econ chapter 1 test bank

Explain the economic assumption that "people are rational."

"People are rational" means that economists assume consumers and firms will use all available information as they act to achieve their goals. Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits exceed the costs.

Refer to Table 1-1. What is Lydia's marginal cost if she decides to stay open for an extra two hours instead of one hour?

$10

Pookie's Pinball Palace restores old Pinball machines. Pookie has just spent $300 purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once he is finished with the restoration. After having spent $300, Pookie discovers that he will need to rewire the entire machine at a cost of $1,100 in order to finish the restoration. Alternatively, he can sell the machine "as is" now for $1,000. What is his marginal benefit if he sells the machine "as is" now?

$1000

DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is the marginal cost of adding the engine detailing to the basic detailing package?

$20

Refer to Table 1-1. What is Lydia's marginal benefit if she decides to stay open for an extra two hours instead of one hour?

$25

Allison's Auto Art is a company that applies pinstripes to vehicles. Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service. For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package. What is the marginal cost of moving up from the 1-color application to the 3-color application?

$40

DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is DeShawn's marginal benefit if he sells a basic detailing package?

$75

Allison's Auto Art is a company that applies pinstripes to vehicles. Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service. For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package. What is Allison's marginal benefit if she sells a basic 1-color job?

$95

percent change

(x2-x1)/x1 ; when x1 is the starting point and x2 is the ending point or x2/x1 - x1/x1 x 100

trade-offs force society to answer 3 questions:

1. What goods and services will be produced 2. how will the good and services be produces 3. who will receive them

5 steps in developing an economic model

1. decide on the assumptions to use 2. formulate a testable hypothesis 3. use economic data to test the hypothesis 4. revise the model if it fails to explain the economic data well 5. retain the revised model to help answer similar economic questions in the future

3 assumptions used frequently in economics

1. people are rational 2. people respond to economic incentives 3. optimal decisions are made at the margin

The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea cakes for $1.00 each. What is the opportunity cost of buying a cappuccino?

2 1/2 Russian tea cakes

Lydia runs a small nail salon in the town of New Hope. She is debating whether she should extend her hours of operation. Lydia figures that her sales revenue will depend on the number of extra hours the nail salon is open as shown in the table above. She would have to hire a worker for those extra hours at a wage rate of $10 per hour. Refer to Table 1-1. Using marginal analysis, by how many hours should Lydia extend her nail salon's hours of operations?

5 hours

What is a centrally planned economy?

A centrally planned economy is an economy in which the government decides how economic resources will be allocated.

What is a firm? What other terms do economists use interchangeably with the term "firm"?

A firm is an organization that produces a good or service. Firms are also called companies or businesses.

Explain the difference between a firm's revenue and its profit.

A firm's revenue is the total amount received for selling a good or service. It is calculated by multiplying the price per unit by the number of units sold. A firm's profit is the difference between its revenue and its costs.

What is a mixed economy?

A mixed economy is an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Consider the following economic agents: a. the government b. consumers c. producers Who, in a centrally planned economy, decides what goods and services will be produced with the scarce resources available in that economy?

A) the government

Which of the following is an example of a "how much" decision? A) Dinah's Diner is only open for breakfast and lunch. Dinah is trying to decide whether to open for dinner as well. B) Zander has torn up his front yard and is debating whether to plant grass or install a rock garden. C) You received a nice birthday check from your grandmother and are deciding on whether to spend it on a trip to New York or a trip to San Francisco. D) Sergio quit his job to go back to school full time.

A.

Which of the following is an example of an efficiency-equity trade-off faced by economic agents? A) According to an article by in the American Journal of Public Health by Edward Kaplan and Michael Merson of Yale University School of Medicine, the federal government's current method of allocating HIV-prevention resources is not cost-effective. Instead of allocating resources to states in proportion to reported AIDS cases, resources should flow first to those activities that prevent more infections per dollar and then to less and less effective combinations of programs and populations until funds are exhausted, even if it means that some populations would be left without any prevention services. B) Concerned about the falling birth rate, the French government has pledged more money for families with three children, in an effort to encourage working women to have more babies. C) Some U.S. colleges are actively recruiting foreign students for their technology-based programs. D) All New York City art museums are considering adopting a free-admission policy for local residents one weekend per month.

A.

What is an economic model?

An economic model is a simplified version of reality used to analyze real-world economic situations.

