Exam Study Guide

when competition is present, businesses have a strong incentive to serve the general public and therefore there is little need for regulation of competitive markets.

"Competition is the great regulator." This statement reflects that

are valued more highly than their cost.

A competitive capital market is important to society because it directs resources toward projects that

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

A country should import a good or a service

outweighs the extra cost.

According to marginal analysis, you should spend more time studying economics if the extra benefit from an additional hour of study

$20,000.

An online business produces an app for smart phones. Its costs in labor, technology, materials, and promotion are $80,000. If the business sells 10,000 apps at $10, it will make a profit of

Equilibrium Price: Decrease Equilibrium Quantity: Decrease or Increase

Consider the impact of the following two events in the television market.First, people are using more tablets and fewer television sets. Second, new production techniques decrease the production cost of television sets. What is the effect of these events on the equilibrium price and quantity of television sets?

Yes, exchange makes it possible for the trading partners to gain more value from the existing supply of goods and it also makes larger output levels possible.

Does voluntary exchange create wealth?

will prosper if they undertake projects that increase the value of the resources.

Entrepreneurs

promotes gains from trade by keeping transaction costs low.

Even-handed enforcement of contracts fuels economic prosperity because it

economic losses are present.

Firms will exit an industry and the remaining firms will contract the scale of their operations when

1 and 3

Government leaders in California are concerned about high rents and housing prices. What would be the result(s) of a law that would lower rents below the market equilibrium price? ​ I. Initially rents would be lower. II. More apartments would be built in the future. III. In the long run, there would be a shortage of apartments and fewer incentives to maintain them.

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

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

can produce this good or service at a low opportunity cost.

If a country, business, or person has a comparative advantage in producing a good or service, this means that this country, business, or person

a mechanism to attract savings and channel them into productive investment projects.

If a nation is going to achieve its full potential, it must have

it is willing to sell the resources to buyers offering the highest prices even if some of the buyers live in other countries.

If a nation is rich in natural resources, that nation will increase its wealth if

supply of corn will decrease and the price of corn will rise

If the Midwest experiences a severe drought that damages the corn crops, we should expect the

should not be undertaken.

If the construction of a high speed rail project creates benefits of $20 billion while the cost is $45 billion, this indicates the project

Consumers will buy less of the good.

If the price of a good increases, what is the impact on consumers, other things equal?

producers are likely to produce more than consumers are willing to purchase.

If the price of a good or service is higher than the equilibrium price

Price would decrease and quantity would increase.

If the supply of a good increased, what would be the effect on the equilibrium price and quantity?

approximately 64 years

In 1820, average life expectancy at birth for the world was 26 years. By 2003, the average life expectancy worldwide at birth was

shape the future course of the national economy.

In a free market economy, current consumption, saving and investment decisions

1 and 2

In a free market, if the price of a good is above equilibrium, then 1. the market price will fall. 2. the quantity supplied will be greater than quantity demanded. 3. there will be a shortage of the good.

both parties receive something they value more than what they gave up.

In an informed and voluntary exchange,

combine resources in a manner that increases their value

In order to be successful in a market economy, entrepreneurs must

exaggerate the perceived benefits and understate the expected costs of a proposal.

In order to obtain support for favored political proposals, special interest groups have an incentive to

relaxing the grip of scarcity and improving the quality of life.

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

both positive and negative incentives

Individuals economize and respond predictably to

will help redirect resources away from unproductive projects.

Losses and business failures

50 cents.

Maria wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of gasoline at $2.50 per gallon, the car wash costs $2, but if she buys 10 gallons of gasoline, the car wash is free. For Maria, the marginal cost of the tenth gallon of gasoline is

the importance of secondary effects.

Mediocre economists often consider only the immediate direct effects of a change, whereas a good economist will also consider indirect effects that may only become observable over time. This statement most clearly emphasizes

specialize in reducing transactions costs

Middlemen, such as grocers, stockbrokers, and realtors

tend to have higher incomes in the future.

