ECON 101 EXAM 1 STUDY GUIDE

On a supply and demand curve, a move to the right indicates an _________, while a move to the left indicates a _____________.

increase, decrease

What is a price ceiling?

Maximum price allowed by law.

The main incentive for business activity is: A) government subsidies. B) technological advancement. C) profit. D) employment.

C

What influences a supply's demand to be inelastic?

-Difficult to increase production -Large share of market -Global supply -Short timeline

What influences a supply's demand to be elastic?

-Easy to increase production -Small share of market -Local supply -Long timeline

What influences a good's demand to be inelastic?

-Fewer substitues -Shorter timeline -Categories of product -Necessity -Small part of budget

What makes a good's demand elastic?

-More substitutes -Longer time line -Specific brands -Luxuries -Large part of budget

A public good is: A) nonrival and nonexcludable. B) rival and nonexcludable. C) rival and excludable. D) nonrival and excludable.

A

Absolute advantage derives from which of the following? A) the lowest cost production B) the most suitable climate C) the least expensive labor force D) the best educated labor force

A

Assume that spaghetti is an inferior good for most people. As their incomes increase, all other things held constant, the: A) demand for spaghetti will decrease shifting the demand curve to the left. B) demand for spaghetti will decrease shifting the demand curve to the right. C) demand for spaghetti will increase shifting the demand curve to the left. D) demand for spaghetti will increase shifting the demand curve to the right.

A

Since the demand for illegal drugs is quite inelastic, an increase in the price of illegal drugs: A) increases seller revenues. B) decreases seller revenues. C) does not affect seller revenues. D) The change in revenue depends on supply elasticity.

A

The opportunity cost of a choice is: A) the value of the next best alternative. B) the net value of the opportunities gained. C) the difference between the benefits and costs of the choice. D) sometimes positive or negative.

A

The production possibilities frontier shows: A) the combinations of outputs a country can produce given its resources and productivity. B) the combinations of inputs that a country has given its outputs and productivity. C) the combinations of outputs and resources that a country possesses given its productivity. D) the maximum level of a country's productivity given its resources and outputs.

A

Traders should specialize in the good in which: A) they have the lowest opportunity cost. B) they have an absolute advantage. C) their trading partner has the lowest opportunity cost. D) they do not have an absolute advantage.

A

Uncongested, non-toll roads are a good example of a: A) public good. B) common resource. C) private good. D) natural monopoly.

A

What you give up to obtain an item is called your: A) opportunity cost. B) explicit cost. C) true cost. D) direct cost.

A

What is an inferior good?

A good that's demand decreases when people's income increases

What is a normal good?

A good that's demand increases when people's income increases

What is a price floor?

A minimum price allowed by law

What is shortage?

A shortage occurs when demand is higher than supply.

What is surplus?

A surplus occurs when supply is higher than demand.

What are transcation costs?

All costs necessary to reach an agreement

Anita is a wonderful baker and can bake 10 cakes in a day, but then has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John can make equally delicious cakes and cookies but can only make seven cakes or 100 cookies in a day. Based on this information, which of the following statements is true? A) Anita has the comparative advantage in the production of cakes. B) John has the comparative advantage in the production of cakes. C) John has the absolute advantage in the production of cookies. D) Anita has the comparative advantage in the production of both cakes and cookies.

B

Coke and Pepsi are substitute soft drinks. Which of the following would cause the demand curve for Pepsi to shift to the left? A) A report emerges that shows that drinking Pepsi helps to promote weight loss. B) The price of Coke decreases. C) The price of Pepsi rises. D) The cost of making Pepsi rises.

B

If producers form expectations that the price will be lower in the near future, S1 will: A) shift left to S2. B) shift right to S3. C) not shift. D) not shift, although the price of the good will decrease today.

