Principles of Microeconomics Exam 1

Which of the following is microeconomics question? a.Will Federal Reserve intervention lower the inflation rate? b.Why has growth in the economy increased wince the end of the recession? c.Will the merger of American Airlines and US Airways increase or decrease airfares? d.Why do economies experience periods of high inflation?

c.Will the merger of American Airlines and US Airways increase or decrease airfares?

Markets promote...

competition and voluntary exchange

Consider the following economic agents: a.the government b.consumers c.producers Who, in a market economy, decides what goods and services will be produced with the scarce resources available in that economy?

consumers and producers

How do market economies ultimately determine what goods and services are produced, how the goods and services will be produced, and who will receive the goods and services?

Consumers determine what goods and services are produced, firms determine how to produce them, and markets determine who will receive them.

For each surfboard that Australia produces, it gives up the opportunity to make 25 boomerangs. New Zealand can produce 1 surfboard for every 15 boomerangs it produces. Which of the following is true about the comparative advantage between the two countries?

Australia has the comparative advantage in boomerangs.

Damian shares a small food truck with his sister. His share of the expenses if $500 per month. He has decided to get his own, newer food truck which he will not have to share with anyone. His expenses for the newer truck are $1,400 per month. Damian is as rational as any other person. As an economics major, you rightly concluded that...

Damian figures that the additional benefit of having his own truck(as opposed to sharing) is at least $900

In the 1950s, the economist Bela Balassa compared 28 manufacturing industries in the United States and Britain. In everyone of the 28 industries, Balassa found that the United States had an absolute advantage. In these circumstances, would there have been any gain to the United States from importing any of these products from Britain?

Even with an absolute advantage, the United States would have benefited from importing those products for which Britain had a comparative advantage.

True or False: If Sanjaya can shuck more oysters in one hour than Tatiana, then Sanjaya has a comparative advantage in shucking oysters.

False

True or False: If additional units of a good could be produced at a constant opportunity cost, the production possibility frontier would be bowed outward(concave).

False

In the 18th century Europe, governments gave guild legal authority to limit production of goods. Did this authority obstruct or improve the market mechanism and how?

It obstructed the market mechanism because the guild's actions prevented the forces of demand and supply from coordinating the self-interested decisions of producers and consumers.

For each bottle of wine that Italy produces, it gives up the opportunity to make 10 pounds of cheese. France can produce 1 bottle of wine for every 25 pounds of cheese it produces. Who has the comparative advantage in wine?

Italy

Julia Paul, an analyst at a research institute, lives very close to her office and walks to work every day. Meanwhile, her colleague, Amanda Jones, dislikes the fact that it takes her almost an hour to commute to work every day. As a result, when Julia devices to move to a suburb farther away, Amanda is very surprised. What would explain Julia's behavior?

Julia saves more in rent that she spends on commuting to work

Which of the following correctly describes the relationship between economic efficiency and economic equity?

There is often a trade-off between the two

True or False: A college must decide if it wants to offer more Internet-based classes. This decision involves answering the economic question of "what to produce."

True

True or False:If it costs Danitra $225 to create 4 necklaces and $275 to create 5 necklaces, then $50 is the marginal cost of producing the 5th necklace.

True

True or False:To increase gas mileage, automobile manufacturers make cars small and light. Large cars absorb more of the impact of an accident than small cars but yield lower gas mileage. These facts suggest that a negative relationship exists between safety and gas mileage.

True

a.The minimum wage law causes unemployment b.A minimum wage law benefits some groups and hurts others c.In some cities such as San Francisco and New York, it would be impossible for low-skilled workers to live in the city without minimum wage laws d.The gains to winners of a minimum wage law should be valued more highly than the losses to losers because the latter primarily comprises businesses Which of the consequences above are positive statements and which are normative statements?

a and b are positive statements, c and d are normative statements

A production possibilities frontier(PPF) is...

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

What is a market?

a group of buyers and sellers of a good or service

What is a mixed economy?

a mix of both a centrally planned economy and market economy;most economic decisions result from the interaction of buyers and sellers, but governments play a significant role in the allocation of resources

What is meant by a more equitable distribution of wealth?

a more fair distribution of wealth

An inward shift of a nation's production possibilities frontier can occur due to...

a natural disaster like a hurricane or bad earthquake

What is scarcity?

a situation in which there is finite resources but unlimited wants/needs

Consider the following statements: a.Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area. b.Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring. c.Firms produce more fo a particular DVD when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives?