Other things constant, countries with higher investment rates will

an increase in the rate of investment as a share of total output

Other things constant, which of the following would you expect to increase the output growth rate of a country?

the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

People are willing to pay more for a diamond than for a bottle of water because

direct businesses toward productive projects and away from ones that are unproductive.

Profits and losses play an important role in helping

They benefit as long as the additional revenue derived from the standby passengers exceeds the marginal cost.

Standby passengers on airlines who pay low rates for seats benefit from the low price. How are the airlines affected?

is a process that promotes cooperation and brings individual choices into harmony.

Supply and demand analysis

The demand for soda served in small containers will increase.

Suppose persistent obesity leads to a ban on soda served in large containers. Which of the following will result?

No, the turbines are an inefficient form of producing electricity and therefore the subsidies will increase the opportunity cost of supplying it.

Suppose the government spends $10 billion subsidizing firms producing electricity with wind turbines because these firms are high cost producers. Will the subsidies lead to economic growth and higher income levels?

the value of the output produced compared to its cost

Suppose the government spends an additional $10 billion on a program to subsidize the production of gasoline produced with 10 percent corn based ethanol. Which of the following is most important when evaluating the efficiency of this program?

$25,500

Susan is trying to decide whether to quit her $20,000 per year job so she can return to college next year as a full time student. If she goes to college next year, her books and supplies will cost $500, tuition will cost $3,000, and her other expenses (transportation, housing, and food) will increase by $2,000. What is Susan's opportunity cost of attending college next year?

1 and 2

The U.S. government subsidizes the production of ethanol from corn and requires gasoline to contain a specific percentage of ethanol. What are the unintended consequences of this program? 1. higher corn prices 2. higher prices for cornbread and tortillas, products made from corn 3. lower prices for gasoline because corn is a renewable resource

seek the lowest cost method of achieving their objectives.

The economic way of thinking indicates that individuals

1 only

The income and living standard of a country will generally improve when 1. property rights are protected. 2. jobs are protected. 3. banks are protected.

even when each market participant cares only about their own self-interest rather than about the overall efficiency of resource use.

The invisible hand principle indicates that competitive markets can help promote the efficient use of resources

even when market participants care only about their own self interests rather than about the overall efficiency of resource use.

The invisible hand principle indicates that competitive markets can help promote the efficient use of resources

even when each market participant cares only about their own self interest rather than the overall efficiency of resource use.

The invisible hand principle indicates that when individuals are directed by prices determined in competitive markets, their actions will tend to promote the efficient use of resources

specialization and exchange will make it possible for trading partners to expand their joint output.

The law of comparative advantage explains why

the best alternative given up in order to build the stadium

The opportunity cost of a city using tax money to build a new stadium is

$10 per hour.

The price of an airline ticket from Denver to Chicago costs $450. A bus ticket costs $150. Traveling by plane takes 2 hours compared with 32 hours by bus. Other things constant, Erica would gain by choosing air travel if, and only if, she values her time at more than

the value of that product or service to the buyer

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

people on both sides of the trade are made better off.

The primary benefit of voluntary trade is that

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

The secondary effects of an economic action refer to the

Canada produces wheat at a lower opportunity cost than other countries.

To say that Canada has a comparative advantage in the production of wheat is similar to saying that

it moves goods, services and resources from people who value them less to individuals who value them more.

Voluntary trade promotes economic progress because

Production of goods and services people value makes higher living standards possible.

What is the main benefit derived from production of goods and services?

both the customer and the pawn shop owner believe the sale will benefit them.

When a customer sells a piece of jewelry to a pawn shop

Both trading partners benefit from voluntary exchange, regardless of their nationality.

When an American buys a good from someone in China rather than buying the good from an American, which of the following is true?

Both the American and the Mexican are better off than they would be if they had not made this voluntary exchange.

When an American hires a Mexican worker to perform a job, we know that

this indicates that the producer's decision to direct resources to that product was profitable.

When consumers are willing to pay a price that exceeds the per unit cost of production,

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

When economists say a good is scarce, they mean

promote instability because the time lags of monetary policy are long and unpredictable.

When policy makers are constantly shifting back and forth between expansionary and restrictive monetary policy, this is most likely to

have an incentive to develop and expand resources that are expected to be valuable in the future.

