Microeconomics Midterm Study Guide

Which of the following statements is true about a downward-sloping demand curve that is a straight line?

The slope remains the same, but the elasticity falls as you move down the demand curve

In the goods market:

businesses produce goods and services and sell them to households and government.

The term efficiency involves achieving a goal as:

cheaply as possible

If an economist observed that higher hot dog prices lead to an increase in the demand for chili, she most likely would conclude that:

chili and hot dogs are substitutes.

According to the law of one price:

competition, combined with transferable goods and resources, drives the prices of similar goods toward equality.

Trade based on comparative advantage benefits:

consumers in all countries

Socialism in theory is based on the principle that individuals should:

cooperate with one another to meet their needs.

Cross-price elasticity of demand is defined as the:

percentage change in the quantity demanded divided by percentage change in the price of the same good

Price elasticity of demand is the:

percentage change in the quantity of a good demanded divided by the percentage change in the price good

The price elasticity of supply is:

percentage change in the quantity supplied divided by the percentage change in price

Microsoft has just taken some senators out to dinner in Paris in a private jet. This is probably an example of an attempt to influence:

political forces

If quantity supplied exceeds the quantity demanded, there is a tendency for:

price to fall to restore equilibrium

If the supply is high elastic and demanded shit to the right:

price will hardly change at all; quantity will rise significantly

If a negative externality is to be internalized to the decision maker, the:

producers' marginal costs should be increased by an amount equal to the marginal cost to those outside the trade that results from production of the good.

All of the following are considered sources of market failure EXCEPT:

profit-maximizing behavior

A price elasticity of demand for a good or strive of 1.8 tells us that:

quantity demanded falls by the 1.8 percent when price rises by 1 percent

Other things held constant in a competitive labor market, if workers negotiate a contract in which the employer agrees to pay an hourly wage rate of $17.85 while the market equilibrium hourly wage rate is $16.50, the:

quantity of workers supplied will exceed the quantity of workers demanded.

If the price of steel rises, the law of supply predicts that, other things constant, the:

quantity supplied of steel with increase.

Countries that exported a lot of gas or oil would see their exchange rates go up as a result. This in turn would make their manufacturing exports uncompetitive and possibly slow economic growth. This situation can be described as the:

resource curse.

If a single union supplies all the labor in a competitive labor market, the union probably will:

restrict labor supply to raise wages.

Example of the law of one price in action:

wages in India are lower than in the U.S, and so firms move their call centers to India. This tends to raise wages in India and depress wages in the U.S.

The use of the phrase "other things constant" in supply and demand analysis indicates that:

we are considering changes in just one factor.

A public good is a good that:

when consumed by one individual, can still be consumed by others.

The appreciation of a currency will:

worsen a country's comparative advantages.

Which of the following CANNOT be determined by using a production possibility table?

What combination of outputs is best

What is expected to cause the quantity of wool suppled to decrease?

a decrease in the price of wool

If the price elasticity of demand for a good is inelastic, a price change causes:

a less than proportionate change in the quantity demanded

An economic force given relatively free rein by society to work through the market is:

a market force

Graphically, a change in price causes:

a movement along a given supply curve, not a shift.

A theorem is:

a proposition that is logically true based on the assumption of the model.

A good that is supplied to one person is supplied to all and whose consumption but one individual does not prevent the consumption by another individual is known as:

a public good

In the early 2000s, Europeans saw the United States as a big half-off sale. Europeans visitors to the U.S were enjoying shopping for many items that were much more expensive in Europe. Which of the following would have led to this shopping spree?

a rise in the dollar price of the euro

If elasticity of a demand is greater than 1:

a rise in the price lowers the total revenue

If the elasticity of demand is 1.8, elasticity of the supply is .7 and a 20 percent tax excise tax is levied on the good:

a tax burden on the suppliers will be greater.

In election campaigns, presidents often promise more of everything (that is, more huns and butter). What would help those elected presidents fulfill that promise?

The economy becomes more efficient.

Which of the following factors most likely would explain why a U.S. company would choose to operate in the United States despite much lower wages in Mexico?