a,b, and c

Suppose there is no unemployment in the economy and society devices that it wants more of one good. Which of the following statements is true? a.it will have to give up production and consumption of some other good b.it can only achieve this with an increase in resource supplies c.it can increase output without giving up another good d.it can only achieve this with an advance in technology

a.it will have to give up production and consumption of some other good

Consider the following items: a.the novel "The DaVinci Code" by Dan Brown b.the "The Spirited Shipper", an innovative wine shipping box c.a Swiss chef's award-winning recipe d.an original fabric design for example, the fabric used for "Coach" bags and luggage Which of the items listed is an example of intellectual property?

all of the items listed

Economics assumes people and firms...

are rational, respond to incentive, and make decisions by comparing marginal benefits with marginal costs

What are some things that a model needs?

assumptions,simplifications, testability, and economic variables

Arlene quits her $125,000 a year job to take care of her ailing parents. What is the opportunity cost of her devision?

at least $125,000

Which of the following is motivated by an equity concern? a.The United Network for Organ Sharing advocates a system of rationing scarce kidneys that would favor young patients over old in an effort to wring more life out of donated organs. b.Some states have transferred funds to food bank programs in order to increase benefits to lower-income families. c.Following the implementation of subsidies for energy conservation, household demand for rooftop solar panels increased quite significantly in California d.The United States offers patent protection to pharmaceutical manufacturers to prevent others from duplicating their products

b.Some states have transferred funds to food bank programs in order to increase benefits to lower-income families

Increasing opportunity cost is represented by a ___ production possibilities frontier.

bowed out

Which of the following is a positive economic statement? a.foreign workers should not be allowed to work for lower wages than the citizens of a country b.the government should mandate electric automobiles c.scarcity necessitates that people make trade-offs d.people should not buy SUVs

c. scarcity necessitates that people make trade-offs

Which of the following is a microeconomics question? a.How much will be saved and how much will be produced in the entire economy? b.What determines the average price level and inflation? c.What factors determine the price of carrots d.What will the level of economic growth be in the entire economy?

c.What factors determine the price of carrots?

___ increases economic efficiency because it forces firms to produce and sell goods and services as long as the additional benefit to consumers is greater than the additional cost of production

competition

Tesla Motors manufacturers its cars at a plant in Fremont, California. At this plant, Tesla is able to take advantage of the high level of technical training possessed by its American workers, but it also sacrifices the ability to pay lower wages had it chosen to open its plant in a low-wage country such as Mexico, India, or China. In deciding to open the Fremont plant, Tesla...

faced a trade-off between higher cost and lower precision

True or False: "The distribution of income should be left to the market" is an example of a positive economic statement.

false

True or False:Policies based on positive economic ideas tend to decrease economic efficiency and reduce equity

false

Pookie's Pinball Palace restores old Pinball machines. Pookie has just spent $300 purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once he is finished with the restoration. After having spent $300, Pookie discovers that he will need to rewire the entire machine at a cost of $1,100 in order to finish the restoration. Alternatively, he can sell the machine "as is" now for $1,000. What should he do?

he should sell the machine now to make the most profit

In the circular flow model, producers...

hire resources sold by household in the factor market

Microeconomics is the study of...

how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

Economics is a social science because...

it applies the scientific method to the study of the interactions among individuals, it considers human behavior-particulary decision-making behavior, and it is based on studying the actions of individuals.

What covers the study of topics such as inflation or unemployment?

macroeconomics

What are the steps to building an economic model?

make assumptions to simplify the complex world, formulate a testable hypothesis, revise the model if it fails to explain the economic data, retain the revised model to help answer similar economic questions in the future

A grocery store sells a bag of potatoes at a fixed price of $2.30, What is the term used by economist to describe the money received from the sale of an additional bag of potatoes?

marginal revenue

According to the U.S. Bureau of Labor Statistics, the amount of time men devote to housework has been increasing, while the amount of time women devote to housework has been decreasing. An economic explanation for this trend could be that as women have...

more employment opportunities, their opportunity cost of doing housework, relative to men's, has risen.

Would an equitable distribution of wealth necessarily be the most efficient distribution of wealth?

no, an economically efficient distribution of wealth would not necessarily be equitable

The primary purpose of ___is to encourage the expenditure of funds on research and development to create new products.

patents and copyrights

Suppose that some teachers have decided that economic and financial uncertainty have made the prospect of retiring more risky, and therefore carry a higher cost than not retiring. By using all available information as they act to achieve their goals, these teachers are exemplifying the economic idea that...

people are rational

What are the three key economic ideas?

people are rational, people respond to economic incentives, and optimal decisions are made at the margin

Suppose the U.S. government encouraged new medical school graduates to take over existing practices from doctors wishing to retire by paying both the new and retiring doctors $100,000. These doctors would be exemplifying the economic idea that...

people respond to economic incentives

Holding all other personal characteristics-such as age, gender, and income-constant, economists would expect that...