What is an entrepreneur, and what decisions does an entrepreneur make in a market system?

An entrepreneur is someone who operates a business. In a market system, entrepreneurs decide what goods and services to produce and how to produce them.

What is the difference between an invention and an innovation?

An invention is the development of a new good or a new process for making a good. An innovation is the practical application of an invention. Innovation could also refer to any significant improvement in a good or in the means of producing a good

What is an economic variable?

Answer: An economic variable is something measurable that can have different values, such as the wages of software programmers.

77) What is meant by the statement that "optimal decisions are made at the margin"?

Answer: In economics, the word "marginal" means "extra" or "additional." Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost, so optimal decisions are made at the point where the extra benefit received from an activity is equal to the extra cost associated with that activity.

All of the following questions or statements regarding tariffs are positive statements except: A) Economic models can be used to estimate the dollar amounts gained by the winners from the imposition of a tariff. B) Economic analysis can, by itself, decide whether a tariff proposal should be enacted. C) Economic analysis can show the size of the loss of economic efficiency from the imposition of a tariff. D) Economic models can be used to estimate the dollar amounts lost by the losers from the imposition of a tariff.

B

Suppose a hat manufacturer currently sells 2,000 hats per week and makes a profit of $5,000 per week. The plant owner observes, "Although the last 300 hats we produced and sold increased our revenue by $1,000 and our costs by $1,100, we are still making an overall profit of $5,000 per week so I think we're on the right track. We are producing the optimal number of hats." Refer to Scenario 1-2. Had the firm not produced and sold the last 300 hats, would its profit be higher or lower, and by how much?

B) Its profit will be $100 higher.

Which of the following statements about positive economic analysis is false? A) Positive analysis uses an economic model to estimate the costs and benefits of different course of actions. B) There is much more disagreement among economists over normative economic analysis than over positive economic analysis. C) There is much more disagreement among economists over positive economic analysis than over normative economic analysis. D) Unlike normative economic analysis, positive economic analysis can be tested.

C

Which of the following statements is true? A) Any time you have to decide which action to take you are experiencing economic equity. B) Trade-offs do not apply when the consumers purchase a product for which there is excess supply, such as with a stock clearance sale. C) Every individual, no matter how rich or poor, is faced with situations that require trade-offs. D) Economics is a social science that studies the trade-offs we are forced to make because resources are unlimited.

C) Every individual, no matter how rich or poor, is faced with situations that require trade-offs.

Which of the following statements about competition in a market is true? A) Competition forces firms to outsource the production of their labor-intensive products. B) Competition forces firms to undercut their selling price, thus benefiting consumers who will be able to purchase products at the lowest price possible. C) Competition forces firms to produce and sell products as long as the marginal benefit to consumers exceeds the marginal cost of production. D) Competition forces firms to add only low profit margins to their costs of production.

C.

________ increases economic efficiency because it forces firms to produce and sell goods and services as long as the additional benefit to consumers is greater than the additional cost of production.

Competition

All of the following contributed to the downfall of the Soviet Union in 1991 except A) public dissatisfaction with low living standards and political repression. B) an inability to produce low-cost consumer goods that households wanted. C) lack of high-quality goods and services. D) lack of a strong dictator who could coordinate economic activities.

D) lack of a strong dictator who could coordinate economic activities

Explain why economics is considered a social science.

Economics is a social science because it studies the actions of individuals. As a social science, economics considers human behavior, particularly decision-making behavior, in every context.

What is equity, and how does it differ from efficiency?

Equity refers to the fair distribution of economic benefits. In economics, efficiency refers to least cost production (productive efficiency) and producing according to human preferences (allocative efficiency).

16) Why is it necessary for all economic systems to not only provide people with goods and services, but also restrict them from getting as much of these goods and services as they wish?

Failure to do this could reduce the efficiency of the system by producing some goods and services that are not as highly valued as others.

What is the difference between goods and services?

Goods are tangible merchandise such as cell phones or automobiles. Services are activities done for others, such as providing medical care or legal advice

19) How are the fundamental economic questions answered in a market economy?

Households and firms interact in markets to decide the answers to these questions.

Explain the economic idea that "people respond to incentives."

Human beings act from a variety of motives, including religious belief, envy, and compassion. "People respond to incentives" means that people will act in the way that they feel is in their best interest.