B

Jim has an old (working) television that he would like to get rid of now that he has purchased a new high-definition, flat-screen television. The old television is no longer worth anything to him now that he has his new flat-screen TV. Veronica on the other hand has an even older television that has just broken down. She would pay up to $50 for any working TV. Which of the following statements is NOT true? A) If Jim trades Veronica his old television for $50, total value in society increases by $50. B) If Jim trades Veronica his old television for $50, both are better off but total value in society does not increase. C) If a middleman facilitates the $50 trade between Jim and Veronica, but takes a $10 finders' fee, Jim and Veronica will still both be better off. D) If Jim and Veronica do not trade, both are worse off than if they did trade.

B

Marge tutors English students—if she raises rates, her revenues increase. Brad tutors biology students—if he lowers rates, his revenues increase. Which of the following is TRUE? A) Marge's demand is elastic, and Brad's demand is inelastic. B) Marge's demand is inelastic, and Brad's demand is elastic. C) Marge's demand is elastic, and Brad's demand is elastic. D) Marge's demand is inelastic, and Brad's demand is inelastic.

B

Nigeria receives $53 of producer surplus from each barrel of oil sold at $60. At that level of production, Nigeria's cost to produce a barrel of oil is: A) $1.13. B) $7. C) $53. D) $113.

B

The elasticity of demand measures: A) the height of the demand curve. B) how sensitive the quantity demanded is to a change in price. C) how sensitive the price is to a change in demand. D) the extent to which demand shifts in response to supply changes.

B

The real cost of producing a good is: A) the dollar cost of inputs used to make the item. B) the opportunity cost of producing the good. C) the resources that were used to make the good. D) the dollar amount it costs to sell the good.

B

What is external benefit?

Benefit recieved by people other than the consumers or producers trading in a market.

18. When deciding whether or not to undertake an activity, economists compare: A) the total cost of the activity against the total benefit received. B) the total benefit of the activity against the total cost of production. C) the additional cost of the activity against the additional benefits received. D) the average cost of the activity versus the total benefits received.

C

A binding price floor causes: A) excess demand. B) a shortage. C) a surplus. D) quantity demanded to exceed quantity supplied.

C

A free rider is a person who: A) avoids paying taxes by using tax code loopholes. B) produces goods at no cost. C) receives the benefits of a good but avoids paying for it. D) will purchase products only when on sale.

C

Common resources are goods that are: A) excludable and rival. B) excludable but nonrival. C) nonexcludable but rival. D) nonexcludable and nonrival.

C

Deciding whether to study an additional hour for an exam by comparing the additional benefits to the additional costs of an extra hour of study is an example of: A) normative analysis. B) transformational thought. C) marginal thinking. D) None of the answers is correct.

C

For each good produced in a free market economy, demand and supply determine: A) the price of the good, but not the quantity. B) the quantity of the good, but not the price. C) both the price and the quantity of the good. D) neither price nor quantity, sellers determine the price.

C

If the absolute value of the price elasticity of demand is 0.5, then when the price of Good X rises by 20 percent: A) the quantity demanded of Good X rises by 40 percent. B) the quantity demanded of Good X rises by 10 percent. C) the quantity demanded of Good X falls by 10 percent. D) the quantity demanded of Good X falls by 40 percent.

C

If the price of cocoa rises by 20 percent, the quantity supplied of cocoa rises by 4 percent. What is the elasticity of supply? A) 5 B) 2 C) 0.2 D) 0.008

C

In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by: A) a tax of $5 in Market X and a subsidy of $10 in Market Y. B) subsidizing both markets. C) taxing Market Y and subsidizing Market X. D) taxing both markets.

C

Mario buys eight units of good X when his income is $2,000 a month. When his income increases to $2,700 per month, he buys only six units of good X. For Mario, good X is: A) a normal good. B) an expensive good. C) an inferior good. D) a useless good.

C

Suppose the demand for pizza is inelastic and the supply of pizza is elastic, and the demand for cigarettes is inelastic and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the burden of: A) the pizza tax would fall more heavily on sellers than on buyers, and the burden of the cigarette tax would fall more heavily on buyers than on sellers. B) the pizza tax would fall more heavily on buyers than on sellers, and the burden of the cigarette tax would fall more heavily on sellers than on buyers. C) both the pizza and the cigarette taxes would fall more heavily on buyers than on sellers. D) both the pizza and the cigarette taxes would fall more heavily on sellers than on buyers.

