ECON 100 Exam #1 Review Quiz Questions

Which categories of goods are excludable? A. Private goods and club goods B. Private goods and common resources C. Public goods and club goods D. Public goods and common resources

A A good is excludable if people can be prevented from using it. Private goods and club goods are excludable, while common resources and public goods are not excludable.

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with ________ elasticities of demand and ________ elasticities of supply. A. small, small B. small, large C. large, small D. large, large

A A tax has a deadweight loss because it induces buyers and sellers to change their behavior. The tax raises the price paid by buyers, so they consume less. At the same time, the tax lowers the price received by sellers, so they produce less. Because of these changes in behavior, the equilibrium quantity in the market shrinks below the optimal quantity. The more responsive buyers and sellers are to changes in the price, the more the equilibrium quantity shrinks. Hence, the greater the elasticities of supply and demand, the greater the deadweight loss of a tax. So the policymaker should look for goods with as little elasticity as possible, in both supply and demand.

An increase in the supply of a good will decrease the total revenue producers receive if A. the demand curve is inelastic. B. the demand curve is inelastic. C. the supply curve is inelastic. D. the supply curve is inelastic.

A An increase in the supply of a good means that the price of the good will fall and the quantity sold will rise. In order for this to decrease total revenue, it must be that the percentage change in price is larger than the percentage change in quantity. Because the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, you can use the following formula to determine whether the demand curve is inelastic or elastic in this region: Therefore, the demand curve must be inelastic in this region (that is, have a price elasticity of less than one) in order for an increase in supply to lead to a decrease in total revenue.

The demand curve for cookies is downward sloping. When the price of cookies is $2, the quantity demanded is 100. If the price rises to $3, what happens to consumer surplus? A. It falls by less than $100. B. It falls by more than $100. C. It rises by less than $100. D. It rises by more than $100.

A Because the demand curve reflects buyers' willingness to pay, the area below the demand curve and above the price measures the consumer surplus in a market. If the price of cookies rises by $1, you might be tempted to say that consumer surplus falls by $1 per cookie×100 cookies=$100$1 per cookie×100 cookies=$100. However, demand is downward sloping, so an increase in price means a decrease in the quantity demanded. Therefore, consumer surplus must fall by less than $100. The following graph shows the loss in consumer surplus (CS) due to a price (P) increase. Notice that this area must be less than $100.

When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage, A. they both obtain consumption outside their production possibilities frontier. B. they both obtain consumption inside their production possibilities frontier. C. one individual consumes inside his production possibilities frontier, while the other consumes outside his. D. each individual consumes a point on his own production possibilities frontier.

A By producing efficiently and then making a mutually beneficial trade based on comparative advantage, both individuals obtain consumption outside their production possibilities frontier. This is because trade allows each individual to specialize in doing what he does best, leading to an overall increase in production and consumption for both parties.

If a nation that does not allow international trade in steel has a domestic price of steel lower than the world price, then A. the nation has a comparative advantage in producing steel and would become a steel exporter if it opened up trade. B. the nation has a comparative advantage in producing steel and would become a steel importer if it opened up trade. C. the nation does not have a comparative advantage in producing steel and would become a steel exporter if it opened up trade. D. the nation does not have a comparative advantage in producing steel and would become a steel importer if it opened up trade.

A Comparing the world price with the domestic price before trade indicates whether a nation has a comparative advantage in the production of steel. If the domestic price is lower, the cost of making steel in that nation is also low, suggesting that the nation has a comparative advantage in producing steel relative to the rest of the world.

Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much as $300 for the massage, but they negotiate a price of $200. In this transaction, A. consumer surplus is $20 larger than producer surplus. B. consumer surplus is $40 larger than producer surplus. C. producer surplus is $20 larger than consumer surplus. D. producer surplus is $40 larger than consumer surplus.

A Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. In this case, Colleen was willing to pay $300 for a massage but it cost her only $200, so consumer surplus is $300−$200=$100$300−$200=$100. Producer surplus is the amount a seller is paid minus the cost of production. In this case, Jen's cost of production is 2 hours×$60 per hour=$1202 hours×$60 per hour=$120 and she gets paid $200, so producer surplus is $200−$120=$80$200−$120=$80. Therefore, consumer surplus is $20 larger than producer surplus.

When a nation opens itself to trade in a good and becomes an importer, A. producer surplus decreases, but consumer surplus and total surplus both increase. B. producer surplus decreases, consumer surplus increases, and so the impact on total surplus is ambiguous. C. producer surplus and total surplus increase, but consumer surplus decreases. D. producer surplus, consumer surplus, and total surplus all increase.

