ABM Exam #1 Study Prep:

Which situation(s) may require government intervention?

A manufacturing firm on a river is dumping production run off into the water.

Which type of payment would NOT be a market transaction?

payment made to a disaster victim

A market exists when:

people exchange money for goods and services

In the study of economics, the goals of efficiency and equity are often:

in conflict with one another

Which statement about economics is CORRECT?

Economists consider how rational people respond to incentives

What would cause a shift from D1 to D2?

a new study that shows that honey cures cancer

The economics of uranium mining would be studied in:

microeconomics.

According to the table, the equilibrium price is _____, and the equilibrium output is _____ units.

$10, 60

According to the graph, for every extra:

car South Korea wants to produce, it must give up half a bushel of wheat.

In the demand curve shown, an increase in price from $1 to $2 will:

cause quantity demanded to fall from 30 units to 20 units

A combination of goods that lies inside the PPF is considered inefficient because:

the economy is capable of producing more of both goods.

Because of scarcity

we face tradeoffs in nearly every choice we make.

According to the graph, the market quantity demanded at $20 is:

10

Which statement is a key idea in economic thinking?

Incentives matter.

A lawyer can argue a case in court for one hour and make $300. She could alternatively use that hour of time to type a legal brief in her office. What is the opportunity cost of her typing the legal brief?

$300, since that is the amount she could have made by arguing a case in court

An effective (or binding) price ceiling is a situation in which:

. government sets the maximum price for a good below its free market equilibrium price.

Looking at the production possibilities frontier (PPF) of Econia, what is the opportunity cost of moving production from point B (350 tons of wheat and 400 bales of cotton) to point G (190 tons of wheat and 700 bales of cotton)?

.53 ton of wheat per bale of cotton.

Paolo can walk three dogs or mow two lawns in two hours. Ashanti can walk six dogs or mow three lawns in two hours. Ashanti's opportunity cost for each additional dog walked is:

0.5 lawn mowed.

When the supply shifts from S0 to S1 (a leftward shift of the supply curve), the equilibrium quantity changes from:

20 units to 15 units.

The table shows coffee and tea units produced for the United States and Japan. If Japan decides to increase production of tea from 20 units to 35 units, the opportunity cost is:

8 units of coffee

Rational behavior requires thinking at the margin. Which example represents this type of thinking?

All of these examples represent thinking at the margin.

Which graph shows an increase in quantity supplied?

Bottom

Which of these is NOT an example of market failure?

Competition leads firms to provide products at the lowest possible price.

The demand for gasoline is rising. Which statement describes a possible cause?

Consumers expect prices to rise in the near future.

A country that is normally strong in human capital has a weak educational system

False

An increase in consumer preference for a good shifts the demand curve to the left.

False

Combinations of output that lie <em>on</em> the PPF are inefficient.

False

If a price floor is effective, all suppliers benefit from equilibrium prices below the free market prices.

False

If the price of a resource required to produce a good increases, the supply curve will shift to the right, indicating that producers are inclined to produce more of the good at each price point.

False

In an economy producing just beer and autos, producing increasing amounts of autos requires giving up decreasing amounts of beer.

False

Price controls provide only benefits but no costs to society.

False

Thinking at the margin means that decision makers think about all costs associated with an action, both those that may change as a result of a decision and those that won't change.

False

Which of the following statements is true of markets?

Free markets sometimes fail to produce best results for society, but such failure can be reduced by government intervention.

Which is NOT considered a basic economic question?

How will the system accommodate change?

Which of the following statements is true

Human creativity allows for existing products to improve.

What should be included in determining the opportunity cost of an action?

In assessing this value, the costs and benefits of the option should include all the benefits and costs of the action not selected, both financial and nonfinancial.

A theory composed of a number of assumptions and facts boiled down to their basic relevant elements is called a:

Model

Imagine two countries with identical endowments of resources. Using all its resources, Broland can produce 5,000 books or 8,000 forks. Using the same resources, Nomia could produce 4,000 books or 7,000 forks. Which country has a comparative advantage producing forks?

Nomia, because it gives up 0.57 of a book for each fork produced

_____ occurs when goods and services are produced with as few resources as possible, while _____ occurs when the mix of goods and services produced is the most desired by society.

Production efficiency; allocative efficiency

Specialization leads to gains for

Rules can be established to prevent people from acting on certain incentives.

In the market for coffee, consumers expect the price of coffee beans to rise next week. This would make the demand for coffee this week:

Shift right.

What might be done with the surplus caused by a government agricultural price support program?

Some of the surplus might be used for school lunches and in other government institutions; other parts of the surplus might be destroyed.

Which statement is TRUE about specialization and exchange between two individuals?

They generally benefit the poorer individual as well as the richer individual.

A price ceiling is a government mandated maximum price at which a good can be sold.

True

A tradeoff analysis entails assessing the costs and benefits of different alternatives.

True

An economy that finds new inputs or improves technology to use existing inputs in a more productive manner is pushing its PPF outward and can experience long-run economic growth.

True

As income increases, the demand curve for an inferior good shifts to the left.

True

Describe characteristics of wealthy countries that lead to new ideas.

