Econ E200 Final (Purdue)

The price of an airline ticket from St. Louis to Washington D.C. costs $250. A bus ticket costs $100. Traveling by plane takes 2 hours compared with 32 hours by bus. Other things constant, Andrew would gain by choosing air travel if, and only if, he values his time at more than

$5 per hour.

Which of the following would be most likely to increase transaction costs?

A city ordinance bans large superstores in order to protect small, local businesses.

How do marginal tax rates influence consumption decisions?

As marginal tax rates rise people will purchase more tax-deductible goods.

The price of an airline ticket from Denver to Chicago costs $300. A bus ticket costs $150. Traveling by plane takes 2 hours compared with 32 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than

Correct $5 per hour.

While waiting in line to buy a cheeseburger and a soft drink for $3, Stephanie notices that a value meal containing a cheeseburger, soft drink, and french fries can be purchased for $3.25. For Stephanie, the marginal cost of purchasing the french fries would be

Correct 25 cents.

Which of the following marketing pieces takes the concept of marginalism into account?

Correct Contribute $50 annually to the Heifer Foundation and give a chicken to a family living in poverty. This gift will help generate an additional $100 in household income through the sale of the eggs produced.

Joe wants to upgrade his current cell phone for a new one. How would marginal decision making help Joe decide if this is a good idea?

Correct He should weigh the cost of upgrading his phone with the additional benefits he expects to receive from a new phone.

Which of the following is most consistent with the basic postulate of economics: changes in incentives exert a predictable impact on human behavior?

Correct People will buy less gas if the price of gas increases by $0.50 per gallon.

In the last 250 years the U.S. economy has succeeded in

Correct Relaxing the grip of scarcity and improving the quality of life.

The law of comparative advantage indicates that if a group of individuals wants to maximize their joint output, then each good should be supplied by:

Correct The low opportunity cost producer.

With the passage of time and advancements in technology, scarce resources

Correct are transformed into goods and services more efficiently, but still remain scarce.

If Andrea sells Dan a Wii gaming system for $150,

Correct both Dan and Andrea will gain from this transaction.

How did people like Bill Gates and the late Sam Walton become so rich?

Correct by providing highly valued goods and services to consumers at attractive prices

When gas prices rise sharply, as they did in 2007-2008, the "incentives matter" postulates of economics indicates that

Correct consumers will adjust their driving habits, eventually reducing the quantity demanded for gas.

Gross domestic product can be measured as the sum of

Correct consumption, investment, government purchases, and net exports.

If a firm is unable to cover the cost of the resources employed by the firm (including the opportunity cost of resources owned by the firm), the firm will

Correct go out of business in the long run because it is making losses.

A country should import a good or a service

Correct if other countries can provide the imported item cheaper than it could be produced domestically.

Websites, such as Craigslists and eBay, function as middlemen by

Correct increasing the efficiency in matching sellers and buyers.

Countries are likely to reduce the ability of their citizens to achieve prosperity when they

Correct interfere with voluntary exchange either domestically or internationally.

When an emerging industry renders an existing industry obsolete because of advances in technology

Correct it spurs economic progress through increased productivity and expansion in goods and services that are valued more highly relative to cost.

Adam Smith's "invisible hand", coordinating the actions of individuals, is referring primarily to

Correct market prices.

In a market economy, if you want to earn a high income, you will

Correct need to provide others with goods and services they value highly.

In voluntary exchange, if the seller of a product gains,

Correct the buyer will also gain; mutual gain provides the foundation for exchange.

In a market economy, when a consumer is willing to purchase a unit at the market price, this indicates that

Correct the consumer values the unit as much or more than the market price.

When the government finances a job creation project through taxes or borrowing,

Correct the reduction in private sector employment will partially, if not entirely, offset the jobs created by the government spending.

If a business is losing money on the goods it is producing, this indicates that

Correct the resources would be used more productively producing other things.

The secondary effects of an economic action refer to the

Correct the unintended consequences of a change that are not immediately identifiable but are felt over time.

The price that a person is willing to pay for a product or service is a good indication of

Correct the value of that product or service to the buyer.

The opportunity cost of an action is

Correct the value of the best opportunity that must be sacrificed in order to take the action.

