ECO 201 (Ch. 1-4) McGraw-Hill
Microeconomics is the study of
how individual households and firms make decisions.
Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that
people face tradeoffs
Refer to Figure 2-10. When this economy produces 30 doghouses and 25 dishwashers there is full employment.
False
In a market economy, who makes the decisions that guide most economic activity?
Firms and households
Which of the following statements does not apply to a market economy?
Government policies are the primary forces that guide the decisions of firms and households.
Refer to Figure 3-1. The rate of trade-off between producing chairs and producing couches depends on how many chairs and couches are being produced in
Graph (a) only.
Refer to Figure 3-1. The rate of trade-off between producing chairs and producing couches is constant in
Graph (b) only.
Which of the following is an important cause of inflation in an economy?
Growth in the quantity of money in the economy
Refer to Figure 2-4, Graph (a). Production at point K is
possible but inefficient.
Market power refers to the
power of a single person or small group to influence market prices
Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.
If the United States decides to trade with Yemen, we know that
Yemen and the United States can both benefit.
Making rational decisions at the margin means that people
compare the marginal costs and marginal benefits of each decision.
Refer to Figure 2-6. Consider the production possibilities frontier for an economy that produces only sofas and cars. When society moves from point A to point B,
the opportunity cost is the same as when society moves from point B to point C
For a very long time the country of Zeeland has had an inflation rate of 9 percent. Suddenly its inflation rate drops to 3 percent. The drop in the inflation rate
could be due to slower money supply growth. We would expect unemployment to be higher.
Large or persistent inflation is almost always caused by
excessive growth in the quantity of money.
Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce
externalities
Refer to Figure 3-4. Both Alice and Betty
face a constant trade-off between producing pitchers of lemonade and pizzas
A professor spends 10 hours per day giving lectures and writing papers. For the professor, a graph that shows his various possible mixes of output (lectures given per day and papers written per day) is called his
production possibilities frontier
The ability of an individual to own and exercise control over scarce resources is called
property rights
Economists at the Department of the Treasury
provide advice on tax policy to the President
Central planning refers to
government guiding economic activity. Today many countries that had this system have abandoned it.
A circular-flow diagram is a model that
helps to explain how the economy is organized
According to the circular-flow diagram, if Jalyssa is a worker who delivers flowers for Happy Day FlowerCompany, she participates
in the markets for factors of production exchanging labor for income
An increase in the overall level of prices in an economy is referred to as
inflation
Prices direct economic activity in a market economy by
influencing the actions of buyers and sellers
Absolute advantage is found by comparing different producers'
input requirements per unit of output.
Another term for factors of production is
inputs
The business cycle is the
irregular fluctuations in economic activity
Refer to Figure 2-3. This economy cannot currently produce 70 washers and 70 dryers because
it does not have the resources and technology to produce that level of output.
An economy's production of two goods is efficient if
it is impossible to produce more of one good without producing less of the other.
In the circular-flow diagram,
labor flows from households to firms
In the short run, an increase in the money supply is likely to lead to
lower unemployment and higher inflation.
Both the production of goods and services and the unemployment rate are used to measure
the business cycle
In most societies, resources are allocated by
the combined actions of millions of households and firms
The primary determinant of a country's standard of living is
the country's ability to produce goods and services
Refer to Figure 2-2. If boxes A and B represent households and firms, then boxes C and D of this circular- flow diagram represent
the markets for goods and services and the markets for factors of production.
During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. A likely explanation of these facts is that
the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.
A production possibilities frontier is bowed outward when
the rate of trade-off between the two goods being produced depends on how much of each good is being produced.
Adam Smith developed the theory of comparative advantage as we know it today
False
Refer to Table 2-1. If the production possibilities frontier is bowed outward, then which of the following could be the maximum number of tennis balls produced when 300 tennis rackets are produced?
$4,500
Assume for the United States that the opportunity cost of each airplane is 50 cars. Which of these pairs of points could be on the United States' production possibilities frontier?
(200 airplanes, 12,500 cars) and (150 airplanes, 15,000 cars)
Refer to Figure 3-2. If the production possibilities frontier shown is for 24 hours of production, then how long does it take Brazil to make one pound of cashews?
1/10 hour
Refer to Figure 3-3. If the production possibilities frontier shown for Arturo is for 100 hours of production, then how long does it take Arturo to make one burrito?
1/3 hour
Refer to Figure 3-2. If the production possibilities frontier shown is for 24 hours of production, then how long does it take Brazil to make one pound of peanuts?
3 hours
Refer to Figure 3-2. If the production possibilities frontier shown is for two months of production, then which of the following combinations of peanuts and cashews could Brazil produce in two months?
3 pounds of peanuts and 150 pounds of cashews
Refer to Table 2-2. What is the opportunity cost to Footville of increasing the production of shoes from 400 to 600?
300 socks
Refer to Figure 3-3. Arturo's opportunity cost of one burrito is
4/3 tacos and Dina's opportunity cost of one burrito is 2 tacos.
