Econ 201 Exam 1

4. In order to understand how the real world works, economists try to capture every aspect of the real world in their models that they construct

FALSE

5. A camera takes pictures of drivers who do not stop at a red light, and this practice is used to issue a traffic ticket. These red light cameras can be understood as serving Positive incentive to encourage individuals to stop at a red light.

FALSE

Opportunity Cost

Highest valued benefit forgone due to choosing an alternative. It is NOT the sum of all foregone activities

The economic decision rule

If the marginal (incremental) benefit of an action exceeds the marginal cost, do it. If the MC > MB, don't do it

How does a MARKET economy answer for who to produce?

share of economic pie based on inheritance, ability and effort

Costs and benefits are_______

subjective

17. Denis purchased his nonrefundable, nontransferable ticket to see the Justin Bieber Career Revival show for $30 last week, while Barbara has yet to buy her ticket but wants to go. In deciding whether to go to the show, the price today of the ticket is a ________ to Denis and a _________ to Barbara.

sunk cost; marginal cost

Private property rights

the ability of an individual to own and exercise control over scarce resources. Can be transferred, sold or mortgaged at the owner's digression.

A PPF shifts outward when...

the economy experiences economic growth

Today's demand curve for gasoline could shift in response to a change in...

the expected future price of gasoline

Josh and his father go to an all-you-can-eat pizza parlor. They find that each piece of pizza is less satisfying than the last. What economic principle does this scenario illustrate?

the law of diminishing marginal utility

Efficiency

the property of society getting the most it can from its scarce resources (the size of the economic "pie")

Economists sometimes tend to be unpopular and to be viewed as troublemakers because:

they tend to draw attention to the cost of various political choices, frustrating the attainment of political consensus

Trade-off VS Opportunity Cost

trade-off = all choices given up opportunity cost = most valuable choice given up

Which of the following statements about comparative advantage is not true? A) Economists use the principle of comparative advantage to emphasize the potential benefits of free trade. B) A country cannot have a comparative advantage in producing a good unless it has an absolute advantage in producing that good. C) Comparative advantage is determined by the opportunity cost of production. D) The principle of comparative advantage applies to countries as well as to individuals.

B) A country cannot have a comparative advantage in producing a good unless it has an absolute advantage in producing that good.

If Nicholasville made it illegal for anyone to buy from or sell to people in Lexington, what would most likely happen as a result?

Both Nicholasville and Lexington will become poorer

The Kentucky state legislature is considering an increase in gasoline tax. Representative Campbell argues that an increase in gas tax would harm low-income families disproportionately. Representative Richards responds by saying that low-income drivers have smaller cars that use less gas therefore they would not be harmed disproportionately. Who is focused on equality and who is focused on efficiency?

Both arguments are primarily based on equality

If the going price for a fresh salad is $8.99 and Panera Bread charges $9.99 for a salad then...

Buyers will choose to eat salads at other restaurants

Which of the following is NOT a resource? A) Vans used by a bakery company for deliveries. B) A person developing a production schedule for a new product. C) 175 shares of Microsoft stock. D) Wilderness areas that have yet to be developed.

C) 175 shares of Microsoft stock

Which of the following is a positive statement? A) Taxes should be lower because then people get to keep more of what they earn, so they will work more. B) My economics class should last for two terms because it is my favorite class. C) A 10 percent increase in income leads to a 4 percent increase in the consumption of beef. D) We should build a wall because it will make America great again

C) A 10% increase in income leads to a 4% increase in the consumption of beef.

All of the choices below are examples of complementary goods except: a) Printers and ink cartridges b) Pokemon Go and Smartphones c) Oranges and apples d) Gasoline and Cars

C) oranges and apples

Which of the following best summarizes a basic difference between market economies and centrally- planned economies? A) The government plays a larger role in a market economy than in a centrally-planned economy. B) A market economy has a "more equal" distribution of resources than a centrally-planned economy. C) Centrally-planned economies rely more on self-interest and prices to allocate resources than market-based economies. D) Self-interest and prices serve to allocate resources in a market economy while a central planner typically attempts to allocate resources in a centrally-planned economy.

D) Self-interest and prices serve to allocate resources in a market economy while a central planner typically attempts to allocate resources in a centrally-planned economy.

10. Several people have started camping out for the big blue madness tickets. The cost of lining up ahead of time for the tickets is zero for these individuals.

FALSE

2. A tax on alcoholic drinks raises the price of alcoholic drinks and provides an incentive for consumers to drink more.

FALSE

The economy will determine answers to 3 things:

- What and how much to produce? - How to produce - For whom to produce

How does a MARKET economy answer How to produce?

- private enterprise - goal- maximize profit -efficiency - hard budget constraint

How does a MARKET economy answer what and how much to produce?

- the market: what people are willing and able to buy - consumer sovereignty

You have $10 to spend. You plan on buying Doritos when cost $2 and 2 liter bottles of Pepsi which are $1. You plan to spend all of the $10. What is the opportunity cost of consuming one bag of Doritos?

