Microeconomics Exam #1
Types of Economies
centrally planned economy, market economy, mixed economy
Points on the PPF
efficient and attainable
Unit Elastic = 1 %Q=%P
equally responsive to a price change
Homogenous goods
goods that do not vary at all
complimentary goods
goods that go together, if price ↑ the demand for both that good and complimentary good ↓.
Heterogenous goods
goods that vary on some level
Monopoly
no competition
Inelastic < 1, %Q < %P
not as responsive to a price change, steeper curve
Points outside the PPF
unattainable
Elastic > 1, > %Q > %P
very responsive to a price change, flatter curve
McDonald's distributes $1.00 off coupons. This will cause A. demand for McDonald's Big Mac hamburgers to shift to the left. B. demand for McDonald's Big Mac hamburgers to shift to the right. C. a movement along the demand curve for McDonald's Big Mac hamburgers.
C. a movement along the demand curve for McDonald's Big Mac hamburgers.
Price Elasticity
%Q/%P
When quantity demanded is completely unresponsive to price, what is the value of price elasticity of demand? A. 0 B. A negative number C. 1 D. A number between 0 and 1
A. 0
What is the basis for trade? A. Comparative advantage. B. Absolute advantage. C. Economic growth. D. Efficiency. E. Available resources.
A. Comparative Advantage
Which of the following would shift the supply curve for MP3 players to the right? A. a decrease in the price of an input used to produce MP3 players B. an increase in consumer income (assuming that all MP3 players are normal goods) C. an increase in the price of a substitute in production D. a decrease in the number of firms that produce MP3 players
A. a decrease in the price of an input used to produce MP3 players
The U.S. economy enters a period of decline in incomes. This will cause A. demand for McDonald's Big Mac hamburgers to shift to the right if they are inferior goods. B. demand for McDonald's Big Mac hamburgers to shift to the left if they are inferior goods. C. a movement along the demand curve for McDonald's Big Mac hamburgers if they are normal goods.
A. demand for McDonald's Big Mac hamburgers to shift to the right if they are inferior goods.
The demand for gasoline is likely to be more inelastic than the demand for Domino's Pizza because: A. gasoline has fewer substitutes available. B. the market for gasoline is more narrowly defined. C. gasoline is less of a necessity. D. gasoline is a larger fraction of a consumer's budget. E. None of the above.
A. gasoline has fewer substitutes available
As you move up a linear demand curve, the price elasticity of demand in absolute value A. increases. B. decreases. C. stays the same. D. None of the above.
A. increases
KFC lowers the price of a bucket of fried chicken. This will A. shift the demand for McDonald's Big Mac hamburgers to the left. B. shift the demand for McDonald's Big Mac hamburgers to the right. C. cause a movement along the demand curve for McDonald's Big Mac hamburgers.
A. shift the demand for McDonald's Big Mac hamburgers to the left
Select the phrase that correctly completes the following statement. "A positive change in technology caused an increase in the supply of flat-screen televisions. As a result ________." A. the price of flat-screen televisions decreased and the quantity demanded of flat-screen televisions increased B. the price of flat-screen televisions decreased. The lower price caused the supply of flat-screen televisions to decrease C. the price of flat-screen televisions decreased and the demand for flat-screen televisions increased D. the equilibrium quantity of flat-screen televisions decreased
A. the price of flat-screen televisions decreased and the quantity demanded of flat-screen televisions increased
Consider the following statement: "An increase in supply decreases the equilibrium price. The decrease in price increases demand." The statement is A. false: decreases in price affect the quantity demanded, not demand. B. true: increases in supply decrease price. Decreases in price increase demand. C. false: increases in supply decrease price. D. false: increases in supply increase price. Decreases in price increase demand.
