Review for economics- midterm

6. When government receipts exceed total government spending during a fiscal year, the difference is a. a budget surplus. b. a budget deficit. c. the national debt. d. automatically refunded.

answer is a) a budget surplus.

5. The opportunity cost of an item is a. the number of hours needed to earn money to buy the item. b. what you give up to get that item. c. usually less than the dollar value of the item. d. the dollar value of the item.

answer is b) what you give up to get that item.

9. Refer to Figure 1. Using the midpoint method, demand is unit elastic between prices of a. $18 and $24. b. $24 and $30. c. $24 and $36. d. $30 and $36.

answer is c. $24 and $ 36.

10. Trade a. allows specialization, which increases costs. b. allows specialization, which reduces costs. c. reduces specialization, which increases costs. d. reduces specialization, which reduces costs.

Answer is b) allows specialization, which reduces costs.

2. Which of the following statements is (are) correct? a. Relative to some other scientists, economists find it more difficult to conduct experiments. b. Theory and observation are important in economics as well as in other sciences. c. To obtain data, economists often rely upon the natural experiments offered by history. d. All of the above are correct.

answer 2d) all of the above are correct.

8. In addition to tax payments, the two other primary costs that a tax system inevitably imposes on taxpayers are a. deadweight losses and administrative burdens. b. deadweight losses and frustration with the political system. c. administrative burdens and tax preparation costs. d. administrative burdens and the risk of punishment for failure to comply with tax laws.

answer 8a. deadweight losses and administrative burden

8. Trade between the United States and India a. benefits both the United States and India. b. is a losing proposition for the United States because India has cheaper labor. c. is a losing proposition for India because capital is much more abundant in the U.S. than in India. d. is a losing proposition for India because U.S. workers are more productive.

answer a) benefits both the United State and India

9. An efficient tax system is one that imposes small a. deadweight losses and administrative burdens. b. marginal rates and deadweight losses. c. administrative burdens and transfers of money. d. marginal rates and transfers of money.

answer a. deadweight losses and administrative burden

9. Trade between countries tends to a. reduce both competition and specialization. b. reduce competition and increase specialization. c. increase competition and reduce specialization. d. increase both competition and specialization.

answer d) increase both competition and specialization

Chapter 2: Thinking Like an Economist 1. Economists, like mathematicians, physicists, and biologists, a. make use of the scientific method. b. try to address their subject with a scientist's objectivity. c. devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. d. All of the above are correct.

answer is 1d) all of the above are correct , make use of the scientific method, try to address their subject with a scientist objectivity, devise theories, collect data and then analyz these data in an attempt to verify or refute their theories.

2. In which of the following circumstances would a buyer be indifferent about buying a good? a. The amount of consumer surplus the buyer would experience as a result of buying the good is zero. b. The price of the good is equal to the buyer's willingness to pay for the good. c. The price of the good is equal to the value the buyer places on the good. d. All of the above are correct.

answer is 2d) all of the above. the

3. Refer to Figure 1. The price ceiling a. is binding. b. causes a shortage. c. causes the quantity demanded to exceed the quantity supplied. d. All of the above are correct.

answer is 3 d. all of the above.

4. A price floor is a. a legal minimum on the price at which a good can be sold. b. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price floor. c. a source of inefficiency in a market. d. All of the above are correct.

answer is 4 d. all of the above

2. What would happen to the equilibrium price and quantity of lattés if consumers' incomes rise and lattés are a normal good? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would increase, and the equilibrium quantity would decrease. d. The equilibrium price would decrease, and the equilibrium quantity would increase.

answer is a) both the equilibrium price and quantity would increase.

5. A budget deficit a. occurs when government receipts are less than spending. b. occurs when government spending is less than receipts. c. occurs when government receipts are equal to spending. d. is the accumulation of years of government overspending.

answer is a) occurs when government receipts are less than spending.

10. Unemployment would cause an economy to a. produce inside its production possibilities frontier. b. produce on its production possibilities frontier. c. produce outside its production possibilities frontier. d. experience an inward shift of its production possibilities frontier.

answer is a) produce inside its production possibilities frontier.