2 bottles of Pepsi

Judy spent 8 hours studying for an exam. Normally, she would've spent that time watching TV. She figured that she could've made a B after studying only 4 hours, but she really wants an A. What is Judy's marginal cost in terms of TV viewing to improve her grade from a B to an A?

4 hours

Suppose students have a demand for football tickets of D=50-5p where D is the quantity of tickets demanded & P is the price. Suppose then UK Athletics has a supply curve of S=5+10P where S is quantity and P is price. What is the equilibrium price of UK football tickets?

50-5p=5+10p 3=p $3 is the equilibrium price

Classify the following factors of production as relating to (A) Land, (B) Labor or (C) Capital: A deposit of Coal. The inventory of auto supplies in an auto supply store.

A deposit of coal: A- land The inventory of auto supplies in an auto supply store: B - labor

When you estimated the costs of attending UK, you demonstrated your economic knowledge by correctly including all the opportunity costs for your education. The items on her list include all but one of the following. Which one is NOT included? a. meals b. tuitions c. reduced leisure time as a student d. income for a job she quit to attend school

A. Meals

Mayor Gray is considering policies that can generate economic growth in Lexington. All of the following policies are likely to generate growth EXCEPT for which one? A. Investments in technologies used in local factories. B. Improvements to infrastructure such as roads, sidewalks, bridges and sewers. C. Taking measures to improve the quality of local schools. D. Encouraging local employers to give employees one additional week of vacation time per year.

D. Encouraging local employers to give employees one additional week of vacation time per year

Equality and Efficiency are similar in that they refer to benefits to society. However, they are different in that...

Equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits froom scarce resources

People choose not to participate in the buying and selling of dates (going out with someone) because of ______________ even though the ___________ will allow for the shaping of your love needs. However, the _____________ will regulate these market to ensure safety, protect users from criminals or predators

Invisible handshake; invisible hand; invisible foot

In Lexington, we have been experiencing warm winters for the past year. How does an unusually warm winter affect the equilibrium price and quantity of gloves?

It lowers both the price and the quantity

51. The R&D team at Boeing rank the following investments options: Rank 1) carbon fiber research Rank 2) lab upgrade Rank 3) hiring new researchers What is the opportunity cost of carbon fiber research?

Lab upgrade

Types of resources

Land, nonhuman animal resources, labor, capital, technology, entrepreneurial ability (these produce commodities)

Scarcity

Limited resources, but unlimited wants

You go to the store to by fruit. If you only buy mangoes, you can buy 6. If you only buy papayas, you can buy 8. Each time you buy 1 mango, you give up 3 papayas. What is the correct linear equation of your budget when P=papayas and M=mangos?

M=6-1/3P

29. Chelsea is an economist who studies the labor market for prostitution in Nevada. She looks at how changes in potential earnings and changes in laws that affect worker safety influence the decision of people to participate in this market. We would say that Chelsea is a...

Microeconomist

Scarcity VS Poverty

Not the same thing. Everyone has scarcity, not everyone has poverty

MC > MB

Part of the economic decision rule stating that the Marginal Cost is greater than the Marginal Benefit, therefore, you shouldn't do it

Market Economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in market for goods and services

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

Negative Incentives

Punish people financially for making certain choices and behaving a certain way (EX: taxes for smoking and tickets for speeding)

In a competitive market: QD=8−0.5P and QS=3+2P. Find the equilibrium price and the equilibrium quantity traded.

Quantity = 7 Price = 2

When calculating the cost of college, which should you not include? income you would've made if you hadn't gone to college, books, tuition or the cost of your off-campus apartment.

Rent

Production possibilities frontiers are usually bowed outward. This is because..

Resources are specialized. That is. some are better at producing particular goods rather than other goods

In the simple circular flow diagram, the flow of money from the markets for goods and services to the firms is called...

Revenue

Positive Incentives

Reward people financially for making certain choices or behaving in a certain way. (EX: coupons, sales, freebies, discounts, rewards)

Suppose that when the price of a 16oz togo cup of gourmet coffee is $4.25, students buy 750 cups per day. If the price drops to $3.75 per cup, what is the most likely outcome?

Students will buy more than 750 cups per day

1. Imagine an island economy that is periodically struck by an epidemic disease that affects only children. Suppose that the island has 1,000 children and that at the first sign of a new outbreak of this disease, the people have produced 1,000 doses of the antidote. If the island operates as a market economy, then the medicine is most likely to go to wealthier children whose parent's can pay higher prices so all children will not get a dose.

TRUE

3. Trade is a "positive-sum game." In other words, when two people trade, both parties gain.

TRUE

6. Jill is farmer in California who uses her land to grow avocados (A) and kiwis (K). The following equation represents her production possibility frontier: A = 2,000 - ¼ K. For Jill, the opportunity cost of producing 1 avocado is 4 kiwis.

TRUE

7. The ceteris paribus assumption means that all other relevant factors remain unchanged.

TRUE

8. Assumptions make the world easier to understand because they simplify reality and focus our attention.

TRUE

9. The market supply curve is the horizontal summation of the individual supply curves.

TRUE

True or False: Transaction costs can inhibit trade

TRUE: time, effort and other resources needed to search out, negotiate and complete and exchange

True or False: Trade is a zero sum game

TRUE: when individuals engage in a voluntary exchange, both parties are made better off

The PPF is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and...