A. false: decreases in price affect the quantity demanded, not demand.
If demand is perfectly elastic, then what is the effect of an increase in price? A. a very small change in quantity demanded B. a change in quantity demanded exactly equal to the change in price C. a decrease in quantity demanded to zero D. no change in quantity demanded
C. a decrease in quantity demanded to zero
Consider the markets for BP supreme-grade gasoline, all BP grades of gasoline, and all gasoline. For which of these three markets will demand be most elastic? Demand will be most elastic for A. BP supreme-grade gasoline, then for all gasoline, and then for all BP grades of gasoline. B. BP supreme-grade gasoline, then for all BP grades of gasoline, and then for all gasoline. C. all BP grades of gasoline, then for BP supreme-grade gasoline, and then for all gasoline. D. all gasoline, then for all BP grades of gasoline, and then for BP supreme-grade gasoline. E. all gasoline, then for BP supreme-grade gasoline, and then for all BP grades of gasoline.
B. BP supreme-grade gasoline, then for all BP grades of gasoline, and then for all gasoline.
What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy? A. The country has eliminated scarcity. B. The country is operating on its production possibilities frontier. C. The country is maximizing its opportunity cost. D. All of the above occur if a country uses all available resources.
B. The country is operating on its production possibilities frontier.
The price of Burger King's Whopper hamburger increases. This will cause A. demand for McDonald's Big Mac hamburgers to decrease. B. demand for McDonald's Big Mac hamburgers to increase. C. a movement along the demand curve for McDonald's Big Mac hamburgers.
B. demand for McDonald's Big Mac hamburgers to increase.
What are the two main categories of participants in markets? A. Households and entrepreneurs. B. Firms and households. C. Households and banks. D. Domestic participants and international participants. E. Firms and the government.
B. firms and households
Studies have shown that drinking one glass of red wine per day may help prevent heart disease. Assume this is true, and favorable weather has increased the grape harvest of California vineyards. In the market for red wine, these two developments would A. increase demand and increase supply, resulting in an increase in the equilibrium price and an uncertain effect on the equilibrium quantity of red wine. B. increase demand and increase supply, resulting in an increase in the equilibrium quantity and an uncertain effect on the equilibrium price of red wine. C. increase demand and decrease supply, resulting in an increase in the equilibrium quantity and a decrease in the equilibrium price of red wine. D. increase demand and increase supply, resulting in an increase in both the equilibrium price and the equilibrium quantity of red wine.
B. increase demand and increase supply, resulting in an increase in the equilibrium quantity and an uncertain effect on the equilibrium price of red wine.
If a soda tax is implemented and demand for soda is price elastic, the effect on discouraging soda consumption would be ________ and ________ tax revenue would be collected than if demand were inelastic. A. larger; more B. larger; less C. smaller; less D. smaller; more
B. larger, less
The formula for the price elasticity of demand is A. the percentage change in price divided by the percentage change in quantity demanded. B. the percentage change in quantity demanded divided by the percentage change in price. C. the change in quantity demanded divided by the price. D. the percentage change in quantity demanded divided by the percentage change in quantity supplied. E. the change in quantity demanded divided by the change in price.
B. the percentage change in quantity demanded divided by the percentage change in price.
Markets
Bring buyers and sellers together to exchange goods and services
A perfectly competitive market is a market that meets the conditions of A. (1) many buyers and sellers, (2) all firms selling identical products, and (3) significant barriers to new firms entering the market. B. (1) few buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. C. (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market D. (1) many buyers and sellers, (2) all firms selling differentiated products, and (3) no barriers to new firms entering the market.
C. (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market
Suppose the value of the price elasticity of supply is 4. What does this mean? A. A 1 percent increase in the price of the good causes the supply curve to shift upward by 4 percent. B. A 4 percent increase in the price of the good causes quantity supplied to increase by 1 percent. C. A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent. D. For every $1 increase in price, quantity supplied increases by 4 units.
