econ exam 1
Which of the following does the law of demand specifically imply?
If the product price increases, quantity demanded will decrease, all else equal
Which of the following is often referred to as the basic postulate of economics?
Incentives matter: individuals respond in predictable ways to changes in personal costs and benefits
GRAPH #4: current consumption and current investment. Points A, B, and C in the figure above indicate consumption and investment for three different economies. Other things constant, which of these three economies is likely to grow more rapidly in the future?
economy C
Adam Smith's "invisible hand" principle indicates that competitive markets can help promote the efficient use of resources and the broader general welfare of society
even when each market participant cares only about their own self interest rather than about the overall efficiency of resource use
GRAPH #9: baseballs and bananas. If the economy moves from point C to point B, then which of the following statements is correct?
The opportunity cost of each additional baseball is 2 bananas
If cable TV and streaming TV services are substitutes, then all else equal
an increase in the price of cable TV will increase the demand for streaming TV services
The basic difference between macroeconomics and microeconomics is that
macroeconomics is concerned with the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents)
The difference between positive economic statements and normative economic statements is that
positive statements are based on facts and are testable, while normative statements are based on opinion and are not testable
If consumer purchases of a good are highly sensitive to the price of the good, economists say the demand for the good is relatively
price elastic
If consumer purchases of a good are not very sensitive to the price of the good, economists say the demand for the good is relatively
price inelastic
Middlemen are generally individuals or firms who
provide valued services that reduce the cost of transactions and help achieve additional gains from trade
"The money and resources currently being devoted to preventing and treating the spread of various strands of the coronavirus reduces the quantity of other goods that we are able to supply." This statement most clearly illustrates which of the following concepts?
the concepts of scarcity and opportunity cost
GRAPH #10: baseballs and bananas. If the economy moves from point A to point C, then
the opportunity cost of each additional banana is 1/3 of a baseball
In economics the term "utility" refers to
the subjective benefit or satisfaction a person expects to receive from a choice or course of action
The opportunity cost of an action is
the value of the best opportunity that must be sacrificed in order to take the action
To say that people make marginal decisions, or that they "make decisions at the margin," means that
they weigh the additional costs and additional benefits of various activities before they make a decision
In economics, the term that refers to the time, effort, and other resources needed to search out, negotiate, and consummate an exchange is
transaction costs
GRAPH #7: toasters and toothbrushes. The opportunity cost of obtaining 10 additional toasters by moving from point B to point A is
zero, since the economy at point B is not fully employed and therefore has the additional resources to produce 10 additional toasters without tradeoffs
Economics is primarily the study of
the choices people make as the result of scarcity
Which one of the following statements is most clearly inconsistent with the economic way of thinking?
"If the government provides a good free to citizens, then the opportunity cost of the good is zero."
Suppose Katie, Kendra, and Kristen each purchase a particular type of smartphone device at a price of exactly $600. Katie's willingness to pay was $700, Kendra's willingness to pay was $640, and Kristen's willingness to pay was $605. Total consumer surplus for all three individuals is
$145
GRAPH #5: toasters and toothbrushes. If the economy moves from point A to point D, the opportunity cost is
20 toasters
GRAPH #8: baseballs and bananas. If this economy put all available resources into the production of bananas, it could produce
400 bananas and no baseballs
Which of the following is a positive economic statement?
A tax on butter will reduce the quantity of butter bought and sold, all else equal
Which of the following could be considered to be a secondary effect (unintended consequence) caused by making drugs such as marijuana, cocaine, heroin and meth illegal?
All of the above would be considered valid and important secondary effects of making drugs illegal
Which of the following is a positive economic statement?
An increase in the minimum wage will reduce employment of low-skill workers
Amanda decides to buy a dress that Hillary has for sale; they both agree on a price of $20 for the exchange. Which of the following best describes who gains and who loses from the trade?
Both parties expect to gain from this transaction
Legislation to protect red-cockaded woodpeckers by making their trees off limits to loggers created incentives that resulted in the widespread cutting and premature harvesting of trees in which these woodpeckers were most likely to nest. This is an example of which of the following pitfalls in economics?
Good intentions do not always lead to desirable outcomes; the problem of secondary effects
Which of the following is a positive economic statement?
Government price controls on rent decreases the number of new apartments constructed
If Harry only pays $25,000 to purchase a new car even though he would have been willing to pay as much as $35,000 for the car, this indicates that
Harry realized $10,000 of consumer surplus from the purchase of the car
Which of the following is a positive economic statement?
If tax rates at all levels of government exceed 50 percent of national income, job creation will decline, all else constant
GRAPH #2: production possibilities curve, clothing, and food. Which of the following is true of the figure above
If the economy operates at point B, it is impossible to increase the output of clothing without giving up some food production
CHART: If the table represents the willingness to pay of four buyers, and the price of the good is $24, then who would be willing to purchase the good?