6. The circular flow diagram is a a. visual model of the economy. b. visual model of the relationships among money, prices, and businesses. c. model that shows the effects of government on the economy. d. mathematical model of how the economy works.

answer is a) visual model of the economy.

5. If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that consumer, consumer surplus amounts to a. $4. b. $16. c. $20. d. $36.

answer is a. $4.

6. Refer to Figure 1. Which area represents consumer surplus at a price of P1? a. ABD b. ACG c. BCDF d. DFG

answer is a. ABD

3. Which of the following is true? a. Efficiency refers to the size of the economic pie, equality refers to how the pie is divided. b. Government policies usually improve upon both equality and efficiency. c. As long as the economic pie continually gets larger, no one will have to go hungry. d. Efficiency and equality can both be achieved if the economic pie is cut into equal pieces.

answer is a. Efficiency refers to the size of the economic pie equality refers to how the pie is divided.

3. When a good is taxed, a. both buyers and sellers of the good are made worse off. b. only buyers are made worse off, because they ultimately bear the burden of the tax. c. only sellers are made worse off, because they ultimately bear the burden of the tax. d. neither buyers nor sellers are made worse off, since tax revenue is used to provide goods and services that would otherwise not be provided in a market economy.

answer is a. both buyers and sellers of the good are made worse off.

6. Deadweight loss measures the loss a. in a market to buyers and sellers that is not offset by an increase in government revenue. b. in revenue to the government when buyers choose to buy less of the product because of the tax. c. of equality in a market due to government intervention. d. of total revenue to business firms due to the price wedge caused by the tax.

answer is a. in a market to buyers and sellers that is not offset by an increase in government revenue.

2. If the government removes a binding price ceiling from a market, then the price paid by buyers will a. increase, and the quantity sold in the market will increase. b. increase, and the quantity sold in the market will decrease. c. decrease, and the quantity sold in the market will increase. d. decrease, and the quantity sold in the market will decrease.

answer is a. increase, and the quantity sold in the market ill increase

7. On a downward-sloping linear demand curve, total revenue reaches its maximum value at the a. midpoint of the demand curve. b. lower end of the demand curve. c. upper end of the demand curve. d. It is impossible to tell without knowing prices and quantities demanded.

answer is a. midpoint of the demand curve.

2. The government taxes corporate income on the basis of a. profit. b. the amount the firm receives for the goods or services it sells. c. the number of employees. d. All of the above are correct.

answer is a. profit

3. The price elasticity of demand measures how much a. quantity demanded responds to a change in price. b. quantity demanded responds to a change in income. c. price responds to a change in demand. d. demand responds to a change in supply.

answer is a. quantity demanded responds to a change in price.

2. When consumers face rising gasoline prices, they typically a. reduce their quantity demanded more in the long run than in the short run. b. reduce their quantity demanded more in the short run than in the long run. c. do not reduce their quantity demanded in the short run or the long run. d. increase their quantity demanded in the short run but reduce their quantity demanded in the long run.

answer is a. reduce their quantity demanded more in the long run than in the short run.

4. A tax levied on the sellers of a good shifts the a. supply curve upward (or to the left). b. supply curve downward (or to the right). c. demand curve upward (or to the right). d. demand curve downward (or to the left).

answer is a. supply curve upward (or to the left)

3. Refer to Figure 1. In this market, equilibrium price and quantity, respectively, are a. $15 and 400 units. b. $20 and 600 units. c. $25 and 500 units. d. $25 and 800 units.

answer is b) $20 and 600 units

10. Taxes create deadweight losses because they a. reduce costs for firms. b. distort incentives. c. cause prices to decrease. d. create revenue for the government.

answer is b) distort incentives

4. Refer to Figure 1. At a price of $20, which of the following statements is not correct? a. The market is in equilibrium. b. Equilibrium price is equal to equilibrium quantity. c. There is no pressure for price to change. d. The quantity of the good that is bought and sold is 600 units.

answer is b) equilibrium price is equal to equilibrium quantity.

7. A rational decision maker takes an action only if the a. marginal benefit is less than the marginal cost. b. marginal benefit is greater than the marginal cost. c. average benefit is greater than the average cost. d. marginal benefit is greater than both the average cost and the marginal cost.

answer is b) marginal benefits is greater than the marginal cost.

