Microeconomics Exam 1
From the early twentieth century to the 1970s:
there were modest declines in oil price.
Jan works in the steel industry, which has experienced falling wages. Where will she move?
to a sector with rising wages
The negative slope of the PPF demonstrates the concept of:
trade-offs.
"Unexploited gains from trade exist when at least one potential buyer places a value on a good that is higher than the cost of producing the good to at least one potential seller." This statement is:
true. If this buyer and this seller were to trade, producer surplus or consumer surplus (or both) would be generated.
"According to the supply and demand model, all else equal, if the technology used to produce a good improves, supply will increase, causing the price to fall, which causes the quantity demanded to rise as well." This statement is:
true. The supply curve moved, and the equilibrium point moved along the fixed demand curve.
substitutes
two goods for which a decrease in the price of one leads to a decrease in demand for the other
complements
two goods for which a decrease in the price of one leads to an increase in the demand for the other, e.g. hamburgers and hamburger buns
The opportunity cost of a choice is the _____ of the opportunities lost.
value
Institutions align self-interest with the social interest:
when markets work well
How much more consumer surplus is there at $2 per paperback than at $3 per paperback? Quantity demanded at 2 is 40 and at 3 is 35
$37.50 The 35 buyers who would buy at $3 all receive $1 surplus. And the price decrease draws in 5 additional buyers who receive, on average, 50 cents' worth of surplus.
Suppose Gil can write a poem in 1 hour, Holly can write a poem in 2 hours, and Ivan can write a poem in 3 hours. Each person spends 12 hours per day writing poems and requires a wage of $10 per hour to do so. How many poems will these three writers produce per day if the market price for a poem is $8?
0 None of the writers is willing to write a poem for only $8. The lowest-cost producer is Gil, and even he charges $10.
OPEC, the Organization of the Petroleum Exporting Countries, was formed in:
1960.
If Carl voluntarily sells a used car to Lathika for $1200, it must be that:
Lathika values the car more than Carl does.
What would happen if the demand for oil increased?
Quantity supplied would increase. Quantity demanded would increase if demand increased.
Who competes with whom to determine the price of a good
Sellers compete with sellers, and buyers compete with buyers. If the price you want to buy is high, you should not blame the seller; blame other buyers for outbidding you.
Which of the following helps explain why specialization increases productivity?
Specialization allows producers to learn more about how to produce something than can be learned by someone who does not specialize.
Who benefits if Stacy uses eBay to sell an old camera to Donna, a collector of old cameras?
Stacy, Donna, and eBay
Imagine that a major car company has been able to plan production to coincide with sales forecasts. As new inventory comes into the showroom, customers purchase it, and there is no unsold inventory and no unfilled orders. How can we BEST describe this phenomenon?
This is a market in equilibrium.
Imagine that a major car company is producing fuel-efficient hybrid cars during a period of rising gas prices. As a result, dealerships are depleted of inventory, and customers remain on a waiting list. How can we BEST describe this phenomenon?
This is a shortage, because the quantity supplied is less than the quantity demanded.
Imagine that a major car company is producing large, fuel-inefficient SUVs during a period of rising gas prices. As a result, dealerships are overstocked with inventory that is not selling. How can we BEST describe this phenomenon?
This is a surplus, because the quantity supplied is greater than the quantity demanded. A surplus will usually lead to a decrease in the price of a good.
Why would modern economic growth be impossible without trade?
Without trade, because specialization would be impossible and all societies could only achieve a subsistence living.
demand curve
a function that shows the quantity demanded at different prices
supply curve
a function that shows the quantity supplied at different prices
inferior good
a good for which demand decreases when income increases
normal good
a good for which demand increases when income increases
shortage
a situation in which the quantity demanded is greater than the quantity supplied
surplus
a situation in which the quantity supplied is greater than the quantity demanded
Total producer surplus is measured by the area _____ and below the price.
above the supply curve The height of the supply curve is the minimum price that a seller would be willing to accept. When the market price is higher than that, producers earn surplus.