The price of a good will tend to fall when

Correct there is excess supply of the good.

If we are going to get the most value from our resources, entrepreneurs should choose the investment alternatives that

Correct yield the highest expected rates of return.

How will foreign competition influence the domestic economy?

Foreign competition forces domestic producers to improve quality and keep costs down.

Joe wants to upgrade his current cell phone for a new one. How would marginal decision making help Joe decide if this is a good idea?

He should weigh the cost of upgrading his phone with the additional benefits he expects to receive from a new phone.

How will high tax rates affect the level and efficiency of capital formation projects?

Investors will seek out investments with higher tax-sheltering benefits, even if they have a lower pre-tax rate of return.

How does the invisible hand principle explain why self-interested individuals pursue activities that benefit others?

The pursuit of profit and income gives individuals a strong incentive to provide goods and services that are highly valued by others.

Incentives matter

To all human beings regardless of environment.

Which of the following is a major implication of the invisible hand concept?

When directed by competitive market prices, the actions of self-interested individuals will tend to promote overall economic prosperity.

Which is the best explanation why the output per acre of small private plots in the former Soviet Union was about sixteen times the output of state-owned farms?

When individuals were allowed to keep or sell the goods from private plots, there was greater incentive to manage them productively.

Can U.S. workers effectively compete with foreigners who make as little as $2 or $3 per day?

Yes, because wages reflect productivity and the greater productivity in the U.S. is the source of the higher wages.

Which of the following would be most likely to improve the efficiency of the capital market?

a legal system that clearly defines and enforces property rights

Which of the following is the most likely result of a quota that limits the importation of steel into the United States?

a reduction in output and employment in domestic industries that utilize steel as a resource

The Cash for Clunkers program of 2009 resulted in

a reduction in the supply of used cars and a temporary increase in spending on new automobiles.

When price controls push the price of a good or resource above the market equilibrium,

a surplus of the good will develop.

The link between helping others and earning income provides a strong incentive for young people to

acquire skills and invest in education that will increase their ability to provide valuable goods and services to others.

There is no such thing as a free lunch. This statement best reflects the fact that

an opportunity cost is always present when scarce resources are used to produce a good.

With the passage of time and advancements in technology, scarce resources

are transformed into goods and services more efficiently, but still remain scarce.

If a society is going to get the most value from its resources, additional spending on pollution control should be undertaken

as long as the marginal benefits derived from pollution control are greater than or equal to the marginal costs.

Private ownership allows people to decide how they will use their property,

as long as they do not invade or damage the property of others.

Voluntary exchange creates wealth

because trade moves products into the hands of people who value them more.

If Andrea sells Dan a Wii gaming system for $150,

both Dan and Andrea will gain from this transaction.

As a result of the 1930 Smoot-Hawley trade bill,

both the volume of U.S. trade and the tariff revenues derived from trade decreased.

The law of demand indicates that as the price of a good decreases,

buyers will purchase more of it.

How did people like Bill Gates and the late Sam Walton become so rich?

by providing highly valued goods and services to consumers at attractive prices

Resources will be used most productively when

competition and the pursuit of profit are present.

When gas prices rise sharply, as they did in 2007-2008, the incentives matter postulate of economics indicates that

consumers will adjust their driving habits, eventually reducing the quantity demanded for gas.

If the price of a good or service is below the equilibrium price

consumers will want to purchase more than producers are willing to produce.

Profit can be defined as the

difference between the sales revenue of a business firm and the opportunity cost of the resources required to produce the goods supplied by the firm.

The market price of a good or service

directs producers and suppliers toward production of those things that consumers value highly relative to the cost of their production.

Which of the following most clearly performs the function of a "middleman"?

eBay

The basic task of economics is to

explain the forces that underlie human decision making.

If a firm is unable to cover the cost of the resources employed by the firm (including the opportunity cost of resources owned by the firm), the firm will

go out of business in the long run because it is making losses.

In a market economy, individuals have a strong incentive to develop skills and improve their productivity because

greater productivity enhances their ability to earn income.

The Economic Freedom of the World index indicates that countries with more economic freedom

grow more rapidly than those that are less free.

The opportunity cost of building a civic center in your hometown would be the

highest valued bundle of other goods and services that must be forgone because of the civic center construction.