C

Suppose your teacher finishes class 30 minutes early on the day before an exam. She indicates that you may leave, or stay on for an optional study period which will last for the remaining 30 minutes of the scheduled class time. You should: A) always choose to stay for the study period, since you have already paid for the class time. B) only choose to stay if you like the instructor, since the value obtained is higher than if you disliked the instructor. C) only choose to stay if the benefits gained from the extra study session exceed the cost of another 30 minutes in class. D) only choose to stay for the study session if you do not plan to study on your own for the exam

C

The September 11 terrorist attacks turned many people away from flying. The demand and supply model would predict which of the following events in the airline travel market? A) The supply of airline travel would decrease, resulting in a higher equilibrium price and lower equilibrium quantity. B) The supply of airline travel would increase, resulting in a lower equilibrium price and higher equilibrium quantity. C) The demand for airline travel would decrease, resulting in a lower equilibrium price and lower equilibrium quantity. D) The supply and demand for airline travel would decrease, resulting in a higher equilibrium price and higher equilibrium quantity.

C

The demand curve is inelastic if the absolute value of the elasticity is: A) greater than 1. B) greater than 0. C) less than 1. D) equal to 1.

C

Which of the following are likely to be complements? A) hotdogs and hamburgers B) books and book-lights C) coffee and tea D) cars and vans

C

Which of the following is NOT true regarding the production possibilities frontier (PPF)? A) The PPF shows the combination of goods that a country can produce given its current productivity and supply of resources. B) The PPF illustrates the trade-offs that exist in the production of goods. C) The PPF shows that gains from trade are maximized when countries produce those goods for which they have the absolute advantage in production. D) The PPF illustrates the fundamental ideas of scarcity and opportunity cost.

C

Which of the following statements correctly defines a demand curve? A) A demand curve is a function that shows the relationship between prices and the quantity available for sale. B) A demand curve is a function that shows the relationship between prices and their associated quantities supplied. C) A demand curve is a function that shows the relationship between prices and their associated quantities demanded. D) A demand curve is a function that shows the relationship between quantity demanded and quantity supplied.

C

Susan quits her administrative job, which pays $40,000 a year, to finish her four-year college degree. Her annual college expenses are $8,000 for tuition, $900 for books, and $2,500 for food. The opportunity cost of attending college for the year is: A) $11,400. B) $8,900. C) $48,900. D) $51,400.

C. This answer is ****ING stupid, you don't include the costs of food because she is gonna need it anyway even though the question poses it like you would because it calls food a college expense.

Formula for calculating elasticity of demand

Change in demand divided by change in price DeltaQd/DeltaP

What is the midpoint formula?

Change in quantity supplied divided by average quantity supplied DIVIDED BY Change in price divided by average price Q1-Q2 -------- (Q1+Q2)/2 -------------- P1-P2 -------- (P1+P2)/2

Formula for calculating elasticity of supply

Change in supply divided by change in price DeltaQs/DeltaP

What is consumer surplus?

Consumer's gain from an exchange. Difference between the maximum price a consumer is willing to pay for a good and market price.

A person has a comparative advantage in activity X when that person's: A) opportunity cost of performing that activity is very high. B) ability to perform that activity exceeds that of all other people. C) government negotiates a favorable trade agreement. D) opportunity cost is lower than other trading partners.

D

An external benefit is a benefit received by: A) the consumers trading in the market. B) the producers trading in the market. C) both the consumers and producers trading in the market. D) people other than the consumers or producers trading in the market.

D

An external cost is a cost paid by: A) the consumers trading in the market. B) the producers trading in the market. C) the government regulating the market. D) people other than the consumer and the producer trading in the market.

