ECON EXAM 1

Mary says that "an increase in the tax on cigarettes will raise its price." Julia argues that "taxes should be increased on cigarettes because college students smoke too much." We can conclude that

Julia's statement is normative, but Mary's is positive.

Refer to the table below. If the six people listed in the table are the only producers in the market and the equilibrium price is $6, how much producer surplus will the market generate?

Total producer surplus: $6

Refer to the diagram, in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. Without government interference, this market will reach

an overallocation of resources to this product.

Public goods are those for which there

are non rivalry and non excludability

Professional buyers of antiques often have more information about the value of antique objects than do the sellers. This illustrates

asymmetric information

Refer to the diagram. Flow 4 represents

consumer expenditures and business revenue

An economic system

is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.

A market

is an institution that brings together buyers and sellers

The four factors of production are

land, labor, capital, and entrepreneurial ability

The many layers of the federal government in the United States

lead to economic inefficiencies because of difficulty aggregating and conveying information

A price floor will result in a .......... only if the price floor is ................the equilibrium price.

the price floor is always above the equilibrium price and it creates a surplus

Which of the following is not one of the five fundamental questions?

what prices will be charged for goods and services?

The market system's answer to the fundamental question "Who will get the goods and services?" is essentially

"those most willing and able to pay for them."

Jackie is given a $100 budget at work that can be spent only on two items: paper and pens. If a pack of paper cost $10 each and pens cost $2.50 each, then the opportunity cost of purchasing one pack of paper is:

4 pens

Refer to the budget line shown in the diagram. Which of the following combinations of goods is unattainable for this consumer?

4 units of C and 6 units of D

Refer to the diagram. A price of $60 in this market will result in

a surplus of 100 units

Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas

a + b

In a command system,

a government-appointed planning board makes production and allocation decisions

Label each of the following scenarios with the correct combination of price change and quantity change. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as, respectively, "P?" and "Q?".

a. On a hot day, both demand for lemonade and supply of lemonade increase. P*p?* Q*increase* b. On a cold day, both demand for ice cream and the supply of ice cream decrease. P*p?* Q*decrease* c. When Hawaii's Mt. Kilauea erupts violently, the demand on the part of tourists for sightseeing flights increases but the supply of pilots willing to provide these dangerous flights decreases. P*increase* Q*q?* d. In a hot area of Arizona where they generate a lot of their electricity with wind turbines, the demand for electricity falls on windy days as people switch off their air conditioners and enjoy the breeze. But at the same time, the amount of electricity supplied increases as the wind turbines spin faster. P*decrease* Q*q?*

Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality.

a. Overallocation of resources: negative externality b. Tammy installs a very nice front garden, raising the property values of all other houses on her block: positive externality c. Market demand curves are too far to the left (too low): positive externality d. Underallocation of resources: positive externality e. water pollution from a factory forces neighbors to buy water purifiers: negative externality

Match each term with the correct definition.

a. The next-best thing that must be forgone in order to produce one more unit of a given product: opportunity cost b. The pleasure, happiness, or satisfaction obtained from consuming a good or service: utility c. The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity: economics d. Making choices based on comparing marginal benefits with marginal costs: marginal analysis

How (if at all) do each of the following events affects the location of a country's production possibilities curve?

a. The quality of education increases: curve shifts outward b. The number of unemployed workers increases: no change c. A new technique improves the efficiency of extracting copper from ore: curve shifts outward d. A devastating earthquake destroys numerous production facilities: curve shifts inward

Graphically, producer surplus is measured as the area

above the supply curve and below the actual price.

Which of the following is an example of market failure?

all of these

The budget line shows

all possible combinations of two goods that can be purchased, given money income and the prices of the goods.

Refer to the diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market the indicated shift in demand may have been caused by

an increase in incomes if the product is a normal good

Refer to the diagram. Which of the following areas best represents the efficiency loss from underproduction?

b + d

Demand-side market failures occur when

demand curves don't reflect consumers' full willingness to pay for a good or service.

If the income of buyers decrease and good A is an inferior good, the ___ will ___. This will cause the equilibrium price to ___ and the equilibrium quantity to ___.

demand of good A; increase; increase; increase

Refer to the diagram. If actual production and consumption occur at Q2,

efficiency is achieved

The idea of government failure includes all of the following except

extensive positive externalities from public and quasi-public goods

A price ceiling means that

government is imposing a legal price that is typically below the equilibrium price.

Select the graph above that best shows the change in the market for wheat, when the cost of fertilizer decreases.

graph c

In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. Consumer expectations that the price of X will rise sharply in the future will

increase D, increase P, and increase Q

If goods X and Y are close substitutes. If the price of good X falls, then we would expect an

increase in the quantity of X demanded and a decrease in the demand for Y.

Refer to the diagram, which shows demand and supply conditions in the competitive market for product X. Other things equal, a shift of the supply curve from S0 to S1 might be caused by a(n)

increase in the wage rates paid to laborers employed in the production of X.

Which of the following would best be classified as a complement for new houses/homes?

mortgage loans

Efficiency losses

none of the above

Refer to the above graph with three demand curves. An increase in price, other factors constant, would cause a change from

point 3 to point 6

The demand curve shows the relationship between

price and quantity demanded

If the supply of a product decreases and the demand for that product simultaneously increases, then equilibrium

price must decline, but equilibrium quantity may rise, fall, or remain unchanged.

In representative democracy, voters are ____________ and politicians are ______________.

principals; agents

Coffee and tea are substitutes for consumers. An increase in the price of coffee coupled with an increase in the number of tea growers ________ the equilibrium price of a pound of tea and ________ the equilibrium quantity of tea

probably changes, but more information is needed to determine if it rises or falls; increases

Which of the following is a fundamental characteristic of the market system?

property rights

Select all of the following that are true. To an economist, a coercive government can be useful in order to:

reallocate resources in order to improve efficiency fight negative externalities provide a low-risk economic environment for individuals and firms

Households and businesses are

sellers in the resource and product markets respectively

A decrease in the price of peanut butter will

shift the demand curve for jelly to the right

Economics may best be defined as the

social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity

Which of the following is not correct? A typical production possibilities curve

specifies how much of each product a society will want to produce

Producers expect a huge decline in the price because of recent storms. As a result, ........ will ..... today.

supply, increase

Among the following examples, the one that best illustrates a public good is

the bike paths around a city or town

Which of the following is a source of government failure?

the enormous size and scope of government

As it relates to corporations, the principal-agent problem is that

the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals).

In the market for gasoline, if the change in demand due to the start of the summer driving season is greater than the change in supply due to disruptions in the refinery operations in the Gulf, then the equilibrium quantity will increase.

true

Refer to the diagram. The movement from curve a to curve b could be explained by an increase in the quantity and/or quality of society's productive resources.

true

The pursuit through government of a transfer of wealth at society's expense is called "rent seeking."

true

Refer to the diagram. The combination of computers and bicycles shown by point G is

unattainable given currently available resources and technology