When private ownership rights are clearly defined and well enforced, owners of resources

higher taxes or interest rates, which will reduce private sector employment.

When the government finances a shovel-ready project through taxes or borrowing, this will result in

exert little impact on net employment because expansion of employment in corn production will be partially offset by less employment in other sectors as the result of the taxes.

When the government levies taxes to subsidize the producers of corn-based sugar, the subsidies will

there are alternative uses for the resource, which create a strong demand for it.

When the price of a resource is high, this indicates that

no one owned the whales or the hunting rights, thus there was no incentive to conserve whales for the future.

When whale oil was in high demand in the middle of the nineteenth century, whales were being hunted to excess because

All of the above

Which of the following actions has an opportunity cost?

development of a legal system that fairly protects people and their property

Which of the following actions would be most likely to increase economic growth in a developing country?

Business failure allows the assets and resources from that business to move into other areas where they will be more productive.

Which of the following best summarizes the importance of business failure and the central idea of creative destruction in a market economy?

The employment generated by the additional spending is highly visible, while the employment crowded out by taxing, spending, and borrowing is largely unseen.

Which of the following contributes to the popularity of the argument that government spending expands employment?

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

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

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

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

production of additional goods and services that people value highly relative to the cost of their production

Which of the following is most important for the achievement of higher income levels and living standards?

an increase in productivity

Which of the following is most likely to increase the wages of American workers?

a high rate of investment

Which of the following is most likely to lead to expansions in output and higher income levels per person?

Incentives matter; individuals respond in predictable ways to changes in personal costs and benefits.

Which of the following is often referred to as the basic postulate of economics?

Anything that widely serves as a medium of exchange, unit of account, and store of value.

Which of the following is the best definition of money?

the ability to provide others with things that they value highly

Which of the following is the primary source of high earnings among physicians and surgeons in a market economy?

the ability to provide others with things that they value highly

Which of the following is the primary source of high earnings in a market economy?

Exchange permits trading partners to expand their total output of goods and services as the result of greater specialization in areas where each has a comparative advantage.

Which of the following is true of exchange?

Life expectancy at birth for the world has exhibited a similar pattern as per person income: it changed very little between 1000 and 1800, but has increased substantially during the past 200 years.

Which of the following is true of life expectancy at birth for the world during the past 1000 years?

Profits attract businesses to productive projects, while losses discourage them from undertaking unproductive activities.

Which of the following is true?

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.

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

Exchange creates value by moving goods from parties who value them less to parties who value them more.

Which of the following most accurately states the economic significance of exchange?

slower growth in the money supply

Which of the following policies would be most likely to lower the inflation rate?

scarcity

Which of the following results because the desire for goods and services is far greater than the production capacity of an economy?

Incentives influence human behavior when they alter marginal costs and marginal benefits.

Which of the following statements about incentives is true?

1,2,and 3

Which of the following statements is/are true about voluntary trade? 1. Trade moves goods from people who value them less to people who value them more. 2. Trade lowers costs because it allows firms to use large-scale production methods. 3. Trade allows people to specialize in what they do best.

You can't have your cake and eat it too

Which of the following statements most clearly reflects the concept of opportunity costs?

Their activities were more susceptible to political influence and favoritism.

Which of the following was the result of Fannie Mae and Freddie Mac being both privately-owned and government-sponsored enterprises?

high and variable rates of inflation

Which of the following will discourage investment?

using the property in a manner that invades or infringes on the property of another

Which of the following would a private owner be prohibited from doing?

an increase in the price of oranges

Which of the following would be most likely to result from destruction of half of the Florida orange crop due to a hard freeze?

a sharp increase in the number of out-of-town students attending the local college

Which of the following would lead to an increase in the demand for rental apartments in your area?

Increased productivity will generally lead to higher earnings.

Why do individuals have a strong incentive to develop skills that enhance their productivity?

It provides owners with a strong incentive to develop and use assets in ways that others value highly.

Why is private ownership an important source of economic prosperity?

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

Young people who want to earn moderate-to-high incomes should