Which of the following is a positive economic statement?

If the price of iPhones falls, a larger quantity of iPhones will be purchased.

How are most fundamental economic decisions now determined in China?

Individuals, firms, and the government interact in a market to make these economic decisions.

Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week. A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track. We are producing the optimal number of cell phones. Refer to Scenario 1-1. Had the firm not produced and sold the last 3,000 cell phones, would its profit be higher or lower, and by how much?

Its profit will be $700 higher.

What is a marginal benefit?

Marginal benefit is the additional benefit received from continuing with an activity.

What is marginal cost?

Marginal cost is the additional cost associated with continuing with an activity.

Define microeconomics.

Microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. Should DeShawn continue to offer the engine detailing service?

No, his marginal benefit is less than his marginal cost.

What is opportunity cost?

Opportunity cost refers to the highest-valued alternative that must be given up to engage in an activity. For example, the opportunity cost of taking this economics class is what you are giving up to take the class, which may be taking another class such as accounting or psychology, working extra hours at your job, or extra sleep (whichever is your highest-valued alternative).

What is the difference between positive economic analysis and normative economic analysis? Give one example each of a positive and normative economic issue or question or statement.

Positive economic analysis is concerned with what is. Positive economic analysis reaches conclusions based on verifiable statements. Normative economic analysis, on the other hand, is concerned with what ought to be. Normative analysis reaches conclusions based on opinions. (Students will give many different examples.)

Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain.

Productive efficiency is an efficiency criterion that describes a situation in which goods and services are produced at the lowest possible cost. It does not imply allocative efficiency which is a criterion associated with producing goods and services that consumers value most. For example, a manufacturer may be able to produce typewriters at the lowest possible cost of $200, but this does not necessarily mean that consumers are willing to pay $200 for a typewriter.

Which of the following statements is true about profit?

Profit is the difference between revenue and cost.

List the four main factors of production.

The four main factors of production are labor, capital, natural resources, and entrepreneurial ability.

Which of the following is a problem inherent in centrally planned economies?

There is too little production of low-cost, high-quality goods and services.

________ have a horizontal and a vertical axis and are used in economics to illustrate relationships between two economic variables.

Two-dimensional graphs

The three fundamental questions that any economy must address are:

What goods and services to produce; how will these goods and services be produced; and who receives them?

The town of Harmonia gives away all 500 tickets to its annual Founder's Day Free Concert-in-the-Park to local residents. Each year, more than 500 people wish to attend the concert, so some of the residents who receive the free tickets sell them for as much as $75 each. Is a transaction where someone pays a resident $75 for a "free ticket" economically efficient?

Yes, it was a voluntary exchange that benefited both parties.

Allison's Auto Art is a company that applies pinstripes to vehicles. Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service. For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package. Should Allison continue to offer the 3-color pinstripe application?

Yes, she still makes a profit by selling the 3-color application.

Consider the following statements: a. Consumers buy more MP3 players from an electronics store that sells MP3 players at a lower price than other rival electronics stores in the area. b. Schools take steps to increase security since they believe it is more costly to allow vandalism than to hire additional security guards. c. Citrus growers produce more oranges when the selling price of oranges falls. Which of the above statements demonstrates that economic agents respond to incentives?

a and b

When every good or service is produced up to the point where the last unit provides ________, allocative efficiency occurs.

a marginal benefit to society equal to the marginal cost of producing it

productive efficiency

a situation in which a good or service is produced at the lowest possible cost - can occur without allocative efficiency

The idea that because of scarcity, producing more of one good or service means producing less of another good or service refers to the economic concept of

a trade-off.

Consider the following statements: a. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area. b. Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment. c. Firms produce more of a particular DVD when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives?

a, b, and c

famous economists

adam smith (capitalism - wealth of nations, invisible hand) , Karl marx (communism - communist manifesto), thomas malthus ("the dismal science"), david ricardo (contemporary of Malthus) , john maynard keynes (challenged theory that people are always rational)

Voluntary exchange between buyers and sellers generates ________ in a market economy.

allocative efficiency

When production reflects consumer preferences, ________ occurs.

allocative efficiency

Of the following examples, which would most likely be performed by an economist working for the U.S. Federal Trade Commission?

analyzing data related to a potential merger of two companies

Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity cost of her decision?

at least $125,000

Which of the following are primarily macroeconomic topics and which are primarily microeconomic topics? a. gasoline prices b. unemployment c. inflation d. health care costs e. air pollution f. economic growth

b, c, and f are primarily macroeconomic topics. a, d, and e are primarily microeconomic topics.

