Economics Exam #1

1 - How does the study of microeconomics differ from that of macroeconomics? 2 - Give one example each of an issue studied in microeconomics and in macroeconomics.

1 - Microeconomics is the study of how household and businesses make choices, how they interact in markets, and how the government attempts to influence their choices while macroeconomics is the study of the economy as a whole, including topics like unemployment, inflation and economic growth. 2 - Macro = Inflation or Unemployment Micro = Congress raising taxes and cutting spending to reduce aggregate demand

Which of the following best describes the difference between a centrally planned economy and a market economy?

A centrally planned economy is an economy in which the government decides how the economic resources will be allocated. A market economy is an economy where households and firms interact within markets to determine how economic resources will be allocated.

A price ceiling is...

A legally determined maximum price that sellers charge (i.e. rent control).

Which of the following best describes a mixed economy?

A mixed economy is a modern economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

When a market is not in equilibrium which of the following best describes the condition that is known as deadweight loss?

A reduction in economic surplus resulting from a market not being in competitive equilibrium or simply stated deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

Give an example of a surplus.

A surplus is a situation in which the quantity supplied is greater than the quantity demanded. An example of a surplus would be a doughnut shop that produces 500 doughnuts a day but historically has sold 300 daily.

Explain absolute advantage....

Absolute Advantage is the ability of an individual, firm, or country to produce more of a good or service at a lower opportunity cost than someone else while using the SAME amount of resources.

Marginal cost is the ________ associated with a particular increase in an activity.

Additional cost

If a decrease in income leads to an increase in the demand for macaroni, then macaroni is...

An inferior good

Canada produces 100 tons of maple syrup each year. The United States produces 72 tons of maple syrup each year. Which of the following statements is true?

Canada has the absolute advantage when producing maple syrup.

The basis for trade is...

Comparative advantage

Goods and services that are used together are called...

Complements

You and your neighbor both have fruit trees on your property. You both have apple trees and cherry trees on your property. Which of the following is a concept discussed in chapter 2 you should consider?

Consider using the production possibilities frontier to show how both you and your neighbor could benefit from trading if you each specialize in one of the fruits.

The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays is called

Consumer Surplus Explanation: Consumer surplus allows us to measure the benefit consumers receive in excess of the price they pay to purchase the product. An example of this would be if I were willing to pay $50 for a new shirt however when I looked at the price tag the shirt was only $42. The $8 difference is a consumer surplus.

The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays is called...

Consumer surplus

Economics promotes which of the following as the way to make the best decision?

Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.

(T/F) Price floors are illegal in the United States.

False

(T/F) Quantity supplied is the same as the Law of Supply.

False

(T/F) Absolute advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

False (Comparative)

(T/F) Rent control is an example of a price floor.

False (Price Ceiling)

Which of the following is a normative economic statement?

Fashion designers should be allowed to copyright designs to promote innovation.

What is the Law of Demand? (WRITE OUT!)

Holding everything else constant, when the price of a product falls, the quantity demanded will increase, when the price of the product rises, the quantity demanded will decrease.

Suppose the U.S. president is attempting to decide whether the federal government should spend more on research to find a cure for heart disease. He asks you, one of his economic advisors, to prepare a report discussing the relevant factors he should consider. Use the concepts of opportunity cost and trade-offs to discuss some of the main issues you would deal with in your report.

If the federal government has a fixed budget for medical research, then the opportunity cost of funding more research on heart disease is the reduction in funding for research on other diseases. The decision should be made at the margin: to maximize the benefits from government spending on medical research, the last dollar devoted to research on heart disease should result in the same marginal benefit—less disease and fewer deaths—as the last dollar spent on research for other diseases. If the additional funding for research on heart disease comes at the expense of other non-medical research expenditures, then the opportunity cost will be different, but a similar analysis should be conducted.