A If a nation becomes an importer when it opens itself to trade, this means that the domestic price for the good must be above the world price. The following graphs indicate consumer surplus (CS) and producer surplus (PS) before and after trade: As you can see, while producer surplus declines, both consumer surplus and total surplus increase as a result of trade.

If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? A. Prices and quantities both rise. B. Prices and quantities both rise. C. Prices rise, quantities fall. D. Prices fall, quantities rise.

A If the demand for a good rises when income falls, the good is called an inferior good. An increase in demand results in a rise in both the equilibrium price and quantity of a good, as seen on the following graph.

Public goods are A. efficiently provided by market forces. B. underprovided in the absence of government. C. overused in the absence of government. D. a type of natural monopoly.

A Public goods are neither excludable nor rival in consumption. Because public goods are not excludable, the free-rider problem prevents the private market from supplying them. A free rider is a person who receives the benefit of a good but does not pay for it. The government, however, can potentially remedy the free-rider problem by providing the public good, paying for it with tax revenue, and making everyone better off.

A $1 per unit tax levied on consumers of a good is equivalent to A. a $1 per unit tax levied on producers of the good. B. a $1 per unit subsidy paid to producers of the good. C. a price floor that raises the good's price by $1 per unit. D. a price ceiling that raises the good's price by $1 per unit.

A Taxes levied on sellers and taxes levied on buyers are equivalent. In both cases, the tax places a wedge between the price that buyers pay and the price that sellers receive. The wedge between the buyers' price and the sellers' price is the same, regardless of whether the tax is levied on buyers or sellers. In either case, the wedge shifts the relative position of the supply and demand curves. In the new equilibrium, buyers and sellers share the burden of the tax. The only difference between a tax levied on sellers and a tax levied on buyers is who sends the money to the government.

The circular-flow diagram illustrates that, in markets for the factors of production, A. households are sellers, and firms are buyers. B. households are buyers, and firms are sellers. C. households and firms are both buyers. D. households and firms are both sellers.

A The circular-flow diagram simplifies the economy by including only two types of decision makers: firms and households. Firms produce goods and services using inputs, such as labor, land, and capital. These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce. Therefore, in the markets for the factors of production, households are sellers, and firms are buyers.

A tax on a good has a deadweight loss if A. the reduction in consumer and producer surplus is greater than the tax revenue. B. the tax revenue is greater than the reduction in consumer and producer surplus. C. the reduction in consumer surplus is greater than the reduction in producer surplus. D. the reduction in producer surplus is greater than the reduction in consumer surplus.

A The fall in total surplus that results when a tax (or some other policy) distorts a market outcome is called a deadweight loss. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. Therefore, a tax on a good has deadweight loss if the reduction in consumer and producer surplus is greater than the tax revenue.

Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government's tax revenue A. increases by less than 50 percent and may even decline. B. increases by exactly 50 percent. C. increases by more than 50 percent. D. The answer depends on whether supply or demand is more elastic.

A The government's tax revenue is the size of the tax times the amount of the good sold. Graphically, tax revenue equals the area of the rectangle formed by the tax wedge between the supply and demand curves. Recall that the area of a rectangle is width times length; in this case the width is the amount of the tax and the length is the quantity sold. When a tax increases from 10 cents to 15 cents per pound, this means the width of the rectangle increases by 50 percent. However, because demand is downward sloping and supply is upward sloping, the length of this rectangle also decreases. Therefore, the overall area of the rectangle increases by less than 50 percent and may even decline if the decrease in length more than offsets the increase in width.

A life-saving medicine without any close substitutes will tend to have: A. A small elasticity of demand B. A large elasticity of demand C. A large elasticity of demand D. A large elasticity of supply

A The price elasticity of demand measures how much the quantity demanded responds to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price. Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from such a good to others. In contrast, goods without close substitutes, such as a unique life-saving medicine, have a less elastic demand.

If a nation has high and persistent inflation, the most likely explanation is A. the central bank creating excessive amounts of money. B. unions bargaining for excessively high wages. C. the government imposing excessive levels of taxation. D. firms using their monopoly power to enforce excessive price hikes.

A The usual suspect in cases of large or persistent inflation is growth in the quantity of money. When a government's central bank creates large quantities of money, the value of that money falls, causing prices to rise and resulting in inflation.

