Econ Final
In the circular-flow diagram showing how a market system works,
. income flows to firms through product markets.
When does allocative efficiency occur?
Allocative efficiency occurs when production is in accordance with consumer preferences.
Why are models based on assumptions?
Because models have to be simplified to be useful.
Imagine that the next time the Indianapolis Colts play the New England Patriots at Lucas Oil Stadium in Indianapolis, Colts star quarterback Andrew Luck has a temporary lack of judgment and plans to sell Colts memorabilia during the game because he realizes that he can sell five times more Colts products than any other player. Likewise, imagine that you are a creative and effective manager at work and that you tell your employees that during the next six months, you plan to clean the offices because you can clean five times better than the cleaning staff. You shouldn't necessarily do what you are better than anyone else at doing
Both you and Andrew are making an error in judgment by assuming that specialization should be based upon absolute advantage. unless your advantage in that activity is greater than advantages you possess in other activities.
Using the same amount of resources, the United States and Canada can both produce lumberjack shirts and lumberjack boots, as shown in the production possibilities frontiers in the figure to the right.
Canada has a comparative advantage in producing lumberjack boots. The United States has a comparative advantage in producing lumberjack shirts.
How do market economies ultimately determine what goods and services are produced, how the goods and services will be produced, and who will receive the goods and services?
Consumers determine what goods and services are produced, firms determine how to produce them, and markets determine who will receive them.
Two neighbors, countries A and B, produce books and blankets, among other goods and services. However, Country A produces more of both goods than country B. A student of economics, Maya, also notes that in both countries, these industries individually employ 30 percent of the population. She concludes that country A has an absolute advantage in the production of books and blankets over country B. Which of the following, if true, would weaken Maya's conclusion?
Country A employs more capital per unit of labor in all industries than country B.
Which of the following, if true, would weaken Maya's conclusion?
Country A employs more capital per unit of labor in all industries than country B.
Consider the following statement: "The problem with economics is that it assumes that consumers and firms always make the correct decisions. But we know that everyone makes mistakes." What is the most correct response to this statement?
Economics assumes that consumers and firms are rational, not that they always make the right decisions.
Which of the following, if true, would suggest that the firm is operating on its PPF?
Even though the demand for both liquor and dark chocolates has increased, the company can increase the production of only one variety.
What are the two main categories of participants in markets?
Firms and households.
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
Is it necessary for the chief executive officer (CEO) of BlackBerry to know this information?
Generic knowledge about the product is certainly to be expected. But a CEO is more of a strategist and, ideally, a visionary, who orchestrates the conception, design, production, and marketing of an innovative product.
Which participants are of greatest importance in determining what goods and services are produced?
Households.
What does increasing marginal opportunity costs mean?
Increasing the production of a good requires larger and larger decreases in the production of another good.
XYZ firm, the leading producer of leather goods in its country is planning to expand its business. Industry experts identify Asia as a potential target market. They report that substitute products, particularly in India, are highly priced. Darren, the operational head, feels that exporting their product to India is a good idea. According to him, their price advantage alone will ensure good sales. However, his colleague, Mark, who is also the head of product development, feels that Darren is too optimistic, and that this venture may not turn out to be as profitable as Darren expects it to be. Which of the following, if true, would support Mark's point of view?
India has high import tariffs.
Harry Fletcher is a market analyst at an automobile firm. He formed a hypothesis that an increase in advertising would increase demand for the firm's cars. The ad campaign ran for a period of six months. However, the results were not as positive as Harry had anticipated. Which of the following, if true, can explain this outcome?
Interest rates increased substantially during this period.
What is the effect on the price of health-care services over time?
It increases because demand increased by more than supply.
Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions?
Macroeconomics
Which of the following statements about microeconomics and macroeconomics is correct?
Macroeconomics is the study of the economy as a whole.
Which of the following is not a step economists follow when developing an economic model?
Make value judgments to be proven or disproven.
Which of the following areas of economics studies issues such as ways to reduce teenage smoking?
Microeconomics
A primary difference between macroeconomics and microeconomics is
Microeconomics examines individual markets while macroeconomics examines the economy as a whole.
Which of the following statements about microeconomics and macroeconomics is correct?
Microeconomics involves the study of how households and firms make choices.
Does either country have an absolute advantage in producing both goods?
Neither country has an absolute advantage in both goods because Canada can produce more boots but the United States can produce more shirts.
What type of economic analysis is concerned with the way things ought to be?
Normative Analysis
Which of the following statements about normative analysis is correct?
