Macroeconomics exam 1: topic 1

Refer to the tables. Suppose that technology and the quality of resources are the same in both countries. We can conclude that

Herbania has more resources than Duckistan

Refer to the tables. Suppose that the amount and quality of resources are the same in both countries. We can conclude that

Herbania is technologically superior to Duckistan in producing civilian goods

The under allocation of resources by society to the production of a product means that the

marginal benefit is greater than the marginal cost

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

If there is an increase in the resources available within the economy

the economy will be capable of producing more goods

If someone produced too much of a good, this would suggest that

the good was produced past the point where its marginal cost exceeded its marginal benefit

opportunity cost

the next- best thing that must be forgone in order to produce one more unit of a given product

Refer to the diagram. This production possibilities curve is constructed so that:

the opportunity costs of both bread and tractors increase as more of each is produced

utility

the pleasure, happiness, or satisfaction obtained from consuming a good or service It is an important component of purposeful behavior because people will allocate their scarce time, energy, and money in an attempt to gain the most utility possible.

economics

the social science concerned with how individual institutions, and society make optimal (best) choices under conditions of scarcity

The process of producing and accumulating capital goods is called

investment

Unemployment

is illustrated by a point inside the production possibilities curve

Refer to the diagram. This economy will experience unemployment if it produces at point:

D

State all the assumptions made when a production possibilities table (or curve) is constructed

(1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.

Production possibilities model assumptions

2 goods, given resources, given technology, max output, resource mobility

Refer to the diagram. Starting at point A, the opportunity cost of producing each successive unit of tractors is:

2, 4, 6, and 8 units of bread

Table 1. A B C D E F Capital goods 100 95 85 70 50 0 Consumer goods 0 100 180 240 280 300 If the economy is producing at D, the cost of 40 more units of consumer goods is about

20 units of consumer goods

Potatoes cost Janice $1 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. If she feels that the first pound of potatoes is worth $1.50, the second pound is worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth $0.30, how many pounds of potatoes will she purchase? What if she only had $2 to spend?

3; 2

Pham can work as many or as few hours as she wants at the college bookstore for $9 per hour. But due to her hectic schedule, she has just 15 hours per week that she can spend working at either the bookstore or at other potential jobs. One potential job, at a café, will pay her $12 per hour for up to 6 hours per week. She has another job offer at a garage that will pay her $10 an hour for up to 5 hours per week. And she has a potential job at a daycare center that will pay her $8.50 per hour for as many hours as she can work. If her goal is to maximize the amount of money she can make each week, how many hours will she work at the bookstore?

4

Suppose that you are given a $100 budget at work that can be spent only on two items: staplers and pens. If staplers cost $10 each and pens cost $2.50 each, then the opportunity cost of purchasing one stapler is:

4 pens (4 x $2.50 = $10)

Which of the following will shift the production possibilities curve to the right?

A technological advance that allows farmers to produce more output from given inputs

What is an opportunity cost? How does the idea relate to the definition of economics? Which of the following decisions would entail the greater opportunity cost: Allocating a square block in the heart of New York City for a surface parking lot or allocating a square block at the edge of a typical suburb for such a lot?

An opportunity cost is what was sacrificed to do or acquire something else. The condition of scarcity creates opportunity cost. If there was no scarcity, there would be no need to sacrifice one thing to acquire another. The opportunity cost would be much higher in New York City as the alternative uses for that square block are much more valuable than for a typical suburban city block

How does the slope of a budget line illustrate opportunity cost and trade-offs? How does a budget line illustrate scarcity and the effect of limited incomes?

Budget lines are always sloped downward. This downward slope shows an inverse relationship between the two goods, meaning that as you increase one, the other must decrease. This decrease is what you are giving up, or opportunity cost, of the good you are getting more of. Budget lines illustrate scarcity in that they show you are limited by your income. Since they slope downward, they show you cannot keep getting more and more of both goods. There is always a trade-off. The area beyond the budget line represents combinations of the goods that are beyond your income.

Refer to the tables. Suppose that Duckistan and Herbania are each producing 14 units of civilian goods and 2 units of military goods. Then:

Duckistan is fully employing its resources, but Herbania is not

What are economic resources? What categories do economists use to classify them? Why are resources also called factors of production? Why are they called inputs?

Economic resources are the natural, human, and manufactured inputs used to produce goods and services. Economic resources fall into four main categories: labor, land (natural resources), real capital (machines, factories, buildings, etc.,) and entrepreneurs. Economic resources are also called factors of production because they are used to produce goods and services. They are called inputs because they go in to a production process (like ingredients go into a bowl to make a cake), with the resulting goods and services also being referred to as output.

Why is entrepreneurial ability considered a category of economic resource, distinct from labor? What are the major functions of the entrepreneur?

Entrepreneurial ability and labor are both human resources, but they perform different functions in the productive process. Entrepreneurial ability does not directly produce goods and services; it organizes the resources that do. Labor refers to the human inputs that directly engage in production. They coordinate the activities of the other three inputs for profit—or loss, which is why they are called risk-takers

Types of resources

land, labor(L), capital(K), entrepreneurship

Marginal-Benefit and Marginal-Cost curves

Marginal Benefit (MB)- downward sloping - falls as more of a profit is consumed Marginal Cost (MC)- upward sloping - increases as more of a product is produced Optimal amount of a product occurs when MB = MC If MC exceeds MB, fewer resources should be allocated to this use, as the additional cost is more than the additional benefit

Which of the following is assumed in constructing a typical production possibilities curve

Production technology is fixed

Refer to the tables. Opportunity costs of producing military goods are:

Smaller in Duckistan than Herbania

Cite three examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit

Student answers will vary, but may include the decision to come to class, to skip breakfast to get a few extra minutes of sleep, to attend college, or to make a purchase. Marginal benefits of attending class may include the acquisition of knowledge, participation in discussion, and better preparation for an upcoming examination.Marginal costs may include lost opportunities for sleep, meals, or studying for other classes. In evaluating the discussion of marginal benefits and marginal costs, be careful to watch for sunk costs offered as a rationale for marginal decisions.