What G&S will be produced?

buyers for the most part dictate which G&S will be produced companies occasionally dictate what will be produces

Markets promote

competition and voluntary exchange.

the decision about what goods and services will be produced in a market economy is made by

consumers and firms choosing which goods and services to buy or produce.

Consider the following economic agents: a. the government b. consumers c. producers Who, in a market economy, decides what goods and services will be produced with the scarce resources available in that economy?

consumers and producers

The U.S. Bureau of Labor Statistics forecasts that by 2024, total employment in U.S. manufacturing will

decline to 11.4 million.

Making "how much" decisions involves

determining the additional benefits and the additional costs of that activity

In economics, the term "equity" means

economic benefits are distributed fairly.

opportunity cost =

explicit cost + implicit cost (money you'd make not going to school)

In the market for factors of production, firms earn income by selling goods and services to households.

false

Optimal decisions are made at the point where marginal cost equals zero

false

Productive efficiency is achieved when

firms produce goods and services at the lowest cost

If society decides it wants more of one good and all resources are fully utilized, then

it has to give up some of another good and incur some opportunity costs.

In economics, the term ________ means "additional" or "extra."

marginal

Economists reason that the optimal decision is to continue any activity up to the point where the

marginal benefit equals the marginal cost.

Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week. A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track. We are producing the optimal number of cell phones. Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 3,000 cell phones?

marginal cost

Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week. A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track. We are producing the optimal number of cell phones." Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic term for the incremental revenue received from the sale of the last 3,000 cell phones?

marginal revenue

An economic ________ is a simplified version of some aspect of economic life used to analyze an economic issue.

model

The demand curve has a _____________ slope.

negative

allocative efficiency

occurs when production is in accordance with consumer preferences (MB>=MC through voluntary exchange) -can't occur without productive efficiency

The highest-valued alternative that must be given up to engage in an activity is the definition of

opportunity cost.

Suppose that some investors have decided that economic and financial uncertainty have made the prospect of investing in domestic stock markets more risky than investing in foreign stock markets, and therefore choose to invest in foreign markets. By using all available information as they act to achieve their goals, these investors are exemplifying the economic idea that

people are rational

Suppose that some teachers have decided that economic and financial uncertainty have made the prospect of retiring more risky, and therefore carry a higher cost than not retiring. By using all available information as they act to achieve their goals, these teachers are exemplifying the economic idea that

people are rational

Suppose the U.S. government encouraged new medical school graduates to take over existing practices from doctors wishing to retire by paying both the new and retiring doctors $100,000. These doctors would be exemplifying the economic idea that

people respond to economic incentives

capital

physical capital - manufactured goods that are used to produce other goods and services. Ex: computers, factory buildings, machine tools, warehouses, trucks. financial capital- stocks and bonds issued by firms, bank accounts, and holdings of money

supply curve has a ____ slope

positive

On a two-dimensional graph, ________ illustrates the effects of additional variables.

shifting curves

human capital

the accumulated training and skills that workers possess.

Who will receive the goods and services produced?

the customers willing to pay the most for it

profit

the difference between a firms revenue and its costs.

innovation

the practical application of an invention

Technology is defined as

the processes used to produce goods and services.

revenue

the total amount received for selling a good or service. We calculate it by multiplying the price per unit by the number of units sold

How will the goods and services be produced?

this decision resides with companies

An increase in the price of gasoline will increase the demand for hybrid vehicles." This statement is an example of a positive economic statement.

true

One example of human capital is the amount of skills that you have.

true

Scarcity refers to a situation in which unlimited wants exceed the limited resources available to fulfill those wants.

true

Suppose the extra cost for a town to lower its speed limit by 5 mph is $20 per day. Then, the town should lower the speed limit if it can generate an additional benefit of $20 per day.

true

The term "market" refers to trading arrangements by which buyers and sellers come together.

true

Marginal analysis involves undertaking an activity

until its marginal benefits equal marginal costs.

Making optimal decisions "at the margin" requires

weighing the costs and benefits of a decision before deciding if it should be pursued.

Allocative efficiency best explains ________, and productive efficiency best explains ________.

what will be produced; how something will be produced