Chapter 4: Elasticity and its Applications 1. A 10 percent increase in gasoline prices reduces gasoline consumption by about a. 6 percent after one year and 2.5 percent after five years. b. 2.5 percent after one year and 6 percent after five years. c. 10 percent after one year and 20 percent after five years. d. 0 percent after one year and 1 percent after five years.

answer is b. 2.5 percent after one year and 6 percent after five year

8. When demand is inelastic, a decrease in price will cause a. an increase in total revenue. b. a decrease in total revenue. c. no change in total revenue but an increase in quantity demanded. d. no change in total revenue but a decrease in quantity demanded.

answer is b. a decrease in total revenue.

8. Suppose consumer income increases. If grass seed is a normal good, the equilibrium price of grass seed will a. decrease, and producer surplus in the industry will decrease. b. increase, and producer surplus in the industry will increase. c. decrease, and producer surplus in the industry will increase. d. increase, and producer surplus in the industry will decrease.

answer is b. increase, and producer surplus in the industry will increase.

3. Consumer surplus a. is the amount of a good that a consumer can buy at a price below equilibrium price. b. is the amount a consumer is willing to pay minus the amount the consumer actually pays. c. is the number of consumers who are excluded from a market because of scarcity. d. measures how much a seller values a good.

answer is b. is the amount a consumer is willing to pay minus the amount the consumer actually pays.

9. If the number of sellers in a market increases, then the a. demand in that market will increase. b. supply in that market will increase. c. supply in that market will decrease. d. demand in that market will decrease.

answer is b. supplly in the market will increase

Chapter 12: The design of the Tax System 1. A person's tax liability refers to a. the percentage of income that a person must pay in taxes. b. the amount of tax a person owes to the government. c. the amount of tax the government is required to refund to each person. d. deductions that can be legally subtracted from a person's income each year.

answer is b. the amount of tax a person owes to the government.

Chapter 6: Demand Supply and Government Policies 1. If a price ceiling is not binding, then a. the equilibrium price is above the price ceiling. b. the equilibrium price is below the price ceiling. c. it has no legal enforcement mechanism. d. None of the above is correct because all price ceilings must be binding.

answer is b. the equilibrium price is below the price ceiling

5. If a shortage exists in a market, then we know that the actual price is a. above the equilibrium price, and quantity supplied is greater than quantity demanded. b. above the equilibrium price, and quantity demanded is greater than quantity supplied. c. below the equilibrium price, and quantity demanded is greater than quantity supplied. d. below the equilibrium price, and quantity supplied is greater than quantity demanded.

answer is c) below the equilibrium price, and quantity demand is greater than quantity supplied.

4. A circular flow model and production possibilities frontier are similar in that a. neither allows economic analysis to occur. b. neither can be represented visually on a graph. c. both make use of assumptions. d. both make use of complex equations to arrive at solutions.

answer is c) both make use of assumptions.

8. When an economy is operating at a point on its production possibilities frontier, then a. consumers are content with the mix of goods and services that is being produced. b. there is no way to produce more of one good without producing less of the other. c. equal amounts of the two goods are being produced. d. All of the above are correct.

answer is c) equal amounts of the two goods are being produced.

7. In the markets for goods and services in the circularflow diagram, a. households and firms are both buyers. b. households and firms are both sellers. c. households are buyers and firms are sellers. d. households are sellers and firms are buyers.

answer is c) households are buyers and firms are sellers

7. When the price of a good is higher than the equilibrium price, a. a shortage will exist. b. buyers desire to purchase more than is produced. c. sellers desire to produce and sell more than buyers wish to purchase. d. quantity demanded exceeds quantity supplied.

answer is c) sellers desire to produce and sell more than buyers wish to purchase.

10. A minimum wage that is set above a market's equilibrium wage will result in an excess a. demand for labor, that is, unemployment. b. demand for labor, that is, a shortage of workers. c. supply of labor, that is, unemployment. d. supply of labor, that is, a shortage of workers.

answer is c) supply of labor, unemployement

6. A rational decisionmaker a. ignores marginal changes and focuses instead on "the big picture." b. ignores the likely effects of government policies when he or she makes choices. c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action. d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of that action and previous actions.

answer is c) takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.

