elasticity of demand is 2.5, the company must
decrease price by 2.0%.
What effect would tougher immigration laws have on labor supply?
decrease the supply of labor
As the interest rate increases, the price of a bond will
decrease.
If X is a normal good, a rise in money income will shift the:
demand curve for X to the right.
If Z is an inferior good, an increase in money income will shift the:
demand curve for Z to the left.
People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a:
demand-side market failure.
Sue likes brownies. However, Sue notices that the more brownies she eats the less satisfaction she receives from each extra brownie. We can say that Sue is experiencing ___________________ from each extra brownie.
diminishing marginal utility
The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.
direct; inverse
Payments to shareholders from corporate profits are known as:
dividends.
The value of the marginal product curve slopes _________ due to _______________.
downward, diminishing marginal product
Limited liability rules:
encourage stock investing by limiting shareholder risk of loss.
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. Refer to the given information. Consumer expectations that the price of X will rise sharply in the future will:
increase D, increase P, and increase Q.
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. Refer to the given information. If X is an inferior good, a decrease in income will:
increase D, increase P, and increase Q.
In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. Refer to the given information. An improvement in the technology used to produce X will:
increase S, decrease P, and increase Q.
With a downsloping demand curve and an upsloping supply curve for a product, an increase in consumer income will:
increase equilibrium price and quantity if the product is a normal good.
A government subsidy to the producers of a product:
increases product supply.
Suppose that a 20 percent increase in the price of normal good Y causes a 10 percent decline in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is:
negative and therefore these goods are complements.
We would expect the cross elasticity of demand between dress shirts and ties to be:
negative, indicating complementary goods.
If one person's consumption of a good does not preclude another's consumption, the good is said to be:
nonrival in consumption.
The two main characteristics of a public good are:
nonrivalry and nonexcludability
An inferior good is:
not accurately defined by any of these statements.
If the cross-price elasticity of demand for two goods is zero, the two goods are
not related.
A positive statement is one that is:
objective and is based on facts.
Economists use the concept of ceteris paribus to examine a change in ____________ in a model, while assuming that all other variables remain constant.
one variable
The Latin term "ceteris paribus" means:
other things being equal
Which of the following is an example of labor as a factor of production?
pilots flying for American Airlines
Nonrivalry and nonexcludability are the main characteristics of:
public goods.
The formula for cross elasticity of demand is percentage change in:
quantity demanded of X/percentage change in price of Y.
If the supply and demand curves for a product both decrease, then equilibrium:
quantity must decline, but equilibrium price may rise, fall, or remain unchanged.
An effective price floor will:
result in a product surplus.
A leftward shift of a product supply curve might be caused by:
some firms leaving an industry.
Macroeconomics can best be described as the:
study of the large aggregates of the economy or the economy as a whole.
In 2007, the price of oil increased, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are:
substitute goods and the higher price for oil increased the demand for natural gas.
Which of the following is a solution to negative externalities?
taxes
Which of the following is an assumption that underlies the construction of a production possibilities frontier?
that the quantity of resources increases with trade
Demand-side market failures occur when:
the demand and supply curves don't reflect consumers' full willingness to pay for a good or service.
A nation's production possibilities curve might shift to the left (inward) as a result of:
the depletion of its soil fertility due to overplanting and overgrazing.
What is the best economic explanation for why a person would drop out of college to take a job or start a business?
the expected future benefits from starting a business now are greater than the costs
Because of the free-rider problem:
the market demand for a public good is nonexistent or understated.
A production possibilities curve shows:
the maximum amounts of two goods that can be produced, assuming the full use of available resources.
According to the marginal-cost-marginal-benefit rule:
the optimal project size is the one for which MB = MC.
Suppose the price of a 75" HD TV remains the same and the price of an iPhone decreases. What noticeable effect(s) occur(s)?
the substitution effect and real-income effect, if there is a noticeable change in purchasing power