Mike and Sandy
CHART: If the table represents the willingness to pay of four buyers, and the price of the good is $15, then who would be willing to purchase the good?
Mike, Sandy, and Jonathan
Which of the following will most likely occur under an economic system of clearly defined and enforced private property rights?
Resource owners will gain by discovering and employing their resources in ways that are highly valued by others
Harold, a delivery man, washes and irons his own shirts. Sarah, his boss, sends her clothes to a laundry. Which is the most plausible economic explanation for this difference?
Sarah has a higher opportunity cost than Harold in terms of the time spent washing and ironing her clothes
What do economists mean when they state that a good is "scarce"?
The amount of the good that people would like exceeds the supply freely available from nature
A cold spell in Florida severely reduced the orange crop, and as a result, California oranges commanded a higher price. Which of the following statements best explains this situation and these events?
The supply of Florida oranges fell due to the freeze, causing their price to increase and the demand for California oranges (a substitute) to increase
All else constant, how will consumers generally react to an increase in the price of butter?
They will substitute other goods like margarine in place of the more expensive butter
Under a system of private property rights, and given typical human life-spans, could a 60-year-old owner of a tree farm benefit by planting and caring for a crop of Douglas firs, most of which will not be ready to cut for another 50 years into the future?
Yes, the tree farmer will benefit because, as long as the wood from Douglas firs is valued in the marketplace, this action will increase the value of the land if and when the farmer (or his heirs) decide to sell it
The law of comparative advantage states that
a group of people can increase their output when each good or service is supplied by the low-opportunity-cost producer
In a market economy,
a larger income for one person means it is highly likely that others also benefit
The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is
a larger overall output and consumption resulting from a more efficient use of resources
Assume the demand curve for cookies is downward sloping. If the price of a bag of cookies falls from $4.50 to $3.75 per dozen, then ceteris paribus
a larger quantity of cookies will be demanded
GRAPH #3: breadfruit and fish. Which of the following would most likely cause the production possibilities curve for breadfruit and fish to shift outward from AA to BB?
a major technological advance in all industries in this economy
The economic way of thinking is
a set of basic concepts that helps one understand human choices and actions under scarcity constraints
Economists are generally opposed to tariffs or other restrictions on imported goods because of the negative secondary effects they create that more than offset the benefits to employment in the domestic industry. Which of the following could be considered a secondary effect of these trade restrictions?
all of the above
Private property rights involve
all of the above
Suppose that vegetarian and environmental lobby groups run large advertising campaigns that are successful in substantially lowering the consumption of beef. As a result of the substantially lower desire for beef, we would expect
all of the above
Which of the following attributes of voluntary trade explain why it is so important for economic prosperity?
all of the above
The wages of house painters will tend to rise when
alternative earning opportunities for house painters improves
Because the height of the demand curve measures the marginal value of the good to consumers, the fact that a demand curve slopes downward to the right illustrates that
as more of a product is consumed, consumers will value additional units less
All else equal, producers are willing to offer greater quantities for sale at higher prices because
at higher selling prices the producers have the incentive to bear the increasing opportunity cost of attracting scarce resources from alternative uses
The price elasticity of demand for a good or service is determined primarily by the
availability of close substitutes for the good or service
The number of people willing to buy tickets to the Super Bowl is frequently much greater than the number of tickets (and seats) available. All else equal, this is evidence that the original box-office price of Super Bowl tickets is
below the equilibrium price
For the typical college student, taking an introductory course in economics should
help the student learn to rationally analyze and systematically think about social problems
Economic analysis assumes that
changes in the personal benefits and costs associated with a choice will exert a predictable influence on human behavior
The difference between the amount consumers would be willing to pay and the amount they actually pay for a good is called
consumer surplus
Ceteris paribus, an increase in the price of a good will cause the
consumer surplus derived from the good to decrease
"A reduction in gasoline prices caused the demand for gasoline to increase. The lower gas prices also led to an increase in demand for larger cars and SUVs, causing their prices to rise." These statements
contain one error; the lower gasoline prices would cause an increase in the quantity demanded of gasoline, not an increase in demand
The curve that shows the relationship between the price of a good and the quantity that consumers are willing to purchase at each price is the
demand curve
When economists say the demand for a product has increased, they mean that the
demand curve for the product has shifted to the right
If consumer purchases of a good are highly sensitive to the price of the good, this is illustrated by a
demand curve that is relatively flat (more horizontal slope)
If consumer purchases of a good are not very sensitive to the price of the good, this is illustrated by a
demand curve that is relatively steep (more vertical slope)
When property rights are clearly defined and enforced, private owners will
develop and direct their property toward uses that others value highly because the market will generally reward them for doing so
The economic way of thinking suggests that if the government imposed a $1,000 tax on owners of red automobiles, ceteris paribus
fewer red automobiles would be produced and sold
Of the following goods, which is the most likely to be quite price inelastic?
