Econ Test 1_Fall16
Suppose the cross price elasticity of demand between grapefruit fruit and orange juice is approximately 6. What does this mean?
A 1 percent decrease in the price of grapefruit juice leads to a 6 percent decrease in orange juice consumption.
Suppose the value of the price elasticity of demand is −3. What does this mean?
A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.
The economic analysis of minimum wage involves both normative and positive analysis. Consider the following consequences of a minimum wage: a. The minimum wage law causes unemployment. b. A minimum wage law benefits some groups and hurts others. c. In some cities such as San Francisco and New York, it would be impossible for lowminus−skilled workers to live in the city without minimum wage laws. d. The gains to winners of a minimum wage law should be valued more highly than the losses to losers because the latter primarily comprises businesses. Which of the consequences above are positive statements and which are normative statements?
A and b are positive statements, c and d are normative statement.
Which of the following is an example of an efficiency-equity trade-off faced by economic agents?
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.
_____ is a situation in which a country does not trade with other countries. The _____ is the ratio at which a country can trade its exports for imports from other countries.
Autarky, terms of trade
Which of the following statements is true about competition in a market?
Competition forces firms to produce and sell products as long as the marginal benefit to consumers exceeds the marginal cost of production.
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.
If the price elasticity of demand for canned soup is estimated at −1.62, what happens to sales revenue if the price of canned soup rises?
It falls
What is the "omitted variable" problem in determining cause and effect?
It is a problem that arises when an economic variable that affects other variables is omitted from an analysis and its omission leads to false conclusions about cause and effect.
Seth is a competitive body builder. He says he has to have his 12-oz package of protein powder to "feed his muscles" every day. On the basis of this information, what can you conclude about his price elasticity of demand for protein powder?
It is perfectly inelastic.
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
Suppose the demand for milk is relatively inelastic. What happens to sales revenue if the government imposes a price floor above the free market equilibrium price in the market for milk?
Sales revenue rises.
Of the three major economic questions, which of the following is the best example of a "How" question?
Should we collect tolls on turnpikes using human toll collectors or mechanized toll machines?
Which of the following is motivated by an equity concern?
Some states have transferred funds to food bank programs in order to increase benefits to lower-income families.
Which of the following best describes scarcity?
Unlimited wants exceed the limited resources available.
The three economic questions that every society must answer are
What goods will be produced, how will they be produced, and who will receive the goods?
Automobile manufacturers produce a range of automobiles such as sports utility vehicles, luxury sedans, pickup trucks and compact cars. What fundamental economics question are they addressing by making this range of products?
What to produce?
The distribution of income primarily determines which of the fundamental economic questions?
Who will receive the goods and services produced?
Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?
Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity.
Productive efficiency means that
a good or service is produced at the lowest possible cost.
China has developed a comparative advantage in the production of clothing. The source of this comparative advantage is
a large supply of unskilled workers and relatively little capital
One of the major reasons why the United States exports jet airplanes is because Boeing faces ________ opportunity cost than firms in other nations in the production of such aircraft.
a lower
For each of the following situations, explain how a change in the stated "price" is likely to affect your incentives regarding the stated decision. a. The price of ski-lift tickets; your decision to purchase a ski-lift ticket. If the price of ski-lift tickets rises, then your incentives are likely to b. The hourly wage for your weekend job; the decision to not work and go skiing on the weekend instead. If the hourly wage for your weekend job rises, then your incentives are likely to c. The value of a speeding ticket; your decision to speed on the highway If the value of a speeding ticket rises, then your incentives are likely to d. The weight of your course grade attached to an assignment; your decision to work hard on that assignment. If the weight of your course grade attached to an assignment falls, then your incentives are likely to e. The level of tuition fees at your college or university; your decision to attend that college or university If the level of tuition fees falls, then your incentives are likely to
a. decrease b. decrease c. decrease d. decrease e. increase
Determine whether each of the following statements is positive or normative. a. The government should impose stricter regulations on the banking sector to avoid future financial crises. The statement is b. Financial aid to developing countries has no impact on per capita GDP in those countries. The statement is c. Tuition fee increases at Canadian universities lead to reduced access for low-income students. The statement is d. It is unfair that Canadians have universal access to health care but not to dental care. The statement is e. Canadians currently have too much personal debt. The statement is
a. normative b. positive c. positive d. normative e. normative
Indicate which of the following statements represent positive analysis positive analysis and which represent normative analysis normative analysis. a. A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents _________. b. The federal government should spend more on AIDS research. This represents c. Rising paper prices will increase textbook prices. This represents d. The price of coffee at Starbucks is too high. This represents
a. positive analysis b. normative analysis c. positive analysis d. normative analysis
Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic. The price elasticities in this range
are inelastic because they are less than one (in absolute value).
