Economics Exam 1 Study Guide
Which of the following events would cause the supply curve to increase from S1 to S3?
. A decrease in the price of inputs.
Suppose the price of pepperpepper increases by 25 percent and, as a result, the quantity of salt demanded (holding the price of salt constant) increases by 66 percent. The cross-price elasticity of demand between pepper and salt is
.24
Suppose that legalizing the use of marijuana would decrease its price by 77 percent. If the price elasticity of demand for marijuana is -2.25, what would be the percentage increase in the quantity of marijuana demanded from legalizing marijuana?
173.25
Although only ________ percent of all firms are corporations, corporations account for the __________ of revenue and profits earned by all firms.
20 majority
Suppose instead that the price elasticity of demand for marijuanas -0.27. What would be the percentage increase in the quantity of marijuanamarijuana demanded from legalizing marijuana The higher the absolute value of the price elasticity of demand for marijuana, the ____________ the increase in marijuana use that would result from legalization.
20.79 greater
Following below are four graphs and four market scenarios, each of which would cause either a movement along the supply curve for Pepsi or a shift of the supply curve. A decrease in the supply of Coke:
4. A decrease in the supply of Coke:
Estonia 40 hours - One Cell Phone 8 hours - Lumber (per board foot) Finland 16 hours - One Cell Phone 4 hours - Lumber (per board foot) The table above shows the number of labor hours required to produce a cell phone and a board foot of lumber in Estonia and Finland. What is Estonia's opportunity cost of producing one cell phone?
5 board feet of lumber
A drop in the average household income in the United States from $42,000 to $41,000:
A drop in the average household income in the United States from $42,000 to $41,000:
What is different about buying stocks and buying bonds?
A stock can possibly pay dividends forever, but bonds have a fixed number of payments. The future growth of a stock is more uncertain than the payments of a bond. Differences of opinion about a stock's future may vary considerably but there is less difference about a bond's future.
An improvement in soft drink bottling technology:
An improvement in soft drink bottling technology:
Which of the following may have caused the shift you have drawn?
An increase in the capital stock. A larger labor force. Advances in technology.
Suppose the economy whose PPF is shown on the right experiences economic growth. 1.) Use the 3-point curved line drawing tool to show how growth affects the trade-offs the country faces between producing ships and food. 2.) Use the point drawing tool to draw and label a point on the new PPF that shows the economy producing more of both goods. Label this point 'B'.
Brand new line with the point B on the new line
Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is considering setting up his business as a corporation. What is one advantage to Jeremy of setting up his business as a corporation?
By setting up the business as a corporation, Jeremy would have the ability to share risk with shareholders.
Your consumption point afterafter trade is illustrated by point
C -above the efficient point
As illustrated in the diagram to the right, when a nation moves from autarky to free trade, economic surplus increases by the areas represented by
C and D.
Which of the two is relatively more elastic?
D1 (the flatter line is more elastic)
Is demand elastic or inelastic? At what price is total revenue maximized?
Demand is elastic at all prices above $9.00 and inelastic at all prices below $9.00 Total revenue is maximized when price equals $9
Which of the following statements is true?
Economic costs include both explicit costs and implicit costs.
Refer to the figure to the right. One segment of the circular flow diagram shows the flow of funds from economic agents E to market F. Who are economic agents E and what is market F?
E = households; F = product markets
Tammi 20 -Dogs Groomed 10- Cats Bathed Horace 12 - Dogs Groomed 8 - Cats Bathed The table above shows the output per day of two pet groomers, Tammi and Horace. They can either devote their time to grooming dogs or bathing cats. Which of the following statements is true?
Horace has a comparative advantage in bathing cats and Tammi in grooming dogs
Use the line drawing tool to draw a perfectly elastic supply curve. Label this line 'S'. The price elasticity of supply when supply is perfectly elasticelastic is
Horizontal line infinity
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.
Which of the following must a firm in a market economy do today to succeed?
Market firms today must do all of these things.
Which of the following is true of the management structure of corporations in the United States?
Members of management who are inside directors serve on the board of directors Large corporations are legally owned by shareholders who do usually not directly manage the firm.
Trade-offs force society to make choices, particularly when answering the following three fundamental questions:
One, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced?
Refer to the diagram to the right which shows cost and demand curves facing a typical firm in a constantminus−cost perfectly competitive industry. If the firm's fixed cost increases by $1,000 due to a new environmental regulation, what happens in the diagram above?
Only the average total cost curve shifts upward; the marginal cost and average variable cost curves are not affected. (Q12 question 9)
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit=(P−ATC)×Q, where P is price, Q is output, and ATC is average total cost.
Which of the following statements about scarcity is true?
Scarcity refers to the situation in which unlimited wants exceed limited resources.
How does the owner of a sole proprietorship relate to the business?
The owner and the business are not separate legal entities.
Suppose a farmer in Georgia begins to grow peaches. He uses $1,000,000 in savings to purchase land, he rents equipment for $90,000 a year, and he pays workers $130,000 in wages. In return, he produces 150,000 baskets of peaches per year, which sell for $3.00 each. Suppose the interest rate on savings is 11 percent and that the farmer could otherwise have earned $35,000 as a shoe salesman. What is the farmer's economic profit? What is the farmer's accounting profit?
The peach farmer earns economic profit of $185,000. (includes explicit and implicit) The peach farmer earns accounting profit of $230,000 (it's just explicit costs)
Consider the polar case where the demand curve is perfectly inelastic. Use the line drawing tool to draw a perfectly inelastic demand curve. Label this line 'D'.
Vertical line
Which of the following is a macroeconomics question?
What determines the growth rate of gross domestic product?