A country should import a good or a service

if other countries can provide the imported item cheaper than it could be produced domestically

Innovation and technological advancements are most likely to occur

in a competitive market economy.

Efficient and unbiased enforcement of contracts will

increase the volume of trade and decrease the risk and uncertainty associated with trade.

Websites, such as Craig's List and eBay, function as middlemen by

increasing the efficiency in matching sellers and buyers.

Volatility in the inflation rate will undermine prosperity because

individuals will spend less time producing and more time attempting to protect their wealth against inflation.

If a poor country is going to grow rapidly and achieve a high level of per capita income, which of the following is most important?

institutions and policies that encourage productive activities

Countries are likely to reduce the ability of their citizens to achieve prosperity when they

interfere with voluntary exchange either domestically or internationally.

International trade

is especially important for smaller countries because it allows them to benefit greatly from economies of scale.

Production should be for people, not for profit. This statement

is incorrect, because it fails to recognize that firms must increase the value of resources in order to earn a profit.

When an emerging industry renders an existing industry obsolete because of advances in technology

it spurs economic progress through increased productivity and expansion in goods and services that are valued more highly relative to cost.

Competition is vitally important in a market economy because

it weeds out high-cost producers and directs production toward firms providing quality goods at economical prices.

Beginning in the mid-1990s, federal regulations

loosened lending standards and mandated that more loans be extended to borrowers with low incomes.

In 2007, the average per capita income of the most economically free quartile of countries in the Economic Freedom of the World index was

more than 8 times that of the countries in the bottom quartile.

If a firm is going to be successful in a competitive market, it must

offer consumers at least as much value per dollar as is available from rival firms.

Political proposals designed to help specific industries, regions, or groups

often have unintended consequences that affect taxpayers and consumers as a whole.

In a market economy, if the supply of oil declines relative to demand,

oil prices will rise, increasing the incentive to conserve, discover new oil reserves, and develop alternative technologies.

Licensing, government permission, and other regulatory mandates required to start a business, are examples of

policies that reduce both trade and market competition, and thereby retard economic progress.

Capital markets will channel funds efficiently into productive projects and bring counterproductive projects to a halt, because

private investors will insist on an accounting of their investments and monitor projects using their funds.

Which of the following institutional arrangements will provide people with the strongest incentive to serve others and use resources efficiently?

private ownership

To be successful in a market economy a firm must

provide goods valued by consumers at economical prices.

What is the source of persistent inflation?

rapid growth of the money supply

Regulations that make it costly to dismiss workers

reduce total employment because they also make it more costly to hire workers.

In a market economy, when the government uses subsidies to keep a company in business even though it is unprofitable, a secondary effect of the subsidies will likely be that

resources that are being used unproductively will continue to be employed in unproductive uses.

If a country is going to reach its full economic potential

restrictions that limit trade and increase the cost of doing business must be kept to a minimum.

Monetary policy in the United States is conducted by

the Federal Reserve.

Investments and improvements in technology are primarily the result of

the actions of entrepreneurs who take risks in the hope of profit.

In voluntary exchange, if the seller of a product gains,

the buyer will also gain; mutual gain provides the foundation for exchange.

Private owners will gain by conserving resources for the future, when

the expected future value of a resource exceeds its current value.

Henry Hazlitt believed that when analyzing an economic proposal, the most common source of economic error was

the failure to consider long-run results and secondary consequences.

To an economist, scarcity means that

the human desire for goods exceeds the amount freely available from nature.

If the United States reduced tariff rates and other trade barriers,

the income levels of Americans would be higher.

When the government finances a job creation project through taxes or borrowing,

the reduction in private sector employment will partially, if not entirely, offset the jobs created by the government spending.

If people work fewer hours, retire early, or forego risky business ventures because of high marginal tax rates,

the size and productivity of the labor supply will be reduced and output will decline.

Which of the following is the best test of whether a government program should be undertaken?

the value generated by the government program that exceeds the value of the production it replaces or "crowds out"

In a market economy, the equilibrium price

will continually adjust to changes in supply and demand as long as it is not restricted by political intervention.

A legal system that protects property, enforces contracts, and settles disputes

will promote investment and trade, and is essential for economic progress.