Econ Test 1

Suppose there is an external cost, or negative externality, associated with production of a certain good. What's wrong with letting the market determine how much of this good will be produced?

An external cost is a cost not reflected in the price of the good and therefore is ignored by the buyers of the good. Consequently, too much of the good is produced and purchased because the market allocates resources without regard to this externality.

Explain how production after the Industrial Revolution differed from production under the cottage industry system.

Cottage industry system- material was provided to rural households, each of which specialized in only one stage of production and was unsupervised. Transportation costs were relatively high since the raw material had to be transported to each of the households and the finished goods collected from each. After the Industrial Revolution, production became more centralized, large factories, which led to a more efficient division of labor and direct supervision. Centralizing production led to reduced transportation costs.

Often it is said that government is necessary when private markets fail to work effectively and fairly. Based on your reading of the text, discuss how private markets might break down.

(1) Private markets may fail to safeguard private property and enforce contracts. In a completely private market, firms may collude to avoid competition. (2) Certain industries may be most efficiently organized as monopolies, but the private market may allow such industries to charge prices higher than are socially optimal. (3) Private firms may not find it profitable to produce public goods. (4) Prices set freely by the market often fail to reflect the costs or benefits imposed by externalities. (5) Private markets can lead to a very unequal distribution of income. (6) Finally, private markets do not guarantee full employment, price stability, and economic growth.

What factors does a householder consider when deciding whether to produce a good or service at home or buy it in the marketplace?

(1) What skills or resources needed (2) Will it help to avoid taxes? (3) will making it at home be cheaper than buying (4) is the technology available householder performs a task if his or her opportunity cost is lower than the price of buying the good

What variables influence the demand for a normal good? Explain why a reduction in the price of a normal good does not increase the demand for that good.

1. consumer income 2. changes in prices of other goods 3. Consumer expectations 4. Change in population 5. Consumer tastes A reduction in the price of a normal good causes a movement along the demand curve, an increase in quantity demanded, not an increase in demand.

What kinds of changes in underlying conditions can cause the supply curve to shift? Give some examples and explain the direction in which the curve shifts.

1. technology, the prices of resources (inputs to production), 2. prices of other goods (those goods that use some of the 3. price of resources 4. producer expectations 5. number of suppliers Supply will decrease, shift to the left, if one of these occurs: A more expensive technology has to be used due to safety regulations. The price of a resource increases, raising the costs of production. The price of another good—one that can be produced using the same resources as the good in question—increases. The future price of the product is expected to be higher. The number of producers decreases. Supply will increase, shift to the right, if one of these occurs: A more efficient technology is discovered, reducing production costs. The price of a resource decreases, lowering the costs of production. The price of another good decreases. The future price of the product is expected to be lower. The number of producers increases. Gasoline is a resource in the production of many goods. A rise in the price of this important resource increases the costs of production and causes the supply of many products to decrease, shifting their supply curves to the left.

What are the sources of government revenue in the United States? Which types of taxes are most important at each level of government? Which two taxes provide the most revenue to the U.S. federal government?

Federal- individual income tax State- income and sales tax Local government- property taxes. 2 greatest sources of tax revenue, personal income taxes (44 percent) and payroll taxes (36 percent).

In economic analysis, what are the assumed objectives of households, firms, and the government?

Households -maximize utility Firms - maximizing profits. Government- maximize the number of votes that they expect to receive in the next election.

Explain the effect of an increase in consumer income on demand for a good.

Increased income leads to greater demand for normal goods and lower demand for inferior goods.

How did the institution of the firm get a boost from the advent of the Industrial Revolution? What type of business organization existed before this?

Industrial Revolution- became more efficient to organize several stages of production under a single entity. Prior to the Industrial Revolution, was cottage industry- households turned raw materials into finished goods.

Why does international trade occur? What does it mean to run a deficit in the merchandise trade balance?

International trade is countries specializing in the production of those goods and services in which they have a comparative advantage and then trade those goods with countries that have comparative advantages in the production of other goods and services. A deficit indicates that the country is buying more goods from other countries than it is selling to other countries.

What is the law of demand? Give two examples of how you have observed the law of demand at work in the "real world." How is the law of demand related to the demand curve?

Law of demand- as price drops the quantity increases. 1. students buying less gasoline when the price per gallon rises 2. buying fewer take-out pizzas when the price of pizza rises. As the price of the good rises, the quantity demanded decreases. As the price of the good falls, the quantity demanded increases.

How do markets coordinate the independent decisions of buyers and sellers?

Markets provide information about the price, quantity, and quality of products for sale. The interaction of the buyers and sellers is coordinated in a way that guides resources and products to their highest valued uses.

What's the difference between money income and real income?

Money income is the actual dollar amount of income that is brought home from labor. Real income is the amount of goods and services the money income will buy.

What are the effects on the equilibrium price and quantity of steel if the wages of steelworkers rise and, simultaneously, the price of aluminum rises?

