PDF Homework Questions & Answers - Macro Exam One
How does consumer surplus change as the equilibrium price of a good rises or falls? As the price of a good rises, consumer surplus (1)___________________ and as the price of a good falls, consumer surplus (2)_______________
(1) Decreases & (2)Increases
A perfectly competitive is a market that meets the conditions of
(1) many buyers and sellers (2) all firms selling identical products and (3) no barriers to new firms entering the market
How can a country gain from specialization and trade
A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods or services
Productive Efficiency
A good or service is produced at the lowest possible costs
Productive efficiency means
A good or service is produced at the lowest possible costs
Economic Efficiency is
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum
If a surplus exists in a market, we know that the actual price is
Above the equilibrium price, and the quantity supplied is great than the quantity demanded
Which of the following would cause a shift in the demand curve from point A to point B
An increase in income (normal good) AND a decrease in income (inferior good) AND an increase in the price of a substitute good
Which of the following illustrates the law of supply
An increase in price causes an increase in the quantity supplied, and a decrease in price causes a decrease in the quantity supplied
Refer to the graph to the right. Which of the following represents the deadweight loss when the price of tea is $2.20 per cup?
Area C&E
If a shortage exists in a market, we know that the actual price is
Below the equilibrium price, and the quantity demanded is greater than the quantity supplied
Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the diagram to the right, deadweight loss is equal to the area(s):
C&E
What is the basis for trade
Comparative advantagw
The Toyota Prius is a gasoline-electric hybrid car that gets 54 miles to the gallon. An article in the Wall Street Journal notes that sales of the Prius have been hurt by low gasoline prices and that: "Americans are now more likely to trade in a hybrid or an electric vehicle for an SUV...." Does the article indicate that gasoline-powered cars and gasoline are substitutes or complements? Briefly explain.
Complements, because they are used together
Complete the following statement: When there is a shortage of a good
Consumers compete against one another by bidding the price upward
This indicated that more ______________ can be produced
Cotton
What is an entrepreneur?
Entrepreneurs operate businesses that produce goods and services
Scarcity is central to the study of economics because it implies that
Every choice involves an opportunity cost
Allocative Efficiency
Every good or service is produced to the point where marginal benefit is equal to marginal cost
Allocative efficiency means that
Every good or service is produced up to the point where marginal benefit is equal to marginal cost
What do economist mean by the word "marginal"?
Extra or additional
In a simple circular flow model, there are flows of __________ and flows of ___________
Factors of production; goods and services AND funds received from the sale of f of p; spending on final goods and services
An increase in demand causes and increase in the equilibrium price. The increase in equilibrium price will then cause an increase in supply
False
Centrally planned economies allocate resources based on decisions by
Government
Market economies answer these questions through decisions made by
Households and Firms
Which of the following are two key groups of participants in the circular flow of income?
Households and Firms
On the diagram, movement along the curve form A to B to C illustrates
Increasing marginal opportunity cost
On the diagram, the movement along the curve from points A to B to C illustrates
Increasing marginal opportunity costs
Which of the following is NOT a step that economist use in developing a useful economic model?
Make a value judgment about the merits of the hypothesis
A primary difference between macro and microeconomics is
Micro examines individual markets while macro examines the economy as a whole
Any Model is based on making assumptions becuase
Models have to be simplified to be useful AND we cannot analyze an economic issue unless we reduce its complexity
What type of economic analysis is concerned with the way things ought to be
Normative analysis
When economists develop models designed to explain the choices people make, they generally assume that
People are rational
The primary difference between product markets and factor markets is that
Product markets are markets for goods, while factor markets are markets for factors of production - labor, capital, natural resources, and entrepreneurial abiltiy
One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls
Scarcity
Consider the PPF that shoes the trade off between the production of cotton (y-axis) and the production of soybeans (x-axis) -- suppose the genetic modification that makes cotton resistant to insects, allowing yields to increase -- if a genetic modification makes cotton resistant to insects, the the PPF will
Shift out along the cotton axis
Additionally, the supply curve will
Shift to the left, because supplying childcare becomes more expensive
Proposals have been made to increase government regulation of childcare businesses by, for instance, setting education requirements for childcare workers. Suppose that these regulations increase the quality of childcare and cause the demand for childcare services to increase. At the same time, assume that complying with the new government regulations increases the costs of childcare businesses. -- Given these developments, the demand curve will
Shift to the right, because the quality of childcare increases
Does it indicate that gasoline-powered cars and hybrids are substitutes or complements?
Substitutes, because the more consumers buy of one good, the less they will buy of the other good
Opportunity Cost
The Highest valued alternative that must be given up to engage in an activity
Comparative Advantage
The ability to produce a good or service at a lower opportunity cost than other producers
What is comparative advantage?
The ability to produce a good or service at a lower opportunity cost than other producers
Absolute Advantage
The ability to produce more of a good or service than competitors using the same amount of resources
What is absolute advantage
The ability to produce more of a good or service than competitors using the same amount of resources
Refer to the graph to the right. After the government imposes a price of $3.50 in this market, area A represents
The consumer surplus transferred to producers
A variable that will cause the supply curve to shift
The cost of raw materials
When a competitive market is in equilibrium, what is the economically efficient level of output?
The output level where marginal cost is equal to marginal benefit
The Law of Demand is the assertion that
The quantity demanded of a product is inversely related to its price
According to the law of supply
There is a positive relationship between the price and quantity supplied AND as the price of a product increase, firms will supply more of it to the market
Why do entrepreneurs play a key role in a market system?
They bring together factors of production
During the 1928 presidential election campaign, Herbert Hoover, the republican candidate, argued that the United States should only import those products that could not be produced here. Do you believe that this would be a good policy?
This is not a good policy because it does not necessarily result in countries producing those goods for which they have a comparative advantage
What is the role of an entrepreneur
To bring together the factors of production & to take risks & to operate a business that produces a good or service
Which of the following best describes scarcity?
Unlimited wants exceed the limited resources available
The Three economic questions that every society must answer are
What goods will be produced How will they be produced Who will receive the goods
Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good
Will have a comparative advantage if it has a lower opportunity cost of producing that good
Given these changes, the net effect on equilibrium price is
an increase
On a shopping trip, Melanie decided to buy a light blue coat made from woven fabric. A tag on the coat stated that the price was $79.95. When she brought the coat to the store's sales clerk, Melanie was told that the coat was on sale, and she would pay 20 percent less than the price on the tag. After the discount was applied, Melanie paid $63.96, $15.99 less than the original price. -- The value of Melanie's consumer surplus from this purchase is
at least $15.99 since this is the difference between the price Melanie is willing to pay for the coat and the actual price she pays, but she could have be willing to pay more than $79.95 for the coat.
The primary difference between product markets and factor markets is that
product markets are markets for goods, while factor markets for factors of production - labor, capital, natural resources, and entrepreneurial ability
When the government imposes price floors or price ceilings
some people win, some people lose, and there is a loss of economic efficiency
One of the great benefits of trade is
that it makes it possible for society to become better off by increasing its consumption
Consumer surplus is
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays
Opportunity cost is
the highest valued alternative that must be given up to engage in an activity
Economists believe that an activity should be continued up to the point where
the marginal benefit from the activity is equal to the marginal cost
An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically
the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers' purchasing power
Economist assume that people are rational in the sense that
they use all available info as they take actions intended to achieve their goals
and the effect on equilibrium quantity is
uncertain