Which of the following would increase quantity supplied, decrease quantity demanded, and increase the price that consumers pay? A. The imposition of a binding price floor B. The removal of a binding price floor C. The passage of a tax levied on producers D. The repeal of a tax levied on producers

A When the government imposes a legal minimum on the price of a good, this is known as a price floor. If the price floor being imposed is above the equilibrium price, the price floor is binding and causes a surplus in the market. The end result is an increase in the quantity supplied, a decrease in the quantity demanded, and an increase in the price that consumers pay.

When the government levies a tax on a good equal to the external cost associated with the good's production, it ________ the price paid by consumers and makes the market outcome ________ efficient. A. increases, more B. increases, less C. decreases, more D. decreases, less

A When the government levies a corrective tax in the presence of a negative externality, it increases the price paid by consumers. Although many kinds of taxes distort the market in a negative way, corrective taxes alter incentives that market participants face to account for the presence of externalities and, thereby, move the allocation of resources closer to the social optimum. Thus, while corrective taxes raise revenue for the government, they also enhance economic efficiency.

Economics is best defined as the study of A. how society manages its scarce resources. B. how to run a business most profitably. C. how to predict inflation, unemployment, and stock prices. D. how the government can stop the harm from unchecked self-interest.

A Economics is the study of how society manages its scarce resources. This includes studying how people make decisions and interact with one another, and the effects this has on the economy as a whole.

The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the elasticity is: A. 1/5 B. 1/2 C. 2 D. 5

B

Which categories of goods are rival in consumption? A. Private goods and club goods B. Private goods and common resources C. Public goods and club goods D. Public goods and common resources

B A good is rival in consumption if one person's use of the good reduces another person's ability to use it. Private goods and common resources are rival in consumption, while public goods and club goods are not.

If a nation that imports a good imposes a tariff, it will increase A. the domestic quantity demanded. B. the domestic quantity supplied. C. the quantity imported from abroad. D. all of the above.

B A tariff raises the price of an imported good above the world price by the amount of the tariff. Domestic suppliers of the good, who compete with suppliers abroad, can now sell the good for the world price plus the amount of the tariff. Thus, the price of that good—both imported and domestic—rises by the amount of the tariff and is, therefore, closer to the price that would prevail without trade: This leads to a decrease in the domestic quantity demanded from QD to QQ, an increase in the domestic quantity supplied from QS to QQ, and a decrease in the quantity imported from abroad from QD−QS to 0 in this case.

If the production of a good yields a negative externality, then the social-cost curve lies ________ the supply curve, and the socially optimal quantity is ________ than the equilibrium quantity. A. above, greater B. above, less C. below, greater D. below, less

B Because of the externality, the cost to society of producing the good is larger than the cost to the producers of that good. Therefore, the social-cost curve is above the supply curve because it takes into account the external costs imposed on society by the production of the good. This causes the equilibrium quantity to be larger than the socially optimal quantity because the market equilibrium reflects only the private costs of production.

Once again, in an hour, Mateo can wash 2 cars or mow 1 lawn, and Tyler can wash 3 cars or mow 1 lawn. Who has the comparative advantage in car washing, and who has the comparative advantage in lawn mowing? A. Mateo in washing, Tyler in mowing. B. Tyler in washing, Mateo in mowing. C. Mateo in washing, neither in mowing. D. Tyler in washing, neither in mowing.

B Economists use the term comparative advantage when describing the opportunity costs faced by two producers. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it. In this case, Mateo's opportunity cost of washing a car is 1/2 mowed lawn, while Tyler's opportunity cost of washing a car is 1/3 mowed lawn. Therefore, Tyler has a comparative advantage in washing cars. Similarly, Mateo's opportunity cost of mowing a lawn is 2 washed cars, while Tyler's opportunity cost of mowing a lawn is 3 washed cars. Therefore, Mateo has a comparative advantage in mowing lawns.

Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor, while producing a shirt takes 4 hours of labor. What will these nations trade? A. China will export aircraft, while the United States will export shirts. B. China will export shirts, while the United States will export aircraft. C. Both nations will export shirts. D. There are no gains from trade in this situation.

B Economists use the term comparative advantage when describing the opportunity costs faced by two producers. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it. In this case, the United States' opportunity cost of producing an aircraft is 5,000 shirts while China's opportunity cost of producing an aircraft is 10,000 shirts. Therefore, the United States has a comparative advantage in producing aircraft, so it will export aircraft, and China will import aircraft. Similarly, the Unites States' opportunity cost of producing a shirt is 1/5,000 aircraft while China's opportunity cost of producing a shirt is 1/10,000 aircraft. Therefore, China has a comparative advantage in producing shirts, so it will export shirts and the United States will import shirts.