people with health insurance will be more likely to be overweight than people without health insurance

Specializing in the production of a good or service in which one has a comparative advantage does not let a country...

produce a combination of goods that lie outside its own production possibilities frontier

What are the two types of efficiency?

productive and allocative

Germany has a market economy. As such, Germany's economy(relative to centrally planned economies) tends to result in...

productive efficiency and allocative efficiency but not necessarily equity

Mr.Peabody chooses to invest in companies that produce goods and services at the lowest possible cost. Mr.Peabody is investing in companies that are...

productively efficient

The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the ___ the payoff to devoting additional resources to that activity.

smaller

Arlisha purchases a cotton candy machine for her concession stand at the state fair. What is this statement an example of in the circular flow model?

spending on factors of production

Javier buys 800 square feet of wood flooring for his vacation home. What is this statement an example of in the circular flow model?

spending on goods and services

What is equity?

the fair distribution of economic benefit

How are the fundamental economic decisions determined in North Korea?

the government decides because North Korea is a centrally planned economy

What is an opportunity cost?

the highest valued alternative that must be given up to engage in an activity

A major factor contributing to the slow growth rate of less developed economies is...

the lack of well-defined and enforceable property rights

Without an increase in the supplies of factors of production, how can a nation achieve economic growth?

through technological advancement which enables more output with the same quantity of resources

True or False: It is possible to have an absolute advantage in producing a good or service without having comparative advantage.

true

True or False:Suppose the extra cost to a doctor of keeping his office open on Saturdays is $1,200. Then, the doctor should stay open on Saturdays if keeping the office open brings in additional revenue of $1,200 or more.

true

True or False:The basis for trade is comparative advantage, not absolute advantage.

true

What is being rational?

using all available info to achieve your goals

A successful market economy requires...

well-defined property rights and an independent court system to adjudicate disputes based on the law

What is productive efficiency?

where goods and services are produced at the lowest possible cost

What is allocative efficiency?

where production is consistent with consumer preferences; every good or service is produced up to the point where the marginal benefit to society is equal to its marginal cost of production

Every society faces trade-offs because we live in a world of scarcity. Suppose a student-athlete has the opportunity to earn $1,000,000 next year playing for a minor league baseball team, $300,000 next year playing for a European professional football team, or $0 returning to college for another year. The opportunity cost of the student-althlete returning to college next year is ___.

$1,000,000

Pookie's Pinball Palace restores old Pinball machines. Pookie has just spent $300 purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once he is finished with the restoration. After having spent $300, Pookie discovers that he will need to rewire the entire machine at a cost of $1,100 in order to finish the restoration. Alternatively, he can sell the machine "as is" now for $1,000. What is the marginal cost of completing the task?

$1,100

DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is DeShawn's marginal benefit if he sells a basic detailing package?

$75

What are three questions that society asks when making choices?

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

What is a model?

a highly simplified representation of a more completed reality

Voluntary exchange between buyers and sellers generates ___ in a market economy.

allocative efficiency

What is a centrally planned economy?

an economy where governments deified what to produce, how to produce it, and who received the goods and services

What is a market economy?

an economy where the decisions of households and firms determine what is produced, how it is produced, and who receives the goods and services

Which of the following is a positive economic statement? a.The government should revamp the health care system. b.If the price of iPhones falls, a larger quantity of iPhones will be purchased. c.The standard of living in the U.S. should be higher. d.The U.S. government should not have bailed out U.S. auto manufacturers.

b. If the price of iPhones falls, a larger quantity of iPhones will be purchased.

Which of the following is not a step economist follow when developing an economic model? a.use economic data to test the hypothesis b.revise the model if it fails to explain well the economic data c.decide on the assumptions to use in developing the model d.make value judgements to be proven or disproven e.formulate a testable hypothesis

d.make value judgements to be proven or disproven

What is the tradeoff in society?

efficiency vs. equity

Alzuria is a developing economy. With trade and liberalization, the country has now seen substantial development in the private sector. However, government intervention in certain markets remains strong. The banking sector has a good mix of both private banks and those called "government undertakings," or public sector banks. Consumers are becoming increasingly aware of the difference in the quality of service provided by the private and the public sector banks. Competition among private banks has ensured that their employees adhere to high standards of customer service. Their public sector counterparts, however, do not appear to be making an effort to improve their customer service. What would explain the careless attitude of employees in public sector banks?

employees in the public sector have greater job security than those in the private sector

in a report made to the U.S. Congress in 2001, the National Academy of Sciences cautioned that if fuel economy encourages the production of smaller and lighter cars, "Some additional traffic fatalities would be expected." This statement suggests that...

there is a tradeoff between safety and fuel economy