The marginal tax rate is the tax rate on _____ income
additional
production possibilities frontier
all the combinations of goods that a country can produce given its productivity and supply of inputs
producer surplus (total)
an amount measured by the area above the supply curve and below the price up to the quantity traded
Which will cause a decrease in demand
an increase in the price of complements
eBay demonstrates value from trade because it operates in more than 30 countries and earns:
billions of dollars in revenue.
Which does not shift the supply curve
changes in consumer tastes. Tastes are a demand factor.
Which does not shift the supply curve
changes in the price of substitutes
What makes trade profitable is differences in:
comparative advantage.
total consumer surplus
consumer surplus (total) the consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price
If the price of a goods complement rises, ____ for the good whose price did not change will decrease
demand
If the demand for oil increased, the _____ curve would shift to the _____.
demand; right
What makes trade between two nations mutually beneficial is:
differences in comparative advantage.
Markets _____ align self interest with social interest
do not always
To efficiently satisfy the world demand for Valentine's Day roses, it must be the case that:
each person involved in the process understands and performs only a small part of the whole process.
The benefits of trade extend beyond simple exchange. For example, trade allows us to take advantage of _____, the reduction in costs that arise when goods are mass-produced.
economies of sale
Who responds to incentives?
everyone
"According to the supply and demand model, all else equal, if the inputs used to produce a good become less costly, supply will increase, causing the price to rise, which causes the quantity demanded to fall." This statement is:
false, because the price will fall. When supply moves to the right, the equilibrium point moves down along the demand curve, toward a lower price.
Which of the following is NOT an incentive for earning good grades in high school?
high-paying local jobs that do not require a high school diploma
What does a decrease in supply result in?
higher equilibrium price A decrease in supply is illustrated by a leftward shift of the supply curve.
An increase in demand results in:
higher equilibrium price. An increase in demand is illustrated by a rightward shift of the demand curve.
An increase in demand results in:
higher equilibrium quantity
Bobby is a buyer in Vernon Smith's classroom experiment of the market model. Which does he know?
his own willingness to buy
When might mutually beneficial trades be difficult to find?
if two individuals have identical preferences
In the real world, when trade occurs, workers in the sector with _____ demand will see their wages rise.
increased
Michael works in the aircraft manufacturing sector, which experienced _____ demand. He will see his wages rise.
increased
From the early twentieth century to the 1970s, the demand for oil:
increased steadily. The demand for oil increased steadily.
A decrease in supply:
increases the equilibrium price and reduces the equilibrium quantity. A decrease in supply will cause the price to rise, which will in turn cause the quantity demanded to fall.
Which of the following is NOT an example of nonmonetary incentives?
interest
A producer has a comparative advantage in the production of a good if:
it has a lower opportunity cost than other producers.
The opportunity cost of attending college increases as _____ increase(s).
job opportunities for high school graduates
You can die because an unsafe drug is approved, but you can also die because a safe drug has not yet been approved. This is drug _____.
lag
Lower production costs result in:
lower equilibrium price.
Consumer surplus is the difference between the _____ the consumer is willing to pay for a good and the market price.
maximum price The maximum price a consumer is willing to pay for something reveals the amount of value that the consumer gets from it.
The demand for _____ goods increases as income increases, while the demand for inferior good decreases as income increases
normal
Which of the pairs is not an example goods that are typically complements?
oranges and grapefruit
The ____ is the producers gain from exchange
producer surplus
The _____ is the producer's gain from exchange.
producer surplus It is equal to the market price minus the minimum price that sellers would have been willing to accept.
total producer surplus
producer surplus (total) the producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity
PPF stands for __________ possibilities frontier.
production
The production possibilities frontier (PPF) shows the combinations of goods that a country can produce given its:
productivity and supply of inputs.