A marginal change is one that A. is not important for public policy. B. incrementally alters an existing plan. C. makes an outcome inefficient. D. does not influence incentives.

B Economists use the term marginal change to describe a small incremental adjustment to an existing plan of action. Recall that margin means "edge," so marginal changes are alterations around the edges of what you are doing. See Section: Principle 3: Rational People Think at the Margin.

Adam Smith's phrase "invisible hand" refers to A. the subtle and often hidden methods that businesses use to profit at consumers' expense. B. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants. C. the ability of government regulation to benefit consumers, even if the consumers are unaware of the regulations. D. the way in which producers or consumers in unregulated markets impose costs on innocent bystanders.

B In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith acknowledged that households and firms act as if they are guided by an "invisible hand" that leads to a desirable market outcome. Although participants in the market act with their own self-interest in mind (for example, households seek to maximize their happiness while firms seek to maximize profits), free markets can reach desirable outcomes without additional intervention under certain assumptions and market conditions.

Sofia pays Sam $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sam, he raises his price to $60. Sofia continues to hire him at the higher price. What is the change in producer surplus, change in consumer surplus, and deadweight loss? A. $0, $0, $10 B. $0, -$10, $0 C. +$10, -$10, $10 D. +$10, -$10, $0

B In this case, the entire tax is passed to Sofia, the consumer. Therefore, there is no change in producer surplus, because the price received by Sam remains the same, but there is a decrease of $10 in consumer surplus because Sofia now pays $10 more than before. Since no mutually beneficial transactions are lost as a result of the tax, all of the decrease in consumer surplus goes to government revenue. Therefore, overall surplus remains the same, and deadweight loss is zero.

Which of the following is an example of a public good? A. Residential housing B. National defense C. Restaurant meals D. Fish in the ocean

B Public goods are neither excludable nor rival in consumption. Once the country is defended, it is impossible to prevent anyone in the country from enjoying the benefit of this defense. Moreover, when one person enjoys the benefit of national defense, that person does not reduce the benefit to anyone else. Thus, national defense is neither excludable nor rival in consumption.

The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the A. deadweight loss. B. government's tax revenue. C. equilibrium quantity. D. price paid by consumers.

B The Laffer curve shows the relationship between the tax on a good and the amount of government tax revenue received. In some instances, as the size of a tax increases, tax revenue grows. But as the size of the tax increases further, tax revenue falls because the higher tax drastically reduces the size of the market.

A change in which of the following will not shift the demand curve for hamburgers? A. The price of hot dogs B. The price of hamburgers C. The price of hamburger buns D. The income of hamburger consumers

B The demand curve for hamburgers shows the relationship between the price of hamburgers and the quantity of hamburgers demanded by consumers, assuming that all of the determinants of demand are held constant. The following list displays determinants of demand, which are the factors that affect the quantity of hamburgers consumers want to buy at a given price: Factors That Determine Demand •Price of a related good (complement or substitute) •Income of consumers •Tastes of consumers •Number of consumers •Expectations of consumers Therefore, if the price of hamburgers changes, the result is a movement along the demand curve from the old price to the new one. However, if a change occurs in any of the factors that determine demand—such as the price of hot dogs (a substitute), the price of hamburger buns (a complement), or the income of hamburger consumers—the result is a shift of the demand curve.

The government auctions off 500 units of pollution rights. They sell for $50 per unit, raising total revenue of $25,000. This policy is equivalent to a corrective tax of _____ per unit of pollution. A. $10 B. $50 C. $450 D. $500

B The following graphs show the demand curve for the right to pollute, which demonstrates that the lower the price of polluting, the more firms will choose to pollute. In the case of a corrective tax, the supply curve for pollution rights is perfectly elastic because firms can pollute as much as they want by paying the tax, and the position of the demand curve determines the quantity of pollution. In the case of pollution permits, the supply curve for pollution rights is perfectly inelastic because the quantity of pollution is fixed by the number of permits, and the position of the demand curve determines the price of pollution. Hence, the government can achieve a pollution level of 500 units by setting a corrective tax of $50 per unit or by auctioning off 500 permits.

