ECO 110: Exam 1

when the price of a good or service changes,

there is a movement along a given supply curve

If the supply of a product decreases, then we would expect equilibrium price

to increase and equilibrium quantity to decrease

A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect

Both the value of a good to society and the cost of making it

Goods with many close substitutes tend to have

more elastic demands

Senario: Accounting and Economic Profit Wang's Wicker Furniture Store Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job, which paid $60,000 per year, and started Wang's Wicker Furniture Store. He rented a showroom for $20,000 for the year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was $150,000.

$5,000

Suppose the price elasticity of supply for minivans is 0.3 in the short run and 1.2 in the long run. If an increase in the demand for minivans causes the price of minivans to increase by 5%, then the quantity supplied of minivans will increase by about

1.5% in the short run and 6% in the long run

For which of the following individuals would the opportunity cost of going to college be highest?

A famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree

If at any given quantity ____, the decision maker should do ____ of the activity

MB > MC; more

Which combination would produce an increase in equilibrium price and an indeterminate change in equilibrium quantity? Increase in supply and increase in demand - A Increase in supply and decrease in demand - C Decrease in supply and increase in demand - B Decrease in supply and decrease in demand - D

B - Decrease in supply and increase in demand

The production of methamphetamine (meth) is a social problem in the Midwest. Iowa is considering two potential programs: Operation Methbust would increase the number of sheriffs' deputies to search out and destroy methamphetamine labs. Operation Say No to Meth would increase the training required of public school teachers so that they could better educate students about the health risks of using meth. Assuming that each program were successful, which of the following statements is correct?

Both Operation Methbust and Say No would reduce the equilibrium quantity of meth; Operation Methbust would increase the equilibrium price, whereas Say No would reduce the equilibrium price of meth.

Which combination would produce a decrease in equilibrium price and an indeterminate change in equilibrium quantity? Increase in supply and increase in demand - A Increase in supply and decrease in demand - C Decrease in supply and increase in demand - B Decrease in supply and decrease in demand - D

C - Increase in supply and decrease in demand

If the cross-price elasticity of two goods is negative, then the two goods are

Complements

The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%. The equilibrium price will

Decrease in both the aged cheddar cheese and bread markets

An early frost in the vineyards of Napa Valley would cause a(n)

Decrease in the supply of wine, increasing price

Which of the following events must cause equilibrium quantity to fall?

Demand and supply both decrease

Which of the following events must cause equilibrium quantity to rise?

Demand and supply both increase

The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an increase in total revenue if the

Demand for wheat is elastic

How does the concept of elasticity allow us to improve upon our understanding of supply and demand?

Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept

Suppose the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market?

Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous

Mark is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360. Mark discovers that he needs to do an additional $200 of work to make the cabinet worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for $100. What should he do?

He should complete the additional work and sell the cabinet for $360

Which of the following is likely to have the most price elastic demand?

Ice Cream

When a single person (or small group) has the ability to influence market prices, there is

Market power

According to a recent study of Chilean bus drivers, drivers who are paid by the number of passengers they transport have higher productivity than drivers who are paid by the hour. This result is an example of which principle of economics?

People respond to incentives

Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, residents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate?

People respond to incentives

What will happen to the equilibrium price and quantity of traditional camera film of traditional cameras become more expensive, digital cameras become cheaper, the cost of the resources needed to manufacture traditional film falls, and more firms decide to manufacture traditional film?

Price will fall, and the effect on quantity is ambiguous

A drug interdiction program that successfully reduces the supply of illegal drugs in the United States likely will

Raise the price, reduce the quantity, increase total revenues, and increase crime

Economics deals primarily with the concept of

Scarcity

In most societies, resources are allocated by

The combined actions of millions of households and firms

A surplus exists exists in a market if

The current price is above its equilibrium price

The implicit cost of capital is:

The opportunity cost of the capital used by a business

Under which of the following conditions would the interdiction of illegal drugs result in a decrease in the quantity of drugs sold and in a decrease in total spending on illegal, drugs by drug users?

The price elasticity of demand for illegal drugs is 1.3

If the price of a good is low,

The quantity supplied of the good could be zero

T or F: Because resources are scares, the true cost of anything is its opportunity cost.

True

T or F: Part of the explicit cost of owning a restaurant is rent paid for the kitchen equipment.

True

When we move upward and to the left along a linear, downward-sloping demand curve, price elasticity of demand

always becomes larger

A decrease in supply will cause the largest increase in price when

both supply and demand are inelastic

In a market economy, supply and demand determine

both the quantity of each good produced and the price at which it is sold

Today, producers changed their expectations about the future. This change

can affect today's supply

A movement upward and to the left along a demand curve is called a(n)

decrease in quantity demanded

An increase in the price of a good will

decrease in quantity demanded

Good news for farming can be bad news for farmers because the

demand for basic foodstuffs is usually inelastic, meaning that factors that shift supply to the right decrease total revenues to sellers

If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the

demand for marijuana is inelastic

Money that must be paid for the use of factors of production such as labor and capital is an

explicit cost

The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by

government actions that distort prices

Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. The change in equilibrium quantity would be

greater in the beef market than in the milk market

Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. The change in equilibrium price will be

greater in the milk market then in the beef market

If muffins and bagels are substitutes, a higher price for bagels would result in a(n)

increase in the demand for muffins

If the demand for textbooks is inelastic, then an increase in the price of textbooks will

increase total revenue of textbook sellers

For most firms, economic profit is:

less than accounting profit

Economic profit is

less than accounting profit if implicit costs exist

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

The term used to describe a situation i which markets do not allocate resources efficiently is

market failure

The supply curve for a good is a line relates

price and quantity supplied

The price elasticity of demand measures how much

quantity demanded responds to a change in price

When a shortage exists in a market, sellers

raise price, which decreases quantity demanded and increases quantity supplied until the shortage is eliminated

If soybean farmers know that the demand for soybeans is price inelastic, in order to increase their total revenues they should

reduce the number of acres they plant to decrease their output

An increase in demand is represented by a

rightward shift of a demand curve

In a market economy, economic activity is guided by

self-interest and prices

The market for diamond rings is closely linked to the market for high-quality diamonds. If a large quantity of high-quality diamonds enters the market, then the

supply curve diamond rings will shift right, which will create a surplus at the current price. Price will decrease, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be a lower price and higher quantity.

Mathew bakes apple pies that he sells at the local farmer's market. If the price of apples increases, the

supply curve for Mathew's pies will decrease

If the number of sellers in a market increases, then the

supply in that market will increase

Today's demand curve for gasoline could shift in response to a change in

the expected future price of gasoline

If at the current price, there is a shortage of a good, then

the price is below the equilibrium price

When computing the opportunity cost of attending a concert you should include

the price you pay for the ticket and the value of your time

For which of the following goods is the income elasticity of demand likely lowest?

water

Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10 percent of their land, then

wheat farmers would experience an increase in their total revenue

If demand is price inelastic, then when price rises, total revanue

will rise