Which of the following is true based on the following scenario (assume the price associated is the highest price each person is willing to pay): Jessica is willing to pay $8 for a Starbucks coffee Kaylee is willing to pay $6 for a Starbucks coffee Zack is willing to pay $2 for a Starbucks coffee Warren is willing to pay $1.50 for a Starbucks coffee If the price of a Starbucks coffee were $5...

Jessica and Kaylee would purchase the coffee and experience surplus as follows: Jessica's consumer surplus would be $3 Kaylee's consumer surplus would be $1

The additional benefit to a consumer from consuming one more unit of a good or service is called

Marginal benefit

Three key economic ideas are presented in Chapter 1 to help us understand the market. Which of the following is not one of these key ideas?

Money is the most important motivator in all economic decisions.

The highest value alternative that must be given up to engage in an activity is known as...

Opportunity cost

The milk market is an example of a...

Price floor

GRAPH 1 - The graph pictured shows price point P and supply curve S. Which of the following best describes the red shaded area?

Producer surplus

The amount of a good or service that a consumer is willing and able to purchase at a given price is known as...

Quantity Demanded

Samantha is a farmer in Florida who grows both oranges and apples. Warren is a farmer in Washington who grows both oranges and apples. Samantha's opportunity cost for growing 1 pound of apples is 2 pounds of oranges and her opportunity cost of 1 pound of oranges is 1/4 pound of apples. This means based on the resources Samantha has she must give up harvesting 2 pounds of oranges for every 1 pound of apples she chooses to produce and she gives up 1/4 pound of apples for every pound of oranges she chooses to produce. Warren's opportunity cost for growing 1 pound of oranges is 3 pounds of apples and his opportunity cost for growing 1 pound of apples is 1/2 pound of oranges. Which of the following best describes this scenario?

Samantha has the comparative advantage in producing oranges and Warren has the comparative advantage in producing apples.

A change in supply refers to a...

Shift in the supply curve based on a variable

Adam Smith is known for his argument for the free market system. Which of the following best illustrates Adam Smith's ideas?

Smith argued for less government involvement and restrictions on how a good or service can be produced or sold.

Which of the following is the best example of an entrepreneur?

Suzie owns a company that designed and sells a software program that is used in self driving cars.

Explain comparative advantage.

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

If the price of gasoline increases, what will be the impact in the market for public transportation?

The demand curve for public transportation shifts to the right.

Which of the following best describes producers surplus?

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.

Several studies have shown promising links between green tea consumption and cancer prevention. How does this affect the market for green tea?

The green tea demand curve shifts to the right because of a change in tastes in favor of green tea.

When two goods are substitutes, the more you buy of one, the less you will buy of the other. A decrease in the price of a substitute causes the demand curve for a good to shift to...

The left because there is a decrease in demand of the good.

Which of the following is a positive economic statement?

The minimum wage law causes unemployment.

What does the phrase optimal decisions are made at the margin mean?

The optimal decision is to continue any activity to the point where the marginal benefit equals the marginal cost.

GRAPH #2 Using the demand graph shown if the price point is the horizontal line P (directly below the pink shaded area) which of the following describes the pink shaded area?

The pink shading represents the consumer's surplus

________ shows that if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good.

The production possibilities frontier model (PPF)

The additional cost to a firm (business) of producing one more unit of a good or service is known as marginal cost. Which of the following best illustrates marginal cost?

The total cost of producing one pen is $5 and the total cost of producing two pens is $9, then the marginal cost of expanding output by one unit is $4 only (9 - 5 = 4).

(T/F) 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.

True

(T/F) Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

True

(T/F) Price ceilings result in shortages.

True

(T/F) The equilibrium moves when there is a shift in supply.

True

Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

True

Every society has a limited amount of economic resources available to produce goods and services. Which of the following best describes the questions a society must consider when determining how to use resources?

What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services?

Explain how both renters and landlords could be either winners or losers with the imposition of rent control.