9. Which of the following is not correct? a. The economy contains many labor markets for different types of workers. b. The impact of the minimum wage depends on the skill and experience of the worker. c. The minimum wage is binding for workers with high skills and much experience. d. The minimum wage is not binding when the equilibrium wage is above the minimum wage.

answer is c) the minimum wage is binding for workers with higher skills and much experience.

9. Efficiency is illustrated by a. both the production possibilities frontier and the circular flow diagram. b. neither the production possibilities frontier nor the circular flow diagram. c. the production possibilities frontier only. d. the circular flow diagram only.

answer is c) the production possibilities frontier only.

10. A manufacturer produces 400 units when the market price of $10 per unit and produces 600 units when the market price is $12 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is about a. 0.45. b. 2.0. c. 2.2. d. 200.

answer is c. 2.2.

5. If the price elasticity of demand for a good is 0.4, then a 10 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded.

answer is c. 4 percent decrease in the quantity in the quantity demanded.

6. If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a a. 0.0125 percent increase in the quantity demanded. b. 4 percent increase in the quantity demanded. c. 5 percent increase in the quantity demanded. d. 80 percent increase in the quantity demanded.

answer is c. 5 percent increase in the quantity demanded

10. Refer to Figure 2. At equilibrium, producer surplus is represented by the area a. F. b. F+G. c. D+H+F. d. D+H+F+G+I.

answer is c. D+H+F

Calvin is willing to only pay $10. 4. Refer to Table 1. If the price of the product is $15, then who would be willing to purchase the product? a. Lori b. Lori and Audrey c. Lori, Audrey, and Zach d. Lori, Audrey, Zach, and Calvin

answer is c. Lori, Audrey and Zach.

7. Refer to Figure 3. Which of the following statements is correct? a. The amount of the tax per unit is $6. b. The tax leaves the size of the market unchanged. c. The tax is levied on buyers of the good, rather than on sellers. d. All of the above are correct.

answer is c. The tax is levied on buyers of the good, rather than on sellers.

6. Refer to Table 1. A price ceiling set at $5 will a. be binding and will result in a shortage of 50 units. b. be binding and will result in a shortage of 75 units. c. be binding and will result in a shortage of 125 units. d. not be binding.

answer is c. be binding and will result in a shortage of 125 units.

Chapter 7 Consumer, Producer, and the Efficiency of Markets 1. A consumer's willingness to pay directly measures a. the extent to which advertising and other external forces have influenced the consumer's preferences. b. the cost of a good to the buyer. c. how much a buyer values a good. d. consumer surplus.

answer is c. how much a buyer values a good.

4. All of the following are transfer payments except a. Medicaid. b. unemployment compensation. c. personal income taxes. d. Food Stamps.

answer is c. personal income taxes

2. The government's benefit from a tax can be measured by a. consumer surplus. b. producer surplus. c. tax revenue. d. All of the above are correct.

answer is c. tax revenue

5. A $3.50 tax per gallon of paint placed on the sellers of paint will shift the supply curve a. downward by exactly $3.50. b. downward by less than $3.50. c. upward by exactly $3.50. d. upward by less than $3.50.

answer is c. upward by exactly $3.50.

7. Producer surplus directly measures a. the well-being of society as a whole. b. the well -being of buyers and sellers. c. the well -being of sellers. d. sellers' willingness to sell.

answer is c. will-being of sellers.

4. Government policies designed to equalize the distribution of economic wellbeing include (i) the welfare system (ii) unemployment insurance (iii) progressive income tax a. (i) only b. (ii) only c. (i) and (ii) only d. (i), (ii), and (iii)

answer is d) (i), (ii), and (iii)

3. Economists make assumptions in order to a. mimic the methodologies employed by other scientists. b. minimize the number of experiments that yield no useful data. c. minimize the likelihood that some aspect of the problem at hand is being overlooked. d. focus their thinking on the essence of the problem at hand.

answer is d) focus their thinking on the essence of the problem at hand.