Normative analysis is concerned with what ought to be.
Is it necessary for all of the managers in all of these firms to know how all of the components of the Torch are manufactured and how the components are assembled into a smartphone?
Of course not. Any given manager need only command the knowledge necessary to produce the component for which s/he has responsibility.
Trade-offs force society to make choices, particularly when answering the following three fundamental questions:
One, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced?
Use the following production possibilities frontier for a country to answer the following questions. Which point(s) are unattainable? Briefly explain why.
Point A because it is outside the production possibilities frontier.
At which point is the country's future growth rate likely to be the highest? Briefly explain why.
Point B because it is where the most resources are used to produce capital goods.
Which point(s) are inefficient? Briefly explain why.
Point B because it is where the most resources are used to produce capital goods.
Which point(s) are efficient? Briefly explain why.
Points B, C, and D because this is where maximum output is produced with available resources.
Which of the following statements about positive analysis is correct?
Positive analysis is concerned with what is.
When does productive efficiency occur?
Productive efficiency occurs when a good or service is produced at the lowest possible cost.
Suppose initially that the United States is consuming 2 boots and 12 shirts and Canada is consuming 8 boots and 4 shirts, as indicated in the figure. Then, suppose the United States and Canada specialize by each only producing the good for which they have a comparative advantage and then trade. In particular, suppose the United States trades Canada half of its production for half of what Canada produces.
The United States will have 0 additional shirt(s) after the trade (enter a numeric response using an integer) and 10 additional boot(s). At the same time, Canada will be able to consume 8 additional shirt(s) as a result of the trade and 4 additional boot(s).
What is comparative advantage?
The ability to produce a good or service at a lower opportunity cost than other producers.
What is absolute advantage?
The ability to produce more of a good or service than competitors using the same amount of resources.
Which one is best suited to find the quantity demanded at a price of $4.00?
The demand schedule.
Which of the following, if true, would suggest that the firm is operating at a point inside its PPF?
The firm believes in maintaining a certain amount of excess capacity to meet unexpected changes in demand.
Which of the following statements about the idea that people are rational is correct?
The idea assumes that consumers and firms use all available information as they act to achieve their goals.
What are the implications of this idea for the shape of the production possibilities frontier?
The production possibilities frontier will be bowed outward.
Suppose the president is attempting to decide whether the federal government should spend more on research to find a cure for heart disease. What is the opportunity cost of spending more money to find a cure for heart disease?
The reduction in funding for research to cure other diseases.
What factors should the federal government take into account in making its decision of which therapy it will allow Medicare funds to be used to pay for?
The relative cost of each therapy.
Which therapy would you recommend?
Therapy A.
Evaluate the following argument: "Adam Smith's analysis is based on a fundamental flaw: He assumes that people are motivated by self-interest. But this isn't true. I'm not selfish, and most people I know aren't selfish."
This statement is based on the misconception that following your self-interest and being selfish are the same thing.
Which of the following best describes scarcity?
Unlimited wants exceed the limited resources available.
A good for which demand increases as income rises is ________, and a good for which demand increases as income falls is ________.
a normal good; an inferior good
Indicate which of the following statements represent positive analysis and which represent normative analysis.
a. A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents positive analysis. b. The federal government should spend more on AIDS research. This represents normative analysis. c. Rising paper prices will increase textbook prices. This represents positive analysis. d. The price of coffee at Starbucks is too high. This represents normative analysis.
The primary difference between absolute and comparative advantage is
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
Why are independent courts important for a well-functioning economy? Independence is necessary for courts:
all of the above.
If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
an independent court system
Relative to a market economy, a centrally-planned economy would be expected to be
better at neither productive efficiency nor allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using the lowest-cost methods.
What role do they play in the working of a market system? Private property rights:
both a and b.
Microeconomics is most likely to include the study of
consumer choices.
Scarcity is central to the study of economics because it implies that
every choice involves an opportunity cost.
What do economists mean by the word "marginal"?
extra or additional
In economic terminology, the inputs used to make goods and services are referred to as
factors of production.
If Tesla Motors expends resources to expand its supercharger network, then an opportunity cost would be
fewer resources that could be devoted to car production.
To develop a model that will answer economic questions, economists typically:
first make simplifying assumptions, then formulate a hypothesis, test the hypothesis, and finally revise the model if necessary.
If country ABC can produce a unit of good 1 by sacrificing fewer units of good 2 than can country XYZ, it is correct to say that country ABC
has a comparative advantage in producing good 1.