Microsoft charges a price of $599 for a copy of Windows 7. Is this pricing decision rational?
When we assume the managers at Microsoft have used all available information and have weighed all known benefits and costs, we are assuming rationality.
Which of the following is true of the relationship between the average product of labor and the marginal product of labor?
Whenever the marginal product of labor is greater than the average product of labor, the average product of labor must be increasing.
The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve is
a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.
An example of technological change is
a firm rearranging the factory floor to increase productionthe factory floor to increase production. a firm's workers going through a training programa firm's workers going through a training program. a hurricane damaging firm facilitiesa hurricane damaging firm facilities.
All of the following are sources of comparative advantage except
a strong foreign currency exchange rate.
Voluntary exchange increases economic efficiency
because neither the buyer nor the seller would agree to a trade unless they both benefit.
Your company incurs a cost for factory rent, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of factory rent
becomes a variable cost.
On the diagram to the right, a movement from A to to B represents a
change in quantity demanded
On the diagram to the right, a movement from A to B represents a
change in quantity supplied
Both buyers and sellers are price takers in a perfectly competitive market because
each buyer and seller is too small relative to others to independently affect the market price.
In the diagram to the right, point A provides the _____, point B the _____, and point C the _____.
equilibrium price; market equilibrium; equilibrium quantity
Consider the following statement: "An increase in supply decreases the equilibrium price. The decrease in price increases demand." The statement is
false: decreases in price affect the quantity demanded, not demand.
Two key groups participate in markets. A _________ consists of all the individuals in a home. ___________ are suppliers of goods and services. We can use a simple economic model called the ______________________ to see how participants in markets are linked.
household Firms circular-flow diagram
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
flow of funds from savers to borrowers through financial intermediaries such as banks is ____________ finance, while a flow of funds from savers to firms through financial markets, such as the New York Stock Exchange is ______ finance.
indirect direct
In the diagram to the right, point F indicates an (F IS BELOW the efficient result)
inefficient result.
Absent government regulations to guard against fraud, why might top managers deceive investors about the true financial condition of their firms? Top managers might want to deceive investors about the true financial condition of their firms
inflate profits to keep the firm's stock price hight to hide liabilities that should be listed on balance sheets to enhance compensation tied to enhance compensation tied to firm profitability.
Dumping
is selling a product for a price below its cost of production.
Comparative advantage
is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
Economics is a social science because
it applies the scientific method to the study of the interactions among individuals. it considers human behaviorlong dash—particularly decision-making behavior. it is based on studying the actions of individuals.
What conditions make a market perfectly competitive? A market is perfectly competitive if
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.
The United States is one of the _______ _exporters in the world. International trade remains _________ _important to the United States than it is to most other countries.
largest less
Competition forces firms to produce and sell products as long as the ________ to consumers exceeds the ________ of production.
marginal benefit; marginal cost
The price of a seller's product in perfect competition is determined by
market demand and market supply.
Compare the demand for sugar with demand for food. The demand for sugar is likely
more inelastic because sugar tends to represent a smaller fraction of a consumer's budget.
Instead, suppose pepper and salt were complements. If so, then the cross-price elasticity of demand between pepper and salt would be
negative
Subtracting the value of a firm's liabilities from the value of its assets leaves its
net worth.
We do not see complete specialization in the real world because
not all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products differ.
Compare the demand for water with the demand for wine. The demand for water is likely
relatively more inelasticinelastic because waterwater is a necessity.
Does the market system result in productive efficiency? In the long run, perfect competition
results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.
By trading, countries are able to consume more than they could without trade. This outcome is possible because
shifting production to the more efficient countrylong dash—the one with the comparative advantagelong dash—increases total production. inefficiencies in resource allocation are reduced. world production of both goods increases after trade.
In this example, pepper and salt are
substitutes
The production possibilities frontiers depicted in the diagram to the right illustrate
technological advances in the tank industry.
The principle of opportunity cost is that
the economic cost of using a factor of production is the alternative use of that factor that is given up.
What is the production function? The production function is the relationship between
the inputs employed by a firm and the maximum output it can produce with those inputs.
When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives,
the policies are consistent with economic incentives.
Suppose a professional basketball game is to be played at a suburban arena, which increases demand for parking on the night of the game. If the suburban area has the ability to create additional parking during periods of peak demand, then
the supply of parking will be more elastic and the price of parking will increase by a relatively small amount the night of the game
Owners of a corporation share in the profits of the firm
through dividend payments on shares of that firm's stock.
The basic activity of a firm is
to use inputs to produce outputs of goods and services.
Protectionism. is the use of _______ to shield domestic firms from foreign competition. Q: Who benefits and who loses from protectionist policies? What are the main arguments people use to justify protectionism? Winners Losers
trade barriers Workers in trade protected industries - Winners Industries that use trade protected goods as inputs.. - Losers
The distinction between a normal and an inferior good is
when income increases, demand for a normal good increases while demand for an inferior good falls.
A free market exists
when the government places few restrictions on how a good or a service can be produced or sold or on how a factor of production can be employed.
Suppose that last semester your semester GPA was 4.00 and your resulting cumulative GPA was 2.86 Next, suppose that this semester your semester GPA will be 3.30 If so, then your cumulative GPA
will increase because your "marginal" GPA will be above your cumulative GPA.
_____ 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
Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $8,000, buys gasoline ($2.30 in gas is required to mow each yard), and pays a helper $10.00per yard. Prior to opening the lawn company, Charles earned $4,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 55 percent per year in the bank and that the mowing equipment depreciates at 25 percent per year. Charles plans to mow 300 yards per year. What is Charles's implicit cost of production?
Charles's implicit cost of production is $6400 per year.
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
trade-off.