Refer to Figure 3-3. If Arturo and Dina each divides his/her time equally between the production of tacos and burritos, then total production is
400 tacos and 250 burritos
Refer to Figure 2-3. If this economy devotes all of its resources to the production of dryers, then it will produce
80 dryers and 0 washers
In the short run, which of the following rates of growth in the money supply is likely to lead to the lowest level of unemployment in the economy?
9 percent per year
Which of these activities will most likely impose an external cost?
A postal worker smokes a cigarette in a crowded break room.
Refer to Figure 2-3. Efficient production is represented by which point(s)?
A, B
The famous observation that households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desirable market outcomes comes from whose 1776 book?
Adam Smith
Refer to Figure 3-4. If point A represents Alice's current production and point B represents Betty's current production, under what circumstances can both Alice and Betty benefit from specialization and trade?
Alice produces more lemonade and Betty produces more pizzas.
Which of these activities will most likely result in an external benefit?
An elderly woman plants a flower garden on the vacant lot next to her house.
Productivity is defined as the
Answer a. amount of goods and services produced from each unit of labor input
Refer to Figure 2-1. Which arrow represents the flow of goods and services?
B
Refer to Figure 2-10. Points B and C represent infeasible outcomes for this economy.
False
Coal is considered to be a nonrenewable energy source. Which of the following statements is correct?
Coal is a scarce resource
Suppose an economist develops a theory that higher food prices arise from higher gas prices. According to to the scientific method, which of the following is the economist's next step?
Collect and analyze data
Which of the following is true?
Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.
A macroeconomist, rather than a microeconomist, would study the effects on a market from two firms merging
False
A market economy cannot produce a socially desirable outcome because individuals are motivated by their own selfish interests.
False
Figure 2-11 Refer to Figure 2-11. Point B represents an inefficient outcome for this economy.
False
Refer to Figure 2-10. The opportunity cost of moving from point B to point D is 15 doghouses.
False
Which of the following is the most correct statement about the relationship between inflation and unemployment?
In the short run, falling inflation is associated with rising unemployment.
If Iowa's opportunity cost of corn is lower than Oklahoma's opportunity cost of corn, then
Iowa has a comparative advantage in the production of corn.
A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages?
Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.
In the circular-flow diagram, which of the following is not a factor of production?
Money
Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate?
People respond to incentives.
If Shawn can produce more donuts in one day than Sue can produce in one day, then
Shawn has an absolute advantage in the production of donuts
Which of the following statements exemplifies a principle of individual decision making?
The cost of something is what you give up to get it.
Refer to Figure 2-5. Which of the following events would explain the shift of the production possibilities frontier from A to B?
The economy experienced a technological advance in the production of books.
Dee is an accomplished actress and a homeowner who pays a landscaper to maintain her lawn rather than do it herself. Dee has determined that she can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics?
Trade can make everyone better off
"Society would be better off if the welfare system were abolished" is a normative statement, not a positive statement
True
A circular-flow diagram is a visual model of the economy.
True
A marginal change is a small incremental adjustment to an existing plan of action.
True
A production point is said to be efficient if there is no way for the economy to produce more of one good without producing less of another.
True
A tax on gasoline is an incentive that encourages people to drive smaller more fuel-efficient cars.
True
As long as two people have different opportunity costs, each can gain from trade with the other, since trade allows each person to obtain a good at a price lower than his or her opportunity cost.
True
Because resources are scare, society cannot give all individuals the standard of living to which each aspires.
True
Differences in opportunity cost allow for gains from trade.
True
For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs.
True
Macroeconomics is the study of economy-wide phenomena.
True
Positive statements are descriptive, while normative statements are prescriptive. Points: 1
True
Refer to Figure 2-10. Given the technology available for manufacturing doghouses and dishwashers, this economy does not have enough of the factors of production to support the level of output represented by point C.
True
Refer to Figure 2-4, Graph (a) and Graph (b). A shift of the economy's production possibilities frontier from Graph (a) to Graph (b) could be caused by
an improvement in donut production technology
Dale is a guitar teacher and Terrence is a tile layer. If Dale teaches Terrence's daughter to play the guitar in exchange for Terrence tiling Dale's kitchen floor,
both Dale and Terrence are made better off by trade
Communist countries worked under the premise that
central planners were in the best position to determine the allocation of scarce resources in the economy.
Positive statements are
claims about how the world is
Efficiency
refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society
Fundamentally, economics deals with
scarcity.
In a market economy, economic activity is guided by
self-interest and prices
A rational decisionmaker
takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.
Prior to the collapse of communism, communist countries worked on the premise that economic well-being could be best attained by
the actions of government central planners
Refer to Figure 2-6. Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of each car is
the slope of the production possibilities frontier, or 3/2 sofas.
Refer to Figure 2-4, Graph (a). The movement from point M to point K could be caused by
unemployment.
Economics is the study of how society manages its
unlimited wants and limited resources.
In the sample-circular flow diagram, the flow of money from the firms to the markets for factors of production is called
wages, rent, and profit