If a country has a comparative advantage in the production of a good, then that country
has a lower opportunity cost in the production of that good.
Microeconomics is most likely the study of
household choices.
Microeconomics is the study of
how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
A portion of microeconomics examines:
how individual firms make choices, such as how they decide what prices to change.
Tom's lawn service specializes in mowing lawns and trimming bushes. Tom has 4 hours to devote to lawn services. In 1 hour, he can mow 4 lawns or trim 5 bushes. Use the line drawing tool to graph Tom's production possibilities frontier given he has 4 hours to devote to lawn services. Properly label this line. Carefully follow the instructions above, and only draw the required objects.
http://prntscr.com/f3bvih Tom's opportunity cost of mowing lawns in terms of trimming bushes is 1.25 trimmed bushes per mowed lawn.
Tom's lawn service specializes in mowing lawns and trimming bushes. Tom has 4 hours to devote to lawn services. In 1 hour, he can mow 4 lawns or trim 9 bushes. Use the line drawing tool to graph Tom's production possibilities frontier given he has 4 hours to devote to lawn services. Properly label this line. Carefully follow the instructions above, and only draw the required objects.
http://prntscr.com/f3c7qa Tom's opportunity cost of mowing lawns in terms of trimming bushes is 2.25 trimmed bushes per mowed lawn.
The equilibrium price and quantity of a product was $100 and 1,000 units per month in 2015 and is $150 and 800 units per month in 2016. 1.) Use the line drawing tool to draw new demand and supply curves illustrating the changes described above. 2.) Use the point drawing tool to plot the 2016 equilibrium. Carefully follow the instructions above, and only draw the required objects. From 2015 to 2016,
http://prntscr.com/f3c9cv supply decreased more than demand increased.
Scarcity implies that every society and every individual face trade-offs because scarcity means that
human wants are greater than what available resources can produce.
The production possibilities frontier will shift outward
if resources are used to produce capital goods.
What is the outcome of enforcing contracts and property rights in a market system?
increased economic activity
Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when
marginal benefit equals marginal cost.
The term "psychic rewards" refers to
nonmonetary forms of remuneration that are psychologically uplifting.
It is important for Tesla Motors to address the issue of long-distance travel because
people are less likely to buy a car that does not allow them the freedom to take longer trips.
When economists develop models designed to explain the choices people make, they generally assume that
people are rational.
The Scottish philosopher Adam Smith argued in 1776 that
prices would do a better job of coordinating the activities of buyers and sellers than guilds could.
Absolute advantage is the ability of an individual, a firm, or a country to
produce more of a good or service than competitors using the same amount of resources.
The difference between a change in supply and a change in the quantity supplied is that the latter is
produced by a change in the product's own price while the former is caused by a variety of variables other than the products price.
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 ability.
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
A production possibilities frontier:
shows the maximum attainable combinations of two goods that may be produced with available resources.
This reasoning is flawed because it assumes that
similar tastes and preferences translate into similar willingness and ability to pay.
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.
smaller
The production possibilities frontiers depicted in the diagram to the right illustrate
technological advances in the tank industry.
Macroeconomics examines:
the economy as a whole, such as how rapidly the economy grows.
Equity is
the fair distribution of economic benefits.
Opportunity cost is
the highest valued alternative that must be give up to engage in an activity.
A freelance singer-songwriter is planning the restoration of a recently purchased civil war-era farmhouse. While he professes an enjoyment of, and talent in the construction trades, the theory of comparative advantage implies that
the income lost while away from music will likely exceed the savings realized by doing the work himself, thus, he should hire professionals to do the restoration work.
Prepping for a next-day exam over the course of an evening (and possibly into the wee hours of test day) poses increasing costs since
the longer you choose to study will result in an increase in the number and value of foregone activities.
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.
Psychic rewards that an entrepreneur might receive include (check all that apply):
the pride of self-accomplishment. status within the community. being one's own boss.
What are private property rights? Private property rights are:
the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property.
Macroeconomics is
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
These individuals would see their position weakened most by the knowledge that
the substitution of domestic steel for foreign steel absorbs resources that would otherwise produce goods of greater value.
Macroeconomics is most likely the study of
unemployment.
How should policymakers determine the amount of money that should be allocated for research curing heart disease? They should base their decision on
whether the last dollar devoted to research on heart disease results in more benefit than the last dollar spent on research for curing other diseases.
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.
We can show economic inefficiency:
with points inside the production possibilities frontier.
We can show economic efficiency:
with points on the production possibilities frontier.
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.