5. A model can be accurately described as a a. theoretical abstraction with very little value. b. device that is useful only to the people who created it. c. realistic and carefully constructed theory. d. simplification of reality.

answer is d) simplification of reality

6. Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a a. shortage to exist and the market price of roses to increase. b. shortage to exist and the market price of roses to decrease. c. surplus to exist and the market price of roses to increase. d. surplus to exist and the market price of roses to decrease.

answer is d) surplus to exist and the market price of roses to decrease.

Chapter 3: Demand and Supply 1. What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce steamed milk, which is used to make lattés, and scientists discovered that coffee prevents heart attacks? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would increase, and the effect on equilibrium quantity would be ambiguous. d. The equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous.

answer is d) the equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous.

7. Refer to Figure 1. Suppose the government imposes a tax of P' to P'''. Total surplus before the tax is measured by the area a. I+Y. b. J+K+L+M. c. L+M+Y. d. I+J+K+L+M+Y.

answer is d. I+J+K+L+M+Y.

5. Refer to Figure 2. When the price ceiling applies in this market, and the supply curve for gasoline shifts from S1 to S2, a. the market price will increase to P3. b. a surplus will occur at the new market price of P2. c. the market price will stay at P1. d. a shortage will occur at the new market price of P2.

answer is d. a shortage ill occur at the new market price P2.

9. Total surplus is represented by the area a. under the demand curve and above the price. b. above the supply curve and up to the price. c. under the supply curve and up to the price. d. between the demand and supply curves up to the point of equilibrium.

answer is d. between the demand and supply curves up to the point of equilibrium.

8. Which of the following events must cause equilibrium quantity to fall? a. demand increases and supply decreases b. demand and supply both decrease c. demand decreases and supply increases d. demand and supply both increase

answer is d. demand and supply both decrease

4. The greater the price elasticity of demand, the a. more likely the product is a necessity. b. smaller the responsiveness of quantity demanded to a change in price. c. greater the percentage change in price over the percentage change in quantity demanded. d. greater the responsiveness of quantity demanded to a change in price.

answer is d. greater the responsiveness of quantity demanded to a change in price.

3. A transfer payment is a government payment a. to companies that provide goods or services to government agencies. b. designed to transfer funds from one government agency to another. c. which transfers revenue from the federal government to state government. d. not made in exchange for a good or service.

answer is d. not made in exchange for a good or service.

8. Rent control policies tend to cause a. relatively smaller shortages in the short run than in the long run because supply and demand tend to be more elastic in the short run than in the long run. b. relatively larger shortages in the short run than in the long run because supply and demand tend to be more elastic in the short run than in the long run. c. relatively larger shortages in the short run than in the long run because supply and demand tend to be more inelastic in the short run than in the long run. d. relatively smaller shortages in the short run than in the long run because supply and demand tend to be more inelastic in the short run than in the long run.

answer is d. relatively smaller shortages in the short run than in the long run because supply and demand tend to be more inelastic in the short tun than in the long run.

2. The phenomenon of scarcity stems from the fact that a. most economies' production methods are not very good. b. in most economies, wealthy people consume disproportionate quantities of goods and services c. governments restrict production of too many goods and services. d. resources are limited.

answer is d. resources are limited

Chapter 8: Application: The Costs of Taxation 1. Which of the following tools help us evaluate how taxes affect economic well being? (i) consumer surplus (ii) producer surplus (iii) tax revenue (iv) deadweight loss a. (i) and (ii) only b. (i), (ii), and (iii) only c. (iii) and (iv) only d. (i), (ii), (iii), and (iv)

answer is d.(i), (ii), (iii), and (iv)

7. One tax system is less efficient than another if it a. places a lower tax burden on lowerincome families than on higher income families. b. places a higher tax burden on lower income families than on higher income families. c. raises the same amount of revenue at a higher cost to taxpayers. d. raises less revenue at a lower cost to taxpayers.

the answer is c) raises the same amount of revenue at a higher cost to taxpayers.

1. Resources are a. scarce for households but plentiful for economies. b. plentiful for households but scarce for economies. c. scarce for households and scarce for economies. d. plentiful for households and plentiful for economies.

the answer is c) scarce for households and scarce for economies