A situation in which a country does not trade with other countries is called
autarky.
What are the key determinants of the price elasticity of demand for a product? The key determinants of the price elasticity of demand for a product are:
availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget.
How can a domestic producer determine whether or not it has a comparative advantage in the production of a good or service?
by comparing the price it receives to the world price
If a nation can produce a good or service at the lowest opportunity cost, then it
can sell the product at a lower price than other nations.
Economists test their theories by
confronting the theories' predictions with evidence.
Scarcity is central to the study of economics because it implies that
every choice involves an opportunity cost.
Allocative efficiency means that
every good or service is produced up to the point where marginal benefit is equal to marginal cost.
Wall Street, in the borough of Manhattan in New York City, is the heart of the U.S. financial system, where banks, brokerage houses, other financial firms, and the New York Stock Exchange are all located. Which of the following best explains New York City's comparative advantage in the financial market?
external economies
If you buy a DVD player produced in Japan, a
good was exported by Japan and imported by the United States.
Centrally planned economies allocate resources based on decisions by ___________, while market economies answer these questions through decisions made by _____________.
government; households and firms
One study found that the price elasticity of demand for soda is minus−0.78, while the price elasticity of demand for Coca-Cola is −1.22. The price elasticity of Coca-Cola is
greater than it is for soda as a product because there are more substitutes for Coca-Cola than soda.
What happens when the quantity demanded is very responsive to changes in price? The percentage change in quantity demanded will be
greater than the percentage change in price.
Price elasticity of demand measures
how responsive quantity demanded is to a change in price.
Price elasticity of supply is used to gauge
how responsive suppliers are to price changes.
If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain. If manufacturers raise prices, then their revenue will
increase because the percentage increase in price will be larger than the percentage decrease in quantity.
By trading, countries are able to consume more than they could without trade. This outcome is possible because
inefficiencies in resource allocation are reduced, world production of both goods increases after trade, & shifting production to the more efficient country—the one with the comparative advantage—increases total production
A grocery store sells a bag of potatoes at a fixed price of $2.30. Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes?
marginal revenue
Efficiency means that goods are distributed in a way that __________, while equity means that goods are distributed in a way that ___________.
maximizes benefits to society; is fair
Compare the demand for pepper with demand for gasoline. The demand for pepper is likely
more inelastic because pepper tends to represent a smaller fraction of a consumer's budget.
In a free-market economy,
most decisions are left to the price system.
In the 2010 holiday season, Steve Richardson decided to cut the prices of his hand-crafted wooden puzzles to increase sales. According to a newspaper account, "the number of orders at Stave Puzzles Inc., his Norwich, Vt. business, hasn't been enough to offset the price cuts." The demand for these puzzles
must be inelastic because the percentage increase in the quantity demanded for orders is less than the percentage decrease in price of the puzzles.
Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is
negative, so Sefton considers potatoes to be an inferior good.
Compare the demand for water with the demand for wine. The demand for water is likely
relatively more inelastic because water is a necessity.
A sportswriter writing about the Cleveland Indians baseball team made the following observation: "If the Indians suddenly slashed all tickets to $10, would their attendance actually increase? Not all that much and revenue would drop dramatically." The sportswriter is assuming that the demand for Indians tickets is
relatively price inelastic.
Japan has developed a comparative advantage in designing and producing automobiles. The source of its comparative advantage in these products is
technology
Allocative efficiency is achieved when firms produce goods and services
that consumers value most.