The demand curve is a function that shows the _____ at a range of prices.
quantity demanded The demand curve is the overall relationship between these two variables, price and quantity demanded.
consumer surplus (total)
quantity measured by the area beneath the demand curve and above the price
Incentives are the _____ that motivate behavior
rewards and penalties
Suppose the 100 people in society X all know the same 10 facts, but the 10 people in society Z specialize, so that there are five facts that they all know, but each person also knows five unique facts. If the standard of living is roughly equivalent to the total number of societal facts known per person, which society has a better standard of living?
society Z There are 10 facts known in society X and 100 people, which results in an average of 0.1 facts per person. In society Z, there are five common facts and 50 specialized facts. That is 55 total facts, which results in an average of 5.5 per person.
The _____ shows the quantity supplied at various prices.
supply curve And it is upward-sloping to reflect the law of supply
When the British sea captains were paid for prisoners who _____, the survival rate among prisoners was almost 100%.
survived the journey
comparative advantage
the ability to produce a good or service at a lower opportunity cost than another producer
absolute advantage
the ability to produce the same good using fewer inputs than another producer
Which of the following describes an incentive that does NOT affect one's decision whether to obey the speed limit?
the benefits of getting the car maintained
consumer surplus
the consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price
The value of the slope of the PPF reveals:
the opportunity cost. The slope of the PPF shows how many units of one good must be given up in order to get more of another good.
equilibrium price
the price at which the quantity demanded is equal to the quantity supplied
producer surplus
the producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity
equilibrium quantity
the quantity at which the quantity demanded is equal to the quantity supplied
A shortage occurs when:
the quantity demanded is greater than the quantity supplied. A shortage will usually lead to an increase in the price of a good.
quantity demanded
the quantity that buyers are willing and able to buy at a particular price
quantity supplied
the quantity that sellers are willing and able to sell at a particular price
When a good is transferred from a person who does not value it very much to someone who values it a lot:
there are gains from trade.
Suppose the 100 people in society C all know the same 10 facts, but the 10 people in society D specialize, so that there are five facts that they all know, but each person also knows five unique facts. If the standard of living is roughly equivalent to the total number of societal facts known per person, how many times better is the standard of living in society D?
55 times better There are 10 facts known in society C and 100 people, which results in an average of 0.1 facts per person. In society D, there are five common facts and 50 specialized facts. That is 55 total facts, which results in an average of 5.5 per person.
opportunity cost
A choice is the value of the opportunities lost.
Which of the following is an example of self-interest NOT being aligned with social interest?
A firm does not have to pay for its pollution emissions.
Which of the following is an example of self-interest that is aligned with social interest?
A movie star earns millions of dollars for starring in a film.
inflation
An increase in the general level of prices.
incentives
Are rewards and penalties that motivate behavior.
Suppose the 100 people in society J all know the same 10 facts, but the 100 people in society K specialize, so that there are two facts that they all know, but each person also knows eight unique facts. Which of the following is TRUE?
Each person in society J knows the same number of facts as each person in society K, but K has more knowledge in aggregate. In both societies, every person knows only 10 facts, but the total amount of knowledge in society K is much greater.
Which of the following is NOT a trade-off related to Emily's choice to drive above the speed limit?
Emily increases her potential for getting places in a timely manner
Which is not a normal good
Generic brand cereal. Generic products are likely to be inferior goods
Which statement about Vernon Smith's laboratory experiments is correct?
The participants were undergraduate students.
Suppose the 100 people in society J all know the same 10 facts, but the 100 people in society K specialize, so that there are two facts that they all know, but each person also knows eight unique facts. Which of the following is TRUE?
There are 792 more facts known in society K than in society J. There are 802 facts known in society K and only 10 facts known in society J.
Which of the following is NOT a trade-off for making prescription drugs safer?
There are fewer drug-related illnesses and deaths once the drugs come out on the market.
What happened to oil prices from the early twentieth century to the 1970s?
There were modest declines in oil price.
What will happen to workers' wages in sector A, which has experienced increased demand due to trade?
They will rise.