gasoline
"Jeff Bezos and Amazon have made billions of dollars marketing and selling online consumer retail products. Many workers and consumers must have suffered in order for Bezos and Amazon to amass such enormous wealth." The person who makes this claim
has failed to understand that specialization and voluntary exchange result in mutual economic gain
The production possibilities curve illustrates the basic principle that
if all the resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced
GRAPH #1: production possibilities curve, clothing, and food. In the figure above, point A is:
inefficient
The law of demand refers to the
inverse relationship between the price of a good and the quantity demanded
According to Adam Smith, individual self-interest
is a powerful force for economic progress when it is directed by competitive markets.
Economic theory
is all of the above
The opportunity cost of choosing an alternative
is the value of the highest valued alternative forgone as the result of the choice
If an economy is operating at a point inside the production possibilities curve,
its resources are not being used efficiently
The economizing problem is essentially one of deciding how to make the best use of
limited resources to satisfy virtually unlimited wants
James enjoys the feeling of wind in his hair enough to ride his motorcycle without a helmet, even though he fully realizes the greater potential for injury it creates by not wearing one in the uncertain event he is in an accident. To an economist, James is
making a rational choice
The difference between microeconomics and macroeconomics is that
microeconomics deals with narrowly defined economic units, and macroeconomics focuses on highly aggregated economic markets
GRAPH #6: toasters and toothbrushes. The opportunity cost of obtaining 15 additional toasters by moving from point D to point C is
none of the above; the economy cannot move to point C given the current state of technology
When the production possibilities curve is bowed out, this indicates that resources are
not equally suited to the production of both goods (increasing marginal costs)
The expression, "There's no such thing as a free lunch," implies that
opportunity costs are necessarily incurred when resources are used to produce goods and services
Economists use the term ceteris paribus to indicate that
other things are assumed to be held constant
The city governments of many large metropolitan areas have experimented with purchasing electric scooters to leave around town for everyone's use. Anyone who needs a scooter can rent one by paying a nominal fee with a debit card, and they are not allowed to lock up the scooters or take them home, but rather must leave them available and/or connected to a charger for someone else to use. Economic theory predicts that
people will NOT generally take as good care of these commonly owned scooters as they do their own personal scooters
Because information is scarce and costly to acquire,
people will rationally choose not to become 100% fully informed before making decisions
In economics, human-made resources such as tools, equipment, and structures that are used to produce other goods and services are referred to as
physical capital goods
When market prices act as the rationing criterion under scarcity, individuals have a strong incentive to
provide valued services to others in exchange for income in the form of wages, salary, profits, rent, or interest
Adam Smith believed that if people were free to pursue their own interests,
public interest would be served quite well by voluntary self-interested trading
Because of a late night out with friends, Alyssa decided to sleep in rather than attend her 7:50 a.m. economics class. According to economic analysis, her choice was
rational if Alyssa values the additional sleep more highly than the extra benefit she expects to receive from attending the class
Economic choice and competitive behavior both are the result of
scarcity
The value of a good is
subjective; value is placed on the good according to the "subject" or the buyer or seller
The curve that shows the relationship between the price of a good and the quantity that producers are willing to sell at each price is the
supply curve
Given freedom of movement for both goods and input resources, if Florida producers choose to specialize in oranges and Georgia producers choose to specialize in peaches, then it would be reasonable to conclude that
the Georgia economy has a comparative advantage in producing peaches and the Florida economy has a comparative advantage in producing oranges
When deciding whether to buy a second car, the economic way of thinking indicates that the purchaser should compare
the additional benefits of the second car with the additional cost of the second car
In a voluntary exchange, if the seller of a product gains,
the buyer must also gain; mutual gain provides the foundation for exchange
Goods are scarce because
the desire for goods is far greater than their availability from nature
"Now that Blake paints the broad surfaces and I do the trim work, we can paint a house in three-fourths the time that it took for each of us to do both." This statement most clearly reflects
the division of labor and the law of comparative advantage
If a good is scarce,
the good will have a price in a market setting
People are willing to pay more for a diamond than for a bottle of water because
the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water
A rational decision maker takes an action if, and only if
the marginal benefit of the action exceeds the marginal cost of the action
Your professor enjoys his work, teaching economics. He has been offered other positions in the corporate world that would increase his monetary income by as much as 25 percent, but he has decided to continue working as a professor. His decision to continue teaching rather than taking other positions would not change unless
the marginal cost of teaching increased above the marginal benefit