What is the midpoint method for calculating price elasticity of demand? The midpoint method for calculating price elasticity of demand is:
the change in quantity divided by the average of the initial and final quantities divided by the change in price divided by the average of the initial and final prices.
Airlines that restrict the use of frequent flyer miles during holiday periods do so because
the opportunity cost to airlines of filling seats with frequent flyers is higher at these times.
The price elasticity of supply is affected by
the passage of time.
What is the formula for the price elasticity of demand?
the percentage change in quantity demanded divided by the percentage change in price.
The cross-price elasticity of demand is
the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.
The formula for the price elasticity of supply is
the percentage change in quantity supplied divided by the percentage change in price.
If the cross-price elasticity of demand between Breeze Detergent and Faber Detergent is a relatively large positive number, then it indicates that
the two brands of detergent are close substitutes.
If a firm lowered the price of the product it sells and found that total revenue did not change, then the demand for its product is
unit−elastic.
Which of the following is not a factor of production?
your $5,000 money market fund
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.
If the cross-price elasticity of demand is negative, then the products are:
complements, but if it is positive, then the products are substitutes.
If the United States imports purses, then the quantity of purses produced in the United States will ________ and the quantity of purses purchased by consumers in the United States will ________.
decrease; increase
For a normal good, the income elasticity of demand will be
positive, but for an inferior good, the income elasticity of demand will be negative.
The statement that "most economists are of the opinion that tariffs will usually decrease economic welfare" is
positive, since its accuracy can be verified.
If a 28 percent increase in the price of Cheerios causes a 24 percent reduction in the number of boxes of cereal demanded, the price elasticity of demand for Cheerios is The demand for Cheerios is
-0.86; inelastic
Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the value of the cross−price elasticity between the two movie club memberships?
1.6
The United States is a leading exporter of wheat. What explains the comparative advantage of the United States in wheat production?
Climate and soil conditions in the United States which are well suited for wheat productions
Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant?
Demand is likely to be relatively inelastic.
Which of the following statements about the price elasticity of demand is correct?
Demand is more elastic in the long run than it is in the short run.
Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions?
Macroeconomics
Which of the following is not a step that economists use in developing a useful economic model?
Make a value judgement about the merits of the hypothesis.
Which of the following areas of economics studies issues such as ways to reduce teenage smoking?
Microeconomics
A primary difference between macroeconomics and microeconomics is
Microeconomics examines individual markets while macroeconomics examines the economy as a whole
Which of the following is a normative economic statement?
Pharmaceutical manufacturers should not be allowed to patent their products so prescription drugs would be more affordable.
How else can you calculate the price elasticity of demand?
Price elasticity of demand can be calculated using final values for price and quantity & Price elasticity of demand can be calculated using initial values for price and quantity.
Which of the following is motivated by an efficiency concern?
The United Network for Organ Sharing advocates a system of rationing scarce kidneys that would favor young patients over old in an effort to wring more life out of donated organs.
Which determinant is the most important?
The availability of close substitutes is the most important determinant.
Why isn't elasticity just measured by the slope of the demand curve?
The measurement of slope is sensitive to the units chosen for quantity and price.
What is the advantage of the midpoint method?
The midpoint formula will give the same value whether moving from the higher price to the lower price or from the lower price to the higher price.
Consider a world with two countries and two goods. Under which of the following conditions does comparative advantage NOT exist?
The opportunity cost of producing each good is the same in each country.
The prevalence of Alzheimer's dementia is very high among residents living in nursing homes. A student concludes that it is likely that living in nursing home causes Alzheimer's dementia. What is the flaw in the student's reasoning?
The student is drawing a false conclusion; he is confusing cause and effect.
Although international trade leads to substantial net benefits, not everyone gains from international trade. Which of the following groups is most likely to lose from trade?
The workers and companies in the industries that compete with the imports
Which of the following statements is false about positive economic analysis?
There is much more disagreement among economists over positive economic analysis than over normative economic analysis.
Who receives the most of what is produced in a market economy?
Those who are willing and able to buy them.