Quantity goes down when wages rise, the supply curve shifts leftward, increasing equilibrium price. The increase in the price of aluminum (a substitute for steel) should lead to an increase in the demand for steel. The rightward shift in demand will push equilibrium price and quantity up. The price is indeterminate depending on how much the demand and supply shift.

Distinguish between a tariff and a quota. Who benefits from and who is harmed by such restrictions on imports?

Tariffs are trade restrictions in the form of taxes on imports. They affect sales by changing the price of the good, but they do not directly limit the quantity. Quotas directly limit the quantity of the good that can be imported from a country, but price effects are only indirect. Domestic producers and their employees benefit from trade restrictions on imports as both the price and quantity sold of domestic production increase. Domestic consumers are harmed as they face higher prices. Domestic exporters and their employees also suffer as the overall volume of trade is reduced. The government can benefit from revenues generated by the tariffs and the selling of import licenses under a quota.

What is the law of supply? What is the relationship between the law of supply and the supply curve?

The law of supply- amount of a good that producers are willing and able to sell per period related to the price Supply curve- curve showing the relation between price of a good and the quantity producers are willing and able to sell per period

What are the disadvantages of the sole proprietorship form of business?

The owner of a sole proprietorship faces unlimited liability for the debts of the firm, they are in charge of everything

Distinguish between the substitution effect and income effect of a price change. If a good's price increases, does each effect have a positive or a negative impact on the quantity demanded?

The substitution effect refers to the change in a similar goods price . A price increase makes the good more expensive, so customers are more likely to buy a substitute. The income effect refers to the change in the purchasing power of the consumer's income. A price increase reduces purchasing power. The substitution effect always creates a negative impact on the quantity demanded; the income effect has a positive impact for normal goods and a negative impact for inferior goods.

If a severe frost destroys some of Florida's citrus crop, would this lead to a shift of the supply curve or a movement along the supply curve?

This would lead to a leftward shift in the supply curve because output has declined and producers are now willing and able to supply less citrus at every price.

If chocolate is found to have positive health benefits, would this lead to a shift in the demand curve or a movement along the demand curve?

This would lead to a rightward shift in the demand curve, because changing consumer tastes increase demand for chocolate at every price because of the health benefits associated with consumption.

Why are users willing to help create certain products even though few if any users are paid for their efforts?

Usually just for the fun of it. Software developers work on open-source software because of the challenge of solving problems—for the same reason that people work on crossword puzzles. Social network members enjoy participation in interactive sites such as MySpace and Facebook. Those who supply original videos to YouTube likely had fun making them and enjoy having others see their work. Some may hope their talent is discovered

For each of the following pairs of goods, determine whether the goods are substitutes, complements, or unrelated: a. Peanut butter and jelly b.Private and public transportation c. Coke and Pepsi d.Alarm clocks and automobiles e.Golf clubs and golf balls

a. Complements b. Substitutes c. Substitutes d. Unrelated e. Complements

Complete each of the following sentences: a. When the private operation of a market leads to overproduction or underproduction of some good, this is known as a(n) _________________. b. Goods that are nonrival and nonexcludable are known as __________________. c. ________________ are cash or in-kind benefits given to individuals as outright grants from the government. d. A(n) ________________ confers an external benefit on third parties that are not directly involved in a market transaction. e. __________________ refers to the government's pursuit of full employment and price stability through variations in taxes and government spending.

a. Market failure b. Public good c. Transfer payments d. Positive externality e. Fiscal policy

Classify each of the following as a durable good, a nondurable good, or a service: a. A gallon of milk b. A lawn mower c. A DVD Player d. A manicure e. A pair of shoes f. An eye exam g. A personal computer h. A neighborhood teenager mowing a lawn

a. Nondurable b. Durable c. Durable d. Service e. Nondurable f. Service g. Durable h. Service

Determine whether each of the following would increase or decrease the opportunity costs for mothers who choose not to accept work outside the home. Explain your answers. a. Higher levels of education for women b. Higher unemployment rates for women c. Higher average pay levels for women d. Lower demand for labor in industries that traditionally employ large numbers of women

a. Opportunity costs rise as higher levels of education increase the level of earnings available to women working outside the home. b. Opportunity costs fall as there are fewer chances for working outside the home. c. Opportunity costs rise as women forgo higher earnings if they do not work outside the home. d. Opportunity costs fall as there are fewer employment opportunities for women in these traditional industries.

How do you think each of the following affected the world price of oil? (Use demand and supply analysis.) a. Tax credits were offered for expenditures on home insulation. b. The Alaskan oil pipeline was completed. c. The ceiling on the price of oil was removed. d. Oil was discovered in the North Sea. e. Sport utility vehicles and minivans became popular. f. The use of nuclear power declined.

a. Such credits decreased the demand for oil and lowered the world price. b. This increased the supply of oil and lowered the world price. c. The answer depends on whether the control price had been set below equilibrium. d. This increased the supply of oil and lowered the world price. e. This increased the demand for oil and raised the world price. f. This increased the demand for oil and raised the world price.