Over time, technological advance increases consumers' incomes and reduces the price of smartphones. Each of these forces increases the amount consumers spend on smartphones if the income elasticity of demand is greater than _____ and if the price elasticity of demand is greater than _____. A. zero, zero B. zero, one C. one, zero D. one, one

B The income elasticity of demand measures how much the quantity demanded responds to changes in consumers' incomes. In order for an increase in consumers' incomes to bring about an increase in the amount consumers spend on smartphones, the income elasticity of demand must be positive (greater than zero). The impact of a price change on the total amount spent on a good, or total revenue, depends on the price elasticity of demand. Given that technological advances reduce the price of smartphones, total revenue will rise if the percentage change in price is smaller than the percentage change in quantity. Because the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.

When a market is in equilibrium, the buyers are those with the ________ willingness to pay, and the sellers are those with the ________ costs. A. highest, highest B. highest, lowest C. lowest, highest D. lowest, lowest

B The price in a free market determines which buyers and sellers participate in a market. In particular, free markets allocate the supply of goods to the buyers who value them most highly, and they allocate the demand for goods to the sellers who can produce them at the lowest cost.

A point inside the production possibilities frontier is A. efficient, but not feasible. B. feasible, but not efficient. C. both efficient and feasible. D. neither efficient nor feasible.

B The production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. Because resources are scarce, not every conceivable outcome is feasible. With the resources it has, the economy can produce at any point on or inside the production possibilities frontier (such as points A and B on the following graph), but it cannot produce at points outside the frontier (such as point C). An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. Points on (rather than inside) the production possibilities frontier, such as point B on the following graph, represent efficient levels of production.

The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price. A. supply, higher B. supply, higher C. supply, higher D. demand, lower

B The supply curve for gasoline shows the relationship between the price of gasoline and the quantity of gasoline supplied by producers, assuming that all of the determinants of supply are held constant. The following list displays determinants of supply, which are the factors that affect the quantity of gasoline producers want to sell at a given price: Factors That Determine Supply •Price of inputs •Production technology •Number of producers •Expectations of producers Therefore, if the price of gasoline changes, the result is a movement along the supply curve from the old price to the new one. However, if a change occurs in any of the factors that determine supply, such as the discovery of a large new reserve of crude oil, the result is a shift of the supply curve. In this case, the supply of gasoline increases because of the new oil reserve, causing the equilibrium price to decline. The following graph shows this outcome.

An increase in ________ will cause a movement along a given demand curve, which is called a change in ________. A. supply, demand B. supply, quantity demanded C. demand, supply D. demand, quantity supplied

B The term demand refers to the position of the demand curve, whereas the term quantity demanded refers to the amount consumers wish to buy. Similarly, the term supply refers to the position of the supply curve, whereas the term quantity supplied refers to the amount suppliers wish to sell. In this case, an increase in supply will cause the equilibrium price to decrease, resulting in a movement along the demand curve. The demand curve itself remains unchanged, but the quantity demanded is affected.

John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase? A. by less than $100 B. between $100 and $200 C. between $200 and $300 D. by more than $300

B When the price of tutoring services rises from $300 to $400, producer surplus rises. This increase in producer surplus has two parts: 1.John now receives $400−$300=$100$400−$300=$100 more for the tutoring services he was already providing. 2.Jasmine enters the market and receives a producer surplus somewhere between $0 and $100. Jasmine's producer surplus cannot be higher than $100 because if it were, then she would have provided tutoring services when the price was only $300. Therefore, overall producer surplus must rise between $100 and $200 when the price rises from $300 to $400. See Section: How a Higher Price Raises Producer Surplus.

Which of the following is an example of a positive externality? Dev mows Hillary's lawn and is paid $100 for performing the service. A. While mowing the lawn, Dev's lawnmower spews out smoke that B. Hillary's neighbor Kristen has to breathe. C. Hillary's newly cut lawn makes her neighborhood more attractive. D. Hillary's neighbors pay her if she promises to get her lawn cut on a regular basis.

C A positive externality arises when a person engages in an activity that benefits a bystander who neither pays nor receives any compensation for that effect. In this case, Hillary having her lawn mowed benefits her neighbors by beautifying the neighborhood.

The Coase theorem does not apply if A. there is a significant externality between two parties. B. the court system vigorously enforces all contracts. C. transaction costs make negotiating difficult. D. both parties understand the externality fully.

C According to the Coase theorem, if private parties can bargain over the allocation of resources at no cost, then the private market will always solve the problem of externalities and allocate resources efficiently. Therefore, the Coase theorem does not apply if transaction costs make negotiating difficult.

When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls. Which of the following describes the situation? A. Domestic production of coffee rises, and Ectenia becomes a coffee importer. B. Domestic production of coffee rises, and Ectenia becomes a coffee exporter. C. Domestic production of coffee falls, and Ectenia becomes a coffee importer. D. Domestic production of coffee falls, and Ectenia becomes a coffee exporter.