The available production technology

In most societies, resources are allocated by...

The combined actions of millions of households and firms

Scarcity occurs when...

The desire for goods and services exceeds our ability to produce them with the limited resources available.

The Economy

The institutional structure through which individuals in a society coordinate their diverse wants

Suppose a nation is currently producing at a point inside its production capabilities frontier. We know that...

The nation is not using all available resources or is using inferior technology or both

The "invisible hand" that Adam Smith writes about as coordinating economic activity is:

The price system

Equality

The property of distributing economic prosperity uniformly among the members of society (How the economic pie is sliced)

Economics

The study of the choices that individuals make given the presence of scarcity The study of how human beings coordinate their wants How society manages its scarce resources

Fred owns a truck that he values at $2,000. Sue, who does a lot of hauling, values the truck at $5,000. If these two get together, which of the following is most likely to occur?

The truck will be sold at a price greater than $2,000, but less than $5,000 ad both parties will benefit

It once took 90 percent of our population to grow our food but now it takes around 3 percent of the population. Which of the following statements is true?

This is good for our economy because those who would have been farmers years ago can now invent new things and produce other goods.

What is an example of using the scientific method with a natural experiment?

Tracking the price of oil when a war in the Middle East interrupts the flow of crude oil.

Some of the arguments made against free trade include

Trade reduces the # of jobs in the USA & Some industries need to be protected either because they are subject to national security or are an infant industry

3 basic decisions must be made by all economies- what are they?

What goods will be produced? How will goods be produced? For whom will goods be produced?

Market

What people are willing and able to buy

Jewell goes to Tolly Ho for breakfast. She has the option of pancakes, bacon & eggs or a cinnamon roll. If she chooses the pancakes, her opportunity cost is...

Whichever would've been her 2nd choice

An economic system that relies upon some people giving orders to make economic decision would be

a command or central planning system

One of the largest categories of exports from the United States is now pop culture: movies, music, TV programming, and videos. A direct conclusion from this information is that, compared to other countries, the United States has

a comparative advantage in producing pop culture

Procter & Gamble Co. is a major soap producer. All of the following, except one, would shift its supply curve of liquid soap inward. Which is the exception?

a decrease in the price of liquid soap

Fundamental economic problems basically arise from

a society's wants exceeding its scarce resources

Which of the following can lead to market failure? a. externalities and market power b. externalities but not market power c. market power but not externalities d. neither externalities nor market power

a. externalities and market power

In a competitive market, the quantity of a product produced and the price of a product are determined by..

all buyers & all sellers

If someone economizes, they..

are getting the maximum benefit at a minimum cost

Which of the following illustrates a negative (inverse) relationship between two variables?

as patrol cars out on the road increase, highway speeding decreases

Betsy graduates from college, where she earned $3,000 a year working part-time, and takes a job as a third grade teacher, where she now earns $30,000 per year. After receiving her first paycheck, she gave away her bicycle and purchased a new car. Therefore,

automobiles are a normal good for Betsy

In a market economy, supply & demand determine...

both the quantity of each good produced & the price at which it's sold

In the markets for goods and services in the circular-flow diagram, households are _________ and firms are __________.

buyers, sellers

Donald Trump wants to bring "all jobs" back to USA and reduce trade with other countries. Below are all the consequences of that policy as discussed in class, except: a) Domestic prices will increase b) Other industries may choose to move out of the country in search of cheaper inputs c) Everyone will be better off d) Quality of the products may decline to offset the higher cost of local production

c) everyone will be better off

To say that government intervenes in the economy to promote equality is to say that government is aiming to...

create a more fair distribution of income

Commodities

economic goods and services

What can not be illustrated by the Production Possibilities Frontier?

equality

The basic choices of What, How and for Whom to produce...

exist in EVERY economic system

Sunk Cost

has already been incurred and can't be recovered

To be an importer of a product the country must have its domestic price of the product be _____ the foreign price

higher than

If the supply of a product decreases, then we would expect equilibrium price to ...

increase & equilibrium quantity to decrease

A movement downward and to the right along a demand curve for campus parking passes is called an...

increase in quantity demanded

A store remains open from 8 am to 4 pm each weekday. The storeowner is deciding whether to stay open an extra hour each evening. The owner's marginal benefit

must be greater than or equal to the owner's marginal cost if the owner decides to stay open.

Billie Jean has $120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that

people face trade-offs

Lawrence is a photographer and he has $230 to spend. he wants to buy either a flash for his camera or a new tripod. Both cost $230 so he can only buy one. This illustrates the principle that ...

people face trade-offs

The following 2 events occur affecting the iPhone 7 market: i) Samsung Galaxy phones are catching on fire ii) IHS Markit reveals that the total cost of components in an entry-level iPhone 7 is going to be higher than average due to the high costs of the baseband chip - a key input in the production of iPhones. What are the expected effects for the equilibrium quantity traded and the equilibrium price in the iPhone 7 market?

quantity change indeterminate, price increases

Middleman

reduces costs