The lower productivity of Mexican workers

To graphically demonstrate the principle of increasing marginal opportunity cost, the production possibility curve must be:

bowed out

How wages are determined is best described by:

economic factors, with strong influences by political and social forces.

Government failure occurs when:

government intervention in the market to correct a market failure makes this worse.

For normal goods, income elasticity is:

greater than 0

Wages under a bilateral monopoly are generally:

greater than those under monopsony but less than those under a union monopoly.

Assuming a binding price floor, the more elastic the supply and demand curves are, the:

greater the surplus a price floor will create

Suppose New Zealand uses one unit of labor to produce kiwi and two units of labor to produce an apple. Suppose Australia uses two units of labor to produce a kiwi and one unit of labor to produce an apple. In this case, New Zealand:

has a comparative advantage in producing kiwi

The incentive effect refers to how much a person will change his or her:

hours worked in response to a change in the wage rate.

In the factor market:

households supply factors of production to business and are paid by business for doing so

People can reasonably expect that an economic system will decide all of the following EXCEPT:

how to assign initial property

According to the text, economics is the study of how:

human beings coordinate their wants and desires

Mexico has a comparative advantage in producing corn:

if its opportunity cost of producing corn is lower than the opportunity cost in other countries.

A reduction in the supply of labor will cause wages to:

increase and employment to increase.

Firms pay efficiency wages because these wages:

increase worker productivity.

The discovery of a new source of oil will lead to:

increased demanded for domestic currency; appreciation of the currency.

The Industrial Revolution was important to the history of economics system because it:

increased the power of capitalist and eventually led to a revolution instituting capitalism as the dominant economic system

The Consumer Product Safety Commissions (CPSC) is charged with protecting the public from unreasonable risks of serious injury or death from more than 15,000 types of consumer products. The CPSC is designed to overcome:

informational problems

The price mechanism that guides people's actions is called:

invisible hand

Capitalism:

is based on private property and the market.

If a quantity demanded does not change when the price changes, the demand:

is perfectly inelastic

If the euro rises in price, it becomes:

more expensive for Americans to buy European products but cheaper for Europeans to buy American products

Supply is said to be inelastic when the:

percentage change in quantity supplied is less than the percentage change in price

Governments do all of the following except:

supply labor services to businesses in the market factor.

A per-unit tax on coffee paid by the seller causes the:

supply of the coffee curve to shift upward by the amount of the per-unit tax

If the amount of land supplied remains the same even when the price of the land increases, the:

supply of the land must be perfectly inelastic

The efficient amount of pollution control is:

the amount for which the marginal social benefit equals the social marginal cost of pollution

The art of economics is:

the application of the knowledge gained by positive economics to the goals set in the normative economics.

When negative externalities are present, market failure often occurs because:

the cost borne by the third party not involved in the trade is not reflected in the market price.

The resource curse is:

the curse that countries that have an abundance of resources tend to have lower economic growth compared to countries with fewer natural resources.

The Mexican demand for American goods leads to:

the demand for U.S dollars and the supply of Mexican pesos on the foreign exchange market.

The demand for labor is a derived demand because:

the demand for labor comes from the demand for output.

The elasticity of the labor supply curve depends on all of the following factors except:

the elasticity of demand for a firm's output.

Countries gain from trade by producing:

the goods they can produce at the lowest opportunity cost.

the perfectly competitive output level is Pareto optimal because at this output level:

the marginal cost to society equals the marginal benefit

Your opportunity cost of taking this course is:

the net benefit of the activity you would have chosen if you had not taken the course.

Markets coordinate economic activity though:

the price mechanism.

The following is NOT held constant as you move along the demand curve:

the price of that good

A general rule of political economy in a democracy is that when small groups are helped by a government action and large groups are hurt by that action by an equal and offsetting amount, policies tend to reflect:

the small group's interest

Macroeconomics is:

the study of aggregate economic relationships.

The elasticity of labor demand is higher when:

there are many substitutes for labor in the production process.