C. A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent
Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity? A. No. It is not possible to tell from the income elasticity of demand whether a good is a luxury or a necessity. B. Yes. If the income elasticity of demand is greater than 5, then the good is a luxury. If the income elasticity of demand is positive but less than 5, then the good is a necessity. C. Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity. D. Yes. If the income elasticity of demand is greater than 1, then the good is a necessity. If the income elasticity of demand is positive but less than 1, then the good is a luxury. E. Yes. If the income elasticity of demand is positive, then the good is a luxury. If the income elasticity of demand is negative, then the good is a necessity.
C. Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity.
With respect to consumption, individuals and countries A. can consume beyond their production possibilities frontiers only during periods of economic prosperity. B. can, by choosing not to save for the future, consume beyond their production possibilities frontiers. C. can, through trade, consume beyond their production possibilities frontiers. D. are contrained to consume on or inside their production possibilities frontiers.
C. can, through trade, consume beyond their production possibilities frontiers
How can a country gain from specialization and trade? A. A country can specialize by using all available resources to produce goods and services to avoid trading with other countries. B. A country can specialize by using all available resources to invest in capital goods to promote economic growth. C. A country can specialize in producing that for which it has an absolute advantage and then trade for other needed goods and services. D. A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services. E. A country can specialize in producing that which is most scarce and then trade for other needed goods and services.
D. A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.
"An Inquiry into the Nature and Causes of the Wealth of Nations" published in 1776 was written by A. Alfred Marshall. B. John Maynard Keynes. C. Karl Marx. D. Adam Smith.
D. Adam Smith
Which of the following events would create economic growth, that is, shift the production possibilities frontier outward? A. An increase in the available labor. B. An increase in the available natural resources. C. An increase in technology that affects the production of both goods. D. All of the above.
D. All of the above
Which of the following is the correct way to describe equilibrium in a market? A. At equilibrium, demand equals supply. B. At equilibrium, market forces no longer apply. C. At equilibrium, scarcity is eliminated. D. At equilibrium, quantity demanded equals quantity supplied.
D. At equilibrium, quantity demanded equals quantity supplied.
Which participants are of greatest importance in determining what goods and services are produced? A. The government. B. Firms. C. Entrepreneurs. D. Households. E. The financial sector.
D. Households
Let D = demand, S = supply, P = equilibrium price, and Q = equilibrium quantity. What happens in the market for electric vehicles if the government offers incentives to manufacturers to produce more electric vehicles? A. D and S increase, P and Q decrease B. D no change, S increases, P decreases, Q decreases C. D increases, S no change, P and Q increase D. S increases, D no change, P decreases, Q increases
D. S increases, D no change, P decreases, Q increases
What is absolute advantage? A. The gain from selling a product for more than it costs to produce that product. B. The gain from consuming a product whose benefit is greater than its cost. C. The ability to use all available resources to produce output. D. The ability to produce more of a good or service than competitors using the same amount of resources. E. The ability to produce a good or service at a lower opportunity cost than other producers.
D. The ability to produce more of a good or service than competitors using the same amount of resources.
What are private property rights? Private property rights are: A. the rights individuals and firms have to the exclusive use of tangible, physical property but not intellectual property. B. the rights individuals but not firms have to the exclusive use of tangible, physical property and intellectual property. C. the rights individuals have to the exclusive use of intellectual property and firms have to the exclusive use of tangible, physical property. D. the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property. E. the rights individuals and firms have to the exclusive use of intellectual property but not tangible, physical property.
D. the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property.
For a normal good, the income elasticity of demand will be A. negative, but for an inferior good, the income elasticity of demand will be positive. B. positive or negative, but for an inferior good, the income elasticity will be zero. C. inelastic, but for an inferior good, the income elasticity will be elastic. D. positive, but for an inferior good, the income elasticity of demand will be negative. E. one, but for an inferior good, the income elasticity will be zero.