What are the key elements of the scientific method and how does this method relate to economic principles and laws?

The scientific method is the technique used by economists to determine economic laws or principles. These laws or principles are formulated to explain and/or predict behavior of individuals or institutions.

Table 1. A B C D E F Capital goods 100 95 85 70 50 0 Consumer goods 0 100 180 240 280 300 Consider table 1. The choice of alternative B compared to D would tend to promote

a faster rate of economic growth

Production possibilities curve (PPC)

a graphical model that represents all of the different combinations of two goods that can be produced, it captures scarcity of resources and opportunity costs

Which of the following is a capital resource

a piece of software used by a firm

Law of increasing costs

a principle that states that once all factors of production (land, labor, capital) are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well.

Tools, machinery or equipment that is used to produce other goods would be an example of

capital goods

The basic difference between consumer goods and capital goods is that

consumer goods satisfy wants directly while capital goods satisfy wants indirectly

Suppose that you initially have $100 to spend on books or movie tickets. The books start off costing $25 each and the movie tickets start off costing $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease? a. Your budget increases from $100 to $150 while the prices stay the same b.Your budget remains $100, the price of books remains $25 but the price of movie tickets raise to $20 c. Your budget remains $100 the price of movie tickets remains $10 but the price of books falls to $15

a. increase b. decrease c. increase

Indicate whether the following statements applies to micro or macro economics: a. The unemployment rate in the United States was 5.1 percent in September 2015 b. A U.S. software firm discharged 15 workers last month and transferred the work to India: c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise: d. U.S. output, adjusted for inflation, increased by 2.4 percent in 2014: e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1 percentage point: f. The consumer price index rose by 0.2 percent from August 2014 to August 2015:

a. macroeconomics b. microeconomics c. microeconomics d. macroeconomics e. microeconomics f. macroeconomics

For each of the following situations involving marginal cost (MC) and marginal benefit(MB) indicate whether it would be best to produce more , fewer, or the current number of units. a. 3,000 units at which MC =$10 and MB =$13 b. 11 units at which MC= $4 and MB=$3 c. 43,277 units at which MC = $99 and MB=$99 d. 82 units at which MC<MB e. 5 units at which MB<MC

a. more b. fewer c. current d. more e. fewer

Explain how each of the following events affects the location of a country's production possibilities curve a. the quality of education increases b. the number of unemployed workers increase c. a new technique improves the efficiency of extracting copper from ore. d. a devastating earthquake destroys numerous production facilities.

a. productivity would rise and this would shift the curve outward b. should not affect location of the curve c. the curve should shift outward as more production is possible with existing resources d. the curve should shift inward with the destruction of resources aka capital

From the economic perspective, when a business decides to hire more workers, the business decision maker most likely has concluded that the marginal

benefits of employing more workers are greater than then the marginal costs

Use marginal analysis to define optimal allocation, and how optimal allocation determines the optimal point on a production possibilities curve

correct quantity of goods are produced relative to other goods and services because the correct amount of resources are allocated for this optimum production. Optimal allocation: occurs when MB = MC, where supply curves show marginal costs and demand curves show marginal benefits

Which is the correct match of an economic resource and payment for that resource?

entrepreneurial ability and profit

What statement would best complete a short definition of economics? Economics studies

how individuals, institutions and society make optimal choices under conditions of scarcity

The law of increasing opportunity costs states that

if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of another good to do so

What are the two major ways in which an economy can grow and pus out its production possibilities curve?

increase in resources supplies and advances in technology

The slope of the typical production possibilities curve

increases as one moves southeast along the curve

Which situation is most likely to shift the production possibilities curve in an outward direction?

increases in technological advances

marginal analysis

marking choices based on comparing marginal benefits with marginal costs

Money is not an economic resource because

money, as such, does not produce anything

If an economy is operating on its production possibilities curve for consumer goods and capital goods, this means that

more consumer goods can only be produced at the cost of fewer capital goods

Assume an economy is incurring unemployment. The effect of resolving this problem will be to

move the level of actual output on to the economy's production possibilities curve

The opportunity cost of a new public stadium is the

other goods and services that must be sacrificed to construct the new stadium

The scarcity problem

persists because economic wants exceed available productive resources

Efficiency

produce max output (resource use) - technical or productive efficiency that combination of goods, that is preferred the most ( resource allocation) - economy or allocation efficiency

The output of MP3 players should be

reduced if marginal costs exceed marginal benefits

When an economy is operating under conditions of full employment, the production of more of commodity A will mean the production of less of commodity B because

resources are limited

In deciding whether to study for an economics quiz or go to a movie, one is confronted by the idea(s) of

scarcity and opportunity costs

Refer to the diagram for athletic shoes. If the current output of shoes is Q1, then:

society would consider additional units of shoes to be more valuable than alternative uses of those resources

Explain the economizing problem for an individual + society

society's material wants are unlimited while resources are limited or scarce. Unlimited wants (the first fundamental fact): Economic wants are desires of people to use goods and services that provide utility, which means satisfaction.