The law of demand states that the quantity demanded of a food is inversely related to the price of that good. Therefore, as the price of a good goes:

up, the quantity demanded goes down

The law of supply states that, other things equal, and the price of a good goes:

up, the quantity supplied goes up.

If the price elasticity of supply is 0.5, a 1 percent increase in price will cause a:

0.5 percent increase in quantity supplied

Which of the following exchange rates between the dollar and the peso would a Mexican buyer of American goods most prefer?

$0.25= 1 peso

Which of the following does not illustrate the free rider problem

Amanda, a tax payer, prefers to check out books from her local library rather than purchasing them herself.

An increase in the wages of truck drivers might be explained by which of the following factors?

An increase in competition within the trucking industry

Which would not likely change the supply of a personal computer?

An increase in the consumers income

Which of the following will not shift the demand for labor to the right?

An increase in the wage rate

In the U.S, the government regulates business in its role as a "referee". This is NOT among the laws regulating the interaction between households and businesses:

Businesses are required to produce certain goods, called public goods, for the government.

What would most likely generate a negative externality?

Cigarette smoke

Because you can get more one good only by giving up some of another good, the shape of the production possibility curve is:

Downward sloping

What would most likely generate a positive externality?

Education

This is NOT on of the three principal components of a socialist economy:

Entrepreneurs are encouraged by the profit motive, rather than government directive, to satisfy consumer wants in the most efficient manner possible.

Which of the following would cause the supply curve for euros to shift right?

Europeans want to buy more American goods

What do economists mean when they say there is a "market failure"?

Free market yield results that economists do not consider socially optimal

Which group has ultimate control over the U.S economy?

Household.

Which of the following best defines rational behavior?

Improving net gain by pursuing decisions as long as the marginal benefit exceeds the marginal cost.

If you move from a point inside the production possibility curve to a point on the production possibility curve, it follows that efficiency is:

Increased because the economy is now on the production possibility curve.

Government failure is likely to occur for all of the following reasons EXCEPT:

Intervention in the markets is always simpler than it initially seems.

If the U.S dollar appreciates against the Japanese yen:

Japanese goods will be cheaper in the U.S

Countries such as Brazil, India, And Moldova-well-known sources of donors- have banned buying and selling organs. This legal action comes at the risk of driving the trade underground. What idea from chapter 1 of the text does this story best illustrate?

Legal and social forces can eliminate economic forces.

What kind of externalities affect the levels of unemployment, inflation, or growth in the economy as a whole?

Macroeconomics

Statement best summarizing the invisible hand theorem:

Markets direct people's selfish desires (tempered by political and social forces) to the common good.

A person who has auto insurance is likely to drive a little less safety and to take less care in parking the car in a safe place off the street. This is an example of a problem called:

Moral hazard

What is most likely an action that supports competition?

Preventing two dominant firms in the same market from merging.

Rent seeking activities:

Require resources, and then net result is to reduce total welfare to society.

Social forces:

affect the price mechanism though cultural norms

Political forces:

affect the price mechanism though the legal system

The price mechanism is:

affected by both political and social forces.

Economic reasoning would argue that there is an opportunity cost to:

all choices.

The following would likely result in an increase in the demand for beef:

an increase in family income

Suppose both wages and employment increase. These changes most likely were caused by:

an increase in labor demand.

In the early days of the internet, selling an buying form other individuals were dangerous because one never knew the person on the other side of the transaction was honest. eBay.com became successful because it lessened that problem with its feedback rating system that et buyers and sellers develop reputation. eBay.com's innovation is an example of overcoming:

an information problem

An economic model:

applies economic theory to understand real-world events

Private property rights:

are essential elements of a market economy.

Total consumer surplus is measured as the area:

between the vertical axis, the demand curve, and horizontal line through nth market price

Total producer surplus is measured as the area:

between the vertical axis, the supply curve, and the horizontal line through the market price.

A market in which there is only a single seller and a single buyer is a:

bilateral monopoly.

Two countries that specialize their production along the lines of comparative advantage and then trade with each other will be able to:

both produce and consume more.