Suppose taxes are related to income level as follows: Income Taxes $1,000 $200 $2,000 $350 $3,000 $450 a. What percentage of income is paid in taxes at each level? b. Is the tax rate progressive, proportional, or regressive? c. What is the marginal tax rate on the first $1,000 of income? The second $1,000? The third $1,000?

a. The percentages for income levels of $1,000, $2,000, and $3,000 are 20 percent, 17.5 percent, and 15 percent, respectively. b. The tax system is regressive. The marginal tax rates are 20 percent, 15 percent, and 10 percent, respectively. Income Tax Marginal Tax Rate $1,000 $200 (200/1,000) = 0.20 $2,000 $350 (350/1,000) = 0.35 − 0.20 = 0.15 $3,000 $450 (450/1,000) = 0.45 − 0.35 = 0.10

Suppose the demand and supply curves for rental housing units have the typical shapes and that the rental housing market is in equilibrium. Then, government establishes a rent ceiling below the equilibrium level. a. What happens to the quantity of housing available? b. What happens to the quality of housing and why? c. Who benefits from rent control? d. Who loses from rent control? e. How do landlords of rent-controlled apartments try to get tenants to leave?

a. The quantity of housing available falls because, at the rent-controlled price, less rental housing is supplied. b. The quality of housing deteriorates because if rent is controlled, landlords have less incentive to keep apartments in good shape. c. Anyone renting at the rent-control price is better off. d. People who would have rented an apartment at the uncontrolled price but are not able to get one at the rent-control price (after all, fewer units are available) are worse off, as are the suppliers of rental housing units. e. Landlords of rent-controlled apartments may pay a "bounty" to doormen or hire private detectives to identify lease violators. Landlords may also use professional "facilitators" to negotiate with tenants about moving out.

What happens to the equilibrium price and quantity of ice cream in response to each of the following? Explain your answers. a. The price of dairy cow fodder increases. b. The price of beef decreases. c. Concerns rise about the fat content of ice cream. Simultaneously, the price of sugar (used to produce ice cream) increases.

a. The supply curve shifts left, equilibrium price rises, equilibrium quantity falls. b. Assuming cattle can be substituted between dairy and livestock uses, dairy use becomes more attractive and the supply curve shifts right, equilibrium price falls, and equilibrium quantity rises. c. Fat concerns shift demand left, equilibrium price falls, and equilibrium quantity falls. Increase in the price of sugar leads to a leftward supply shift, equilibrium price rises, and equilibrium quantity falls. In the end, equilibrium quantity will fall but the impact on price is unclear.

Using demand and supply curves, show the effect of each of the following on the market for cigarettes: a. A cure for lung cancer is found. b. The price of cigars increases. c. Wages increase substantially in states that grow tobacco. d. A fertilizer that increases the yield per acre of tobacco is discovered. e. There is a sharp increase in the price of matches, lighters, and lighter fluid. f. More states pass laws restricting smoking in restaurants and public places.

a. This should shift the demand curve for cigarettes to the right. b. This should shift the demand curve for cigarettes to the right. c. This should shift the supply curve of cigarettes to the left d. This should shift the supply curve of cigarettes to the right. e. This should shift the demand curve for cigarettes to the left. f. This should shift the demand curve of cigarettes to the left.

Many households supplement their food budget by cultivating small vegetable gardens. Explain how each of the following might influence this kind of household production: a. Both husband and wife are professionals who earn high salaries. b. The household is located in a city rather than in a rural area. c. The household is located in a region with a high sales tax on food. d. The household is located in a region with a high property tax rate.

a. This would reduce the amount of household production. b. This would reduce household production because of the high price of land as well as other opportunity costs. c. This would increase household production. d. This would reduce the amount of household production of food, because it raises the cost of owning land

Determine whether each of the following statements is true, false, or uncertain. Then briefly explain each answer. a. In equilibrium, all sellers can find buyers. b. In equilibrium, there is no pressure on the market to produce or to consume more than is being sold. c. At prices above equilibrium, the quantity exchanged exceeds the quantity demanded. d. At prices below equilibrium, the quantity exchanged is equal to the quantity supplied.

a. True; otherwise there would be a surplus. b. True; in each period the same equilibrium quantity will be produced and sold. c. False; the quantity exchanged is exactly equal to the quantity demanded, even though the quantity supplied at prices above equilibrium will exceed the quantity demanded. d. True; the quantity supplied equals the quantity exchanged, even though the quantity demanded at prices below equilibrium will exceed the quantity supplied

How do cooperatives differ from typical businesses?

business= profit maximization cooperatives = minimize the cost of a product.

When moving along the demand curve, income must be assumed constant. Yet one factor that can cause a change in the quantity demanded is the "income effect." Reconcile these seemingly contradictory facts.

nominal (money) income, is constant as you move along a demand curve, and real income, which changes whenever the nominal income or price changes. Because the price falls as you move down the demand curve while nominal income is held constant, real income increases, leading to an increase in the quantity demanded (i.e., the income effect).