C After trade is allowed, the domestic price must equal the world price. If the domestic price falls as a result of opening Ectenia up to world trade, this means that the domestic price before trade is above the world price. At the world price, domestic quantity supplied (QSQS) is less than the domestic quantity demanded (QDQD). The difference between the domestic quantity demanded and the domestic quantity supplied is bought from other countries, so Ectenia becomes a coffee bean importer.

An economic model is A. a mechanical machine that replicates the functioning of the economy. B. a fully detailed, realistic description of the economy. C. a simplified representation of some aspect of the economy. D. a computer program that predicts the future of the economy.

C An economic model is a simplified representation of some aspect of the economy. Because including every detailed, realistic aspect of an economy would result in something that isn't tractable and informative, economists use models to learn about the world. Just as a model airplane does not include all of the interior details of the plane, an economist's model does not include every feature of the economy.

Common resources are A. efficiently provided by market forces. B. underprovided in the absence of government. C. overused in the absence of government. D. a type of natural monopoly.

C Common resources are rival in consumption but not excludable and, thus, give rise to a problem known as the tragedy of the commons. When one person uses a common resource, that person diminishes other people's enjoyment of it. Because of this negative externality, common resources tend to be used excessively. The government can solve the problem by using regulation or taxes to reduce consumption of the common resource. Alternatively, the government can sometimes turn the common resource into a private good.

Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer's willingness to pay is A. negative. B. zero. C. positive but less than the marginal seller's cost. D. positive and greater than the marginal seller's cost.

C Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus. Producing a quantity larger than the equilibrium quantity results in the value to the marginal buyer being less than the cost to the marginal seller. In this case, decreasing the quantity raises total surplus, and this continues to be true until quantity falls to the equilibrium level.

Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold? A. An increase in the price of peanut butter, a complement to jelly B. An increase in the price of peanut butter, a complement to jelly C. An increase in the price of grapes, an input to jelly D. An increase in consumers' incomes, as long as jelly is a normal good

C If a change occurs in any of the factors that determine supply—such as an increase in the price of grapes, an input to jelly—the result is a shift of the supply curve. In this case, the change in the price of jelly causes the supply of jelly to fall. This leads to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold, as seen on the following graph.

An efficient allocation of resources maximizes A. consumer surplus. B. producer surplus. C. consumer surplus plus producer surplus. D. consumer surplus minus producer surplus.

C If an allocation of resources maximizes total surplus, we say that the allocation exhibits efficiency. If an allocation is not efficient, then some of the potential gains from trade among buyers and sellers are not being realized. For example, an allocation is inefficient if a good is not being produced by the sellers with lowest cost. In this case, moving production from a high-cost producer to a low-cost producer will lower the total cost to sellers and raise total surplus. Similarly, an allocation is inefficient if a good is not being consumed by the buyers who value it most highly. In this case, moving consumption of the good from a buyer with a low valuation to a buyer with a high valuation will raise total surplus.

Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax A. increases by less than 50 percent and may even decline. B. increases by exactly 50 percent. C. increases by more than 50 percent. D. The answer depends on whether supply or demand is more elastic.

C If demand is downward sloping and supply is upward sloping, the deadweight loss of a tax rises even more rapidly than the size of the tax. This occurs because the deadweight loss is the area of a triangle, and the area of a triangle depends on the square of its size. If you double the size of a tax, for instance, the base and height of the triangle double, so the deadweight loss rises by a factor of 4. In this case, if the size of a tax increases by 50 percent, the deadweight loss of the tax increases by more than 50 percent.

Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade? A. The increase of a tariff in an importing country B. The reduction of a tariff in an importing country C. Starting to allow trade when the world price is greater than the domestic price D. Starting to allow trade when the world price is less than the domestic price

C Increasing the amount of a tariff would benefit producers and hurt consumers because it would increase the domestic price, but it would decrease the amount of trade. Similarly, reducing a tariff would increase the amount of trade, but it would hurt producers and benefit consumers. When the world price is greater than the domestic price, allowing trade will mean that nation becomes an exporter in that good. This would benefit producers because they can now sell more of the good at a higher price, it would hurt consumers who now have to pay a higher price, and it would increase the amount of trade.

Your opportunity cost of going to a movie is A. the price of the ticket. B. the price of the ticket plus the cost of any soda and popcorn you buy at the theater. C. the total cash expenditure needed to go to the movie plus the value of your time. D. zero, as long as you enjoy the movie and consider it a worthwhile use of time and money.