With rent control, those renters who are able to obtain a rent-controlled apartment will win by paying a rent which is below the equilibrium rent. Those renters who are not able to obtain an apartment due to the shortage created by rent control will lose. Landlords who abide by the rent control will lose by receiving less than the equilibrium rent. Landlords who do not abide by the rent control can win by charging a rent that is higher than the controlled rent.

When ________ in a market, the total net benefit to society is maximized.

a competitive equilibrium is achieved

In the United States and most other countries, trade is carried out in markets. A market is...

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

The term "market" in economics refers to...

a group of buyers and sellers of a product and the arrangement by which they come together to trade.

The purpose of markets is to bring buyers and sellers together. The interaction of buyers and sellers in markets results in firms producing goods and services most desired by consumers. Market equilibrium is...

a situation in which quantity demanded equals quantity supplied.

TABLE #1 Using the attached picture please answer the following questions: a. What are the equilibrium price and quantity of sorghum? b. Suppose the prevailing price is $6 per bushel. Is there a shortage or a surplus in the market? c. What is the quantity of the shortage or surplus? d. How many bushels will be sold if the market price is $6 per bushel? e. At what price will suppliers be able to sell 36,000 bushels of sorghum? f. Suppose the market price is $14 per bushel. Is there a shortage or a surplus in the market?

a. Equilibrium price = $10; Equilibrium quantity = 20,000 bushels. b. There is a shortage. c. Shortage = 30,000 - 8,000 = 22,000 bushels. d. Quantity sold = 8,000 bushels. e. At $4 per bushel. f. There is a surplus.

In cities with rent control, people have an incentive to list their apartments on sites such as Airbnb at rents ________ the controlled rates, because rent control causes a ________ of apartments.

above;shortage

What does the term "marginal" mean in economics?

an additional or extra

When the marginal benefit equals the marginal cost of the last unit sold in a competitive market...

an economically efficient level of output is produced.

The basis for trade is...

comparative advantage not absolute advantage.

A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed is known as...

free market

Suppose that when the price of hamburgers increases, the Ruiz family increases their purchases of hot dogs. To the Ruiz family,

hamburgers and hot dogs are substitutes.

Suppose that when the price of hamburger decreases, Teddy increases his purchase of ketchup. To Teddy...

hamburgers and ketchup are complements.

The difference between the ________ for a good and the ________ is called consumer surplus.

highest price a consumer is willing to pay; price the consumer actually pays

Suppose that when the price of ice cream increases, Liza decreases her purchase of hot fudge. To Liza...

ice cream and hot fudge are complements

A(n) ________ is represented by a rightward shift of the demand curve while a(n) ________ is represented by a movement along a given demand curve.

increase in demand; increase in quantity demanded

The law of demand implies, holding everything else constant, that as the price of yogurt...

increases, the quantity of yogurt demanded will decrease.

Ramen noodles is an example of a ___________ good while organic wheat pasta is an example of a __________ good.

inferior; normal

The additional cost to a firm of producing one more unit of a good or service is the...

marginal cost

Which of the following is a variable that shifts supply?

prices of inputs

The study of economics arises due to...

scarcity

A supply schedule is a...

table that shows the relationship between the price of a product and the quantity of the product supplied.

Economic growth is...

the ability of the economy to increase the production of goods and services

Assume that the hourly price for the services of personal trainers has risen and sales of these services have also risen. One can conclude that...

the demand for personal trainers has increased.

Increasing marginal opportunity cost implies that...

the more resources already devoted to any activity, the payoff from allocating yet more resources to that activity increases by progressively smaller amounts.

The most important of the variables that influence the willingness and ability of firms to sell a good or service is...

the price

A demand curve shows the relationship between...

the price of a product and the quantity of the product demanded.

The amount of a good or service that a consumer is willing and able to purchase at a given price is called...

the quantity demanded

Scarcity refers to the situation in which

unlimited wants exceed limited resources.