Suppose that a negative externality creates $1 billion worth of cost to third parties. The government attacks the problem with regulations that cut the cost of the externalities to $500 million but cost business and consumers $1.5 billion. This situation illustrates the idea that:

correcting market failure can result in government failure

for substitutes:

cross-price elasticity of demand can be any positive value

For complements:

cross-price elasticity of demand is negative

The foreign exchange market is the market in which:

currencies of different countries are bought and sold

According to the law of demand and increase in the price of gasoline will:

decrease the quantity demanded of gasoline, other things constant.

When the government imposes a per-unit tax on the product, the net price producers actually receive for the products (after all taxes) typically:

decreases by the less than the amount of the per-unit tax

When you produce cars, it is enormously expensive to produce one car, but then the cost per care decrease as more produced. This would be an example of:

decreasing marginal opportunity cost.

The problems created by price controls become greatest as time goes by when:

demand and supply become more inelastic

If Americans suddenly wanted European products because they were emended more fashionable, the:

demand curve for the euro would shift to the right.

Businesses do all of the following except:

demand goods and series form households in the goods market.

The optimal level of employment for a monopsonist corresponds to the point where labor:

demand intersects marginal factor cost.

In the U.Sm government performs all of the following except:

determine production levels.

Normative economics seeks to:

determine the most appropriate economic goals for society.

Most economies today are:

differentiated primarily by the degree to which they'd spend on markets.

If the supply curve us perfectly inelastic, the burden of a tax on the suppliers is borne:

entirely on the suppliers

If the market has no externalities, marginal private costs:

equal marginal social costs.

Price tend to be in equilibrium where supply and demand interact because when quantity supplied:

equals quantity demeaned, prices don't change

Once vaccinated, a person cannot catch a cold or give a cold to someone else. As a result, the marginal social benefit resulting from consumption of the vaccine:

exceeds the marginal social benefit received by the consumers of the vaccine

The focal point phenomenon:

explains why production tends to take place in a few select countries rather than being evenly distributed across countries.

Suppose farmers can use their land to grow either wheat or corn. The law of supply predicts that an increase in the market price of wheat will cause:

farmers to substitute water for the production of corn

In general, the greater the elasticity, the:

larger the responsiveness of quantity to change in price

The marginal factor cost curve for a monopsony:

lies above the labor supply curve.

The more inelastic demand is, the:

more sellers have to gain by restricting supply to raise price and total revenue

The best example of a public good is:

national defense

Alex is playing music full volume in his dorm. The other people living on his floor find this to be nuisance, but Alex does not care. Alex's music playing is an example of:

negative externality

when the wage rate paid to labor is above equilibrium, the:

number of workers seeking jobs exceeds the number of jobs available.

Positive economics seeks to:

objectively explain how the economy functions.

The foreign exchange rate is the rate at which:

one countries currency can be traded for another country's currency

Adverse selection is most likely to be a problem when:

one side of the market, either buyer or seller, has better information than the other side.

Entrepreneurship is defined as the ability to:

organize and get something done

A necessary assumption behind the invisible hand theorem is that:

people behave rationally.

Government is lobbied to institute price controls because:

people care more about their own surplus than they do about total surplus

Income elasticity is define as the:

percentage change in demand divided by the percentage change in income

Demand is said to be elastic when the:

percentage change in quantity demanded is greater than the percentage change in price

The rice of gasoline is generally higher in Hawaii than in the continental U.S. Therefore, the Hawaiian legislature passed a law forbidding gas stations form charging a higher price than the average price of gas on the West Coast of the U.S. As time progresses, one would expect the resulting:

shortage of gas in Hawaii to rise

The elasticity of labor supply:

should be greater for a town than for a state because people are more likely to consider work in a neighboring town than in another state.

A lawyer who drives a beat-up car and wears frumpy clothes may have a hard time getting clients. Potential clients may conclude that from his appliance that he is poor, and if he is poor, he probably is not very good. If this is true for a lawyer, dressing in expensive and stylish clothing is a way of:

signaling quality

The labor demand curve:

slopes down because of the law of demand.

Americans buying Japanese cars:

supply U.S dollars and demand Japanese yen

According to the law of supply:

supply curve slopes upward