Wealthy countries tend to have strong educational systems and provide incentives for its citizens to work hard. These qualities along with a government free of corruption, a strong legal system, and a strong monetary system enable its citizens to create new or improved products and to benefit from inventions, now and in the future.

key principles of economics

a. Economics is concerned with making choices with limited resources. b. While making decisions an individual should consider tradeoffs and opportunity costs. c. Specialization leads to gains for all involved. d. People respond to incentives, both good and bad. e. Rational people think at the margin. f. Markets are an efficient way to organize economic activity. g. Institutions and human creativity help explain the wealth of nations.

Suppose the country of Alphaland can produce more cars than Omegaland can produce, given the same resources. An economist would conclude that Alphaland has a(n) _____ in producing cars.

absolute advantage

Paying a salesperson more for increased sales is an example of

an incentive.

Opportunity cost is the value of the

best alternative which is given up when a decision is made.

example of inferior good

city bus

The typical PPF is:

concave

A production possibilities frontier that is a straight line is the result of:

constant opportunity costs.

An increase in government subsidies for an industry, which reduces production cost, causes the market equilibrium price to _____ and the market equilibrium quantity to _____.

decrease; increase

The limits on international trade include all of these EXCEPT:

decreasing opportunity costs and increasing returns.

The supply and demand model assists in analyzing the

determinants of market price and quantity.

The opportunity cost of producing more of a good increases because of:

diminishing returns to inputs.

Investment in human capital refers to:

education, on-the-job training, and professional training activities.

The basic factors of production are land, capital, labor, and:

entrepreneurial ability.

To achieve long-run economic growth, an economy must:

expand its capacity to produce.

Suppose that an artist has priced his painting at $150, but it remains unsold. We can conclude that the price of $150 is too:

high for this painting and it should be lowered.

Which of these circumstances would NOT affect the supply of new automobiles?

higher interest rates for new car financing

The production possibilities frontier (PPF) shows:

how much an economy can produce when using all of its inputs efficiently.

A combination of goods that lies <em>outside</em> the PPF is:

impossible

A(n) _____ can cause the PPF to expand.

improvement in production technology

A shift to the right of the supply curve could be caused by a(n):

improvement in production technology.

Supply and demand analysis is used:

in both microeconomics and macroeconomics.

Which of the following changes may cause the production possibilities frontier to shift inward from PPF1 to PPF0?

increase government regulation on businesses overall

Assume that hamburgers and ketchup are complements. If the price of hamburgers falls, demand for ketchup:

increases.

Scarcity

is faced by all individuals and societies.

People use _____ to determine how many hours to work, and businesses use _____ to determine how much of their product they are willing to supply to the market.

marginal analysis; marginal analysis

When quantity demanded in a market equals quantity supplied, then the:

market is in equilibrium.

In a _____ economy, individuals and firms own most resources, and in a _____ economy, the government controls most resources

market; planned

When the market for a good is in equilibrium, there is (are):

no shortages or surpluses.

If the government of Spain decides to spend less on the military and more on health care, the forgone spending on military items represents the:

opportunity cost of the extra health care.

When the government chooses to use resources to build tourist centers, the selected resources are no longer available to build highways. This BEST illustrates the concept of:

opportunity cost.

Economics is BEST defined as the study of how

people make rational decisions to satisfy their wants.

In the graph, point b represents:

point where all of society's resources are fully employed.

A change in the quantity demanded of a good results from a change in the:

price of a good.

Production efficiency occurs when goods are:

produced with the lowest possible resource cost.

A combination of goods represented by a point on the PPF is considered efficient because the economy is:

producing goods using the fewest inputs possible.

When goods are produced at the lowest possible cost, an economy is said to have achieved:

production efficiency.

Other factors held constant, as the price of an iPad rises, the:

quantity demanded for iPads falls.

When a customer chooses to accept an item of value from a business because it requires no incremental spending on the part of the customer, the customer is demonstrating the principle that

rational people think at the margin

Short-run economic growth is illustrated on a PPF diagram by movement from inside the PPF toward the PPF. A situation where this would be an appropriate depiction is in an economy:

recovering from a recession.

Which is NOT a source of economic growth?

reducing the level of international trade

Assume a farmer's land is equally productive in growing corn or potatoes and is currently producing both. If the price of corn increases but the price of potatoes does not change, the farm's supply curve for potatoes will:

shift to the left, and fewer potatoes will be produced at each price level.

When price ceiling for a good is set below the free market equilibrium the result is a(n):

shortage

If an effective price ceiling is raised:

shortage decreases

The theory of comparative advantage says that countries:

should export those goods they can produce at a lower opportunity cost than another country.

Improvements in technology that reduce production costs cause the _____ curve to shift to the _____, indicating a(n) _____ in the amount _____ at each price point.

supply; right; increase; supplied

If the price of shoes is $60, then we:

surplus of shoes

One of the costs associated with a minimum wage is that it creates a:

surplus of workers.

In the graph(above), a movement from point f to point g could occur if:

technological improvements occur.

The opportunity costs of attending college do NOT include:

the expenditures for food.

The graph represents:

the law of supply

Supply is defined as:

the maximum amount of a product that sellers are willing and able to provide for sale over a particular time period at various prices, holding all other relevant factors constant.

At any price below the equilibrium price:

the quantity demanded exceeds the quantity supplied in the market.

Economics

the study of how individuals, businesses, and societies make decisions to maximize their well-being given limited resources

If an economy is operating at a point that is inside of its production possibilities frontier, then it can be assumed that its resources are:

underutilized

Price controls are sometimes used when the natural operation of free markets leads to:

undesirable outcomes.

Macroeconomics is concerned with issues such as:

unemployment.