C The opportunity cost of an item is what you give up to get that item. In this case, the opportunity cost of going to a movie includes both the total cash expenditure needed to go to the movie and the value of the time you gave up in order to watch the movie.

The ability of firms to enter and exit a market over time means that, in the long run, A. the demand curve is more elastic. B. the demand curve is more elastic. C. the supply curve is more elastic. D. the supply curve is less elastic.

C The price elasticity of supply measures how much the quantity supplied responds to changes in the price. Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the price. Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price. In most markets, a key determinant of the price elasticity of supply is the time period being considered. Supply is usually more elastic in the long run than in the short run. Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good. Thus, in the short run, the quantity supplied is not very responsive to the price. By contrast, over longer periods, firms can build new factories or close old ones. In addition, new firms can enter a market, and old firms can shut down. Thus, in the long run, the quantity supplied can respond substantially to price changes, making the supply curve more elastic in the long run versus the short run.

An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences, it would A. expand the production possibilities frontier. B. contract the production possibilities frontier. C. move the economy along the production possibilities frontier. D. move the economy inside the production possibilities frontier.

C The production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the trade-off between producing hot dogs and hamburgers doesn't change, because resources remain the same. However, the consumption point along the production possibilities frontier has changed, because consumers now prefer to consume more hot dogs. This is represented by a movement along the production possibilities frontier to a point with more hot dog production and less hamburger production.

In a market with a binding price ceiling, an increase in the ceiling will ________ the quantity supplied, ________ the quantity demanded, and reduce the ________. A. increase, decrease, surplus B. decrease, increase, surplus C. increase, decrease, shortage D. decrease, increase, shortage

C When the government imposes a legal maximum on the price of a good, this is known as a price ceiling. If the price ceiling being imposed is below the equilibrium price. An increase in the price ceiling will raise the market price. This will lead to an increase in the quantity supplied and a decrease in the quantity demanded.

Which of the following statements about corrective taxes is generally not true? A. Economists prefer them to command-and-control regulation. B. They raise government revenue. C. They cause deadweight losses. D. They reduce the quantity sold in a market.

C When the government levies a corrective tax in the presence of a negative externality, it increases the price paid by consumers, reduces the quantity sold in a market, and raises government revenue. Although many kinds of taxes distort the market and cause deadweight losses, corrective taxes alter incentives that market participants face to account for the presence of externalities and, thereby, move the allocation of resources closer to the social optimum, which reduces the deadweight loss already present with the negative externality. Additionally, economists usually prefer corrective taxes to regulations as a way to deal with pollution because they can reduce pollution at a lower cost to society.

When a good is taxed, the burden of the tax falls mainly on consumers if A. the tax is levied on consumers. B. the tax is levied on producers. C. supply is inelastic, and demand is elastic. D. supply is elastic, and demand is inelastic.

D A tax burden falls more heavily on the side of the market that is less elastic because, in essence, the elasticity measures the willingness of buyers or sellers to leave the market when conditions become unfavorable. A small elasticity of demand means that buyers do not have good alternatives to consuming this particular good. A small elasticity of supply means that sellers do not have good alternatives to producing this particular good. When the good is taxed, the side of the market with fewer good alternatives is less willing to leave the market and must, therefore, bear more of the burden of the tax.

Which goods will a nation typically import? A. those goods in which the nation has an absolute advantage B. those goods in which the nation has a comparative advantage C. those goods in which other nations have an absolute advantage D. those goods in which other nations have a comparative advantage

D Because of the benefits of specialization and trade, countries tend to produce goods in which they have a comparative advantage. Therefore, a nation will typically import those goods in which other nations have a comparative advantage and export those goods in which it has a comparative advantage over other nations.

Which of the following is an example of a common resource? A. Residential housing B. National defense C. Restaurant meals D. Fish in the ocean

D Common resources are rival in consumption but not excludable. When one person catches fish, there are fewer fish for the next person to catch, so fish in the ocean are rival in consumption. Yet these fish are not an excludable good because, given the vast size of an ocean, it is difficult to stop fishermen from taking fish out of it.

In an hour, Mateo can wash 2 cars or mow 1 lawn, and Tyler can wash 3 cars or mow 1 lawn. Who has the absolute advantage in car washing, and who has the absolute advantage in lawn mowing? A. Mateo in washing, Tyler in mowing. B. Tyler in washing, Mateo in mowing. C. Mateo in washing, neither in mowing. D. Tyler in washing, neither in mowing.