D

Binding price ceilings would create all of the following effects EXCEPT: A) shortages. B) reductions in product quality. C) a misallocation of resources. D) maximum gains from trade.

D

Economics: A) teaches us how to make the world a better place. B) increases our understanding of historical events. C) can help you better manage your finances. D) All of the answers are correct.

D

If an increase in the price of oil by 10 percent would cause the quantity demanded for oil to fall by 5 percent, the elasticity of demand for oil in absolute terms is: A) 10. B) 5. C) 2. D) 0.5.

D

If the price of ice cream changes by 30 percent and the quantity demanded changes by 75 percent, what is the absolute value of demand elasticity? A) 2.5, so demand is inelastic B) 0.4, so demand is inelastic C) 0.4, so demand is elastic D) 2.5, so demand is elastic

D

In Colombia, it takes three workers to produce two pounds of coffee. In Mexico, it takes four workers to produce one pound of coffee. Therefore: A) Colombia has a comparative advantage in the production of coffee. B) Mexico has a comparative advantage in the production of coffee. C) in Colombia, the opportunity cost of producing one pound of coffee is two-thirds. D) Colombia has an absolute advantage in the production of coffee.

D

The real power of trade lies in people's ability to: A) get things they can't produce. B) get the lowest price possible. C) increase their consumption. D) specialize and increase production.

D

Utilizing comparative advantage can best be exemplified as: A) your lawyer word-processing her own legal briefs. B) the CEO of Microsoft programming his own computer. C) the president of your university teaching a class again. D) a world-renowned chef hiring someone to cook meals for his family.

D

Which of the following are factors that shift the demand curve? A) costs of production, price of the product, and subsidies B) income, population, tastes, and input prices C) expectations, opportunity costs, price of the product D) price of substitutes, tastes, price of complements

D

Which of the following arise as benefits from trade? I. economies of scale II. cost reduction from mass production III. the division of knowledge A) I only B) II and III only C) I and III only D) I, II, and III

D

What is elasticity of supply?

Elasticity of supply measures how responsive quantity supplied is to a change in price.

What are extermalities

External costs or external benefits that fall on bystanders

How do you read a supply curve horizontally? Vertically?

Horizontally: at price X, sellers are willing to sell Y amount Vertically: to produce Y amount, buyers must be willing to pay X

What is the Coase Theorem

If transaction costs are low and property rights are clearly defined then private bargains will ensure the market equilibrium.

What is the elasticity of demand?

It measures how responsive the quantity demanded is to a change in price. A larger response equals a more elastic good.

Non-Excludable Goods

People who do not pay for the good cannot be easily excluded from using it Ex: Asteroid protection

What are the 4 types of goods

Private Goods Excludable & Rival Club Goods NonRival & Excludable Common Resources NonExcludable & Rival Public Goods NonExcludable & NonRival

What is producer surplus?

Producer's gain from an exchange. Difference between market price and minmum price producer would sell for.

Who is a tax generally imposed on?

Taxes are imposed on the group with a less elastic curve. Sellers will pay the tax if the supply curve is less elastic while buyers will pay the tax if the demand curve is less elastic.

What is comparative advantage?

The ability to produce a good for a lower opportunity cost than another country.

What is absolute advantage?

The ability to produce more of the same good than another country.

What is the efficient equilibrium

The point where price and quantity maximize social surplus.

What is equilibrium price?

The price at which quantity demanded and quantity supplied is equal.

What is equilibrium quantity?

The quantity at which quantity demanded and quantity supplied is equal.

What is deadweight loss?

The total lost consumer and producer surplus when not all gains from trade are exploited.

Non-Rival Goods

When one person uses a good, it doesn't reduce it's value. Ex: Fire Alarms

What does binding refer to in terms of price floor & ceilings.

Whether or not the floor or ceiling effects the price of the market.

What is social surplus

consumer surplus plus producer surplus plus everyone elses surplus

What is external cost

cost paid by people other than the consumer or producer in a trading market

What is social cost

the cost to everyone, private plus external cost