D. positive, but for an inferior good, the income elasticity of demand will be negative.
What role do they play in the working of a market system? Private property rights: A. encourage a significant number of people to be willing to risk funds by investing them in business. B. encourage firms to spend money on research and development. C. determine what goods and services will be produced. D. are the basis for international trade. E. both a and b.
E. Both A and B
What is comparative advantage? A. The ability to use all available resources to produce output. B. The gain from selling a product for more than it costs to produce that product. C. The ability to produce more of a good or service than competitors using the same amount of resources. D. The gain from consuming a product whose benefit is greater than its cost. E. The ability to produce a good or service at a lower opportunity cost than other producers.
E. The ability to produce a good or service at a lower opportunity cost than other producers.
Why isn't elasticity just measured by the slope of the demand curve? A. The slope of the demand curve is negative. B. The slope of the demand curve changes along the curve. C. Price elasticity of demand is the same as the slope of the demand curve. D. The slope of the demand curve is often unknown. E. The slope can change dramatically, depending on the units chosen for quantity and price.
E. The slope can change dramatically, depending on the units chosen for quantity and price.
Why are independent courts important for a well-functioning economy? Independence is necessary for courts: A. to make their decisions free of influence from people with powerful political connections. B. to make their decisions based on the law. C. to make their decisions free of intimidation by criminal gangs. D. to make their decisions free of influence from other parts of the government. E. all of the above.
E. all of the above
Income elasticity of demand is A. the percentage change in quantity supplied divided by the percentage change in price. B. the percentage change in quantity demanded divided by the percentage change in price. C. the percentage change in income divided by the percentage change in prices. D. the percentage change in quantity demanded of one good divided by the percentage change in the price of another good. E. the percentage change in quantity demanded divided by the percentage change in income.
E. the percentage change in quantity demanded divided by the percentage change in income.
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 A. will have a comparative advantage if it produces more efficiently. B. will have a comparative advantage if it devotes more resources toward that good's production. C. will have a comparative advantage if it is able to produce that good at a low total cost. D. will not have a comparative advantage because it has fewer resources. E. will have a comparative advantage if it has a lower opportunity cost of producing that good.
E. will have a comparative advantage if it has a lower opportunity cost of producing that good.
Every economy has a _________ and __________ trade off
Efficiency, Equity
inferior goods
Goods for which demand tends to fall when income rises.
Perfectly Elastic
Horizontal Line: Elasticity= infinity
When a "rational person" makes a decsion
MB>MC
total revenue
P*Q
slope of demand curve
P/D
slope of supply curve
P/Q
Shortage
P<Q
Surplus
P>Q
substitute goods
Products or services that can be used in place of each other.
Perfectly Inelastic
Vertical Line: Elasticity=0
Oppurtunity Cost
What we give up when we go with a certain decision
Market
a group of buyers and sellers of a particular good or service
Market Failure
a situation in which a market left on its own fails to allocate resources efficiently
Marginal Change
a small incremental adjustment to a plan of action
normatiive statements
a value judgement
Marginal Benefit
additional benefits from an additional unit (MB)
Marginal Cost
additional cost from an additional unit (MC)
Whether carried out by an individual or a country, production beyond the production possibilities frontier A. happens as a result of forced saving. B. is not physically possible. C. is possible only through trade. D. can occur by acquiring more productive resources.
b. is not physically possible
positive statement
describes a relationship
Equity
distributing economic prosperity among the members of society
Points inside the PPF
inefficient
On the lower part of a linear demand curve below the midpoint, the demand is ________ and raising the price causes total revenue to _________. A. inelastic; increase B. elastic; increase C. elastic; decrease D. inelastic; decrease
inelastic; increase
Scarcity
limited resources in the economy
Competitive Market
many buyers and sellers, each has a negligible effect on price
Efficiency
maximum use of a resource
Comparative Advantage
the ability to produce a good at a lower opportunity cost than another producer
Absolute Advantage
the ability to produce a good using fewer inputs than another producer
Economics
the study of how society manages its scarce resources