D Economists use the term absolute advantage when comparing the productivity of one person, firm, or nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. In this case, Tyler can wash a car in less time than it takes Mateo, so he has an absolute advantage in washing, but it takes both of them the same amount of time to mow 1 lawn, so neither has an absolute advantage in mowing.

Kayla can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes half as long to do each task. How should the roommates allocate the work? A. Kayla should do more of the cooking based on her comparative advantage. B. Kayla should do more of the washing based on her comparative advantage. C. Kayla should do more of the washing based on her absolute advantage. D. There are no gains from trade in this situation.

D Economists use the term comparative advantage when describing the opportunity costs faced by two producers. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it. In this case, Kayla gives up 3/2 load of laundry when she cooks dinner, but her roommate faces the same opportunity cost. Similarly Kayla gives up 2/3 dinner when she does the laundry, but again her roommate faces the same opportunity cost. Therefore, there are no gains from trade in this situation because neither individual has a comparative advantage in either activity.

Governments may intervene in a market economy in order to A. protect property rights. B. correct a market failure due to externalities. C. achieve a more equal distribution of income. D. All of the above.

D One reason we need government is that the invisible hand relies on the enforcement of property rights so individuals can own and control scarce resources. In addition, although the invisible hand can often guide market participants to a desirable market outcome, sometimes government intervention is necessary to correct for market failures. This term refers to a situation in which the market on its own will fail to produce an efficient allocation of resources. One example of a market failure is an externality; this occurs when one person's action inadvertently affects another person's well-being. Finally, the efficient outcome attained by the invisible hand doesn't necessarily result in equality among its participants. Depending on your political philosophy, this disparity in economic well-being may lead you to believe that government intervention is necessary.

The main difference between imposing a tariff and handing out licenses under an import quota is that a tariff increases A. consumer surplus. B. producer surplus. C. international trade. D. government revenue.

D There is only one difference between these two types of trade restriction: A tariff raises revenue for the government, whereas an import quota creates surplus for those who obtain the licenses to import. The profit for the holder of an import license is the difference between the domestic price (at which she sells the imported good) and the world price (at which she buys it).

Movie tickets and film streaming services are substitutes. If the price of film streaming increases, what happens in the market for movie tickets? A. The supply curve shifts to the left. B. The supply curve shifts to the right. C. The demand curve shifts to the left. D. The demand curve shifts to the right.

D When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. If movie tickets and film streaming services are substitutes and the price of film streaming increases, this means the demand for movie tickets will also increase. This results in the demand curve shifting to the right.

Which of the following would increase quantity supplied, increase quantity demanded, and decrease the price that consumers pay? A. The imposition of a binding price floor B. The removal of a binding price floor C. The passage of a tax levied on producers D. The repeal of a tax levied on producers

D When a tax is levied on producers, it places a wedge between the price that buyers pay and the price that sellers receive. This wedge shifts the relative position of the supply and demand curves. In the new equilibrium, buyers and sellers share the burden of the tax. If this tax is repealed, the market returns to its competitive equilibrium, increasing quantity supplied (QSQS) and quantity demanded (QDQD) and decreasing the price consumers pay (PP):

When the government imposes a binding price floor, it causes A. the supply curve to shift to the left. B. the supply curve to shift to the left. C. a shortage of the good to develop. D. a shortage of the good to develop.

D When the government imposes a legal minimum on the price of a good, this is known as a price floor. If the price floor being imposed is above the equilibrium price.

A linear, downward-sloping demand curve is A. inelastic B. unit elastic C. elastic D. inelastic at some points and elastic at others

D ven though the slope of a linear demand curve is constant, the elasticity is not. This is true because the slope is the ratio of changes in the two variables, whereas the elasticity is the ratio of percentage changes in the two variables. At points with a low price and high quantity, the demand curve is inelastic, while at points with a high price and low quantity, the demand curve is elastic. The explanation for this fact comes from the arithmetic of percentage changes. When the price is low and consumers are buying a lot, a $1 price increase and two-unit reduction in quantity demanded constitute a large percentage increase in the price and a small percentage decrease in quantity demanded, resulting in a small elasticity. By contrast, when the price is high and consumers are not buying much, the same $1 price increase and two-unit reduction in quantity demanded constitute a small percentage increase in the price and a large percentage decrease in quantity demanded, resulting in a large elasticity. Therefore, a linear, downward-sloping demand curve is inelastic at some points and elastic at others.