Econ Test Review
If the demand curve for product B shifts to the right as the price of product A declines, then
A and B are complementary goods.
Which of the following statements concerning a pure public good is false?
All benefits associated with the production and use of a public good are received by the government.
Assuming competitive markets with typical supply and demand curves, which of the following statements is correct?
An increase in demand with no change in supply will result in an increase in sales.
Which of the following is a land resource?
natural gas
If one person's consumption of a good does not preclude another's consumption, the good is said to be
nonrival in consumption.
The two main characteristics of a public good are
nonrivalry and nonexcludability.
The Latin term "ceteris paribus" means
other things equal.
When producers do not have to pay the full cost of producing a product, they tend to
overproduce the product because of a supply-side market failure.
It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. In the situation described above, we would expect an
overproduction of paper in the mills.
In the insurance business, the moral hazard problem arises when
people who have car-insurance coverage drive less carefully.
For the music industry, the rise of Internet file-sharing of music has
worsened the free-rider problem.
The French term "laissez-faire" means
"let it be."
Assume the demand curve for product X shifts to the right. This might be caused by
a decline in income if X is an inferior good.
The relationship between quantity supplied and price is _____, and the relationship between quantity demanded and price is _____.
direct; inverse
If competitive industry Z is making substantial economic profit, output will
expand in industry Z, as more resources will move to that industry.
Which of the following is an example of a negative externality?
falling property values in a neighborhood where a disreputable nightclub is operating
You should decide to go to a movie
if the marginal benefit of the movie exceeds its marginal cost.
Even though local newspapers are very inexpensive, people rarely buy more than one of them each day. This fact
implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost.
Alex, Kara, and Susie are the only three people in a community. Alex is willing to pay $20 for the fifth unit of a public good; Kara, $15; and Susie, $25. Government should produce the fifth unit of the public good if the marginal cost is less than or equal to
$60.
Equilibrium price will be
$2.
Which of the following is the best example of a supply-side market failure?
A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area.
Command systems are also known as
Communism
In 2007, the price of oil increased, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are
substitute goods, and the higher price for oil increased the demand for natural gas.
Refer to the diagram. The equilibrium price and quantity in this market will be
$1.00 and 200.
Which one of the following expressions best states the idea of opportunity cost?
"There is no such thing as a free lunch."
The market system's answer to the fundamental question "Who will get the goods and services?" is essentially
"Those most willing and able to pay for them."
The market system's answer to the fundamental question "How will the system accommodate change?" is essentially
"Through the guiding function of prices and the incentive function of profits."
In constructing models, economists
make simplifying assumptions.
The market system's answer to the fundamental question "How will the system promote progress?" is essentially
"Through the profit potential that encourages development of new technology."
Refer to the diagram, which shows demand and supply conditions in the competitive market for product X. If the initial demand and supply curves are D0 and S0, equilibrium price and quantity will be
0F and 0C, respectively.
(Consider This) Since World War II,
South Korea's market economy has significantly outperformed North Korea's command economy.
What two conditions must hold for a competitive market to produce efficient outcomes?
Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.
Which of the following best describes the invisible-hand concept?
The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.
Refer to the diagram. A price of $60 in this market will result in
a surplus of 100 units.
Which of the following is an example of a public good?
a weather warning system
The main mechanism that regulates the market system is
competition
Firms are motivated to minimize production costs because
competitive pressures in the market will drive out higher-cost producers
(Consider This) In 2013, McDonald's introduced Fish McBites, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of
consumer sovereignty
If the market price of a product increases, then the total
consumer surplus will decrease.
The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called
consumer surplus.
An increase in the price of a product will reduce the amount of it purchased because
consumers will substitute other products for the one whose price has risen.
"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a nearly impossible task without markets and profits." This quotation best identifies the
coordination problem under central planning.
Which of the following is a capital resource?
software used by a firm
Other things equal, if the price of a key resource used to produce product X falls, the
supply curve of product X will shift to the right.
An emission fee levied against polluting firms will tend to shift the
supply curve of the firms to the left.
Refer to the diagram, which shows demand and supply conditions in the competitive market for product X. Given D0, if the supply curve moved from S0 to S1, then
supply has decreased and equilibrium quantity has decreased.
Where there are spillover (or external) benefits from having a particular product in a society, the government can make the quantity of the product approach the socially optimal level by doing the following, except
taxing the sellers of the product.
Refer to the diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market the indicated shift in supply may have been caused by
the development of more efficient machinery for producing this commodity.
A person should consume more of something when its marginal
benefit exceeds its marginal cost.
Running shoes and staplers are
independent goods.
Non excludability describes a condition where
there is no effective way to keep people from using a good once it comes into being.
Which of the following most closely relates to the idea of opportunity costs?
trade-offs
Continued losses in an industry will cause some firms to reduce output or eventually leave the industry.
true
Camille is at the candy store with Grandma Mary, who offers to buy her $6 worth of candy. If lollipops are $1 each and candy bars are $2 each, what combination of candy can Camille's Grandma Mary buy her?
two lollipops and two candy bars
Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle
under the demand curve and above the actual price.
Which of the following is most likely to be an inferior good?
used clothing
Examples of command economies are
Cuba and North Korea.
Consider This) Darcy and Rachel live down the hall from each other in the same dorm. Darcy likes to play her music loudly down the hall, and Rachel finds the music annoying. A Coase theorem solution for this problem would be for
Darcy and Rachel to negotiate a mutually agreeable level of volume and/or selection of music.
Which of the following is a microeconomic statement?
The price of smartphones declined 2.8 percent last year.
Which of the following is a positive statement?
The temperature is 92 degrees today.
Which of the following is one of the Five Fundamental Questions?
What goods and services will be produced?
Which of the following is not one of the five fundamental questions?
What prices will be charged for goods and services?
In which of the following statements are the terms "demand" and "quantity demanded" used correctly?
When the price of ice cream rose, the quantity demanded of ice cream fell, and the demand for ice cream toppings fell.
The alternative combinations of two goods that a consumer can purchase with a specific money income is shown by
a budget line.
Which of the following will not cause the demand for product K to change?
a change in the price of product K
Which of the following is a labor resource?
a computer programmer
Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences
a consumer surplus of $10, and Tony experiences a producer surplus of $190.
Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences
a consumer surplus of $9, and Nathan experiences a producer surplus of $3.
Microeconomics is concerned with
a detailed examination of specific economic units that make up the economic system.
A well-tested economic theory is often called
a principle.
A surplus of a product will arise when price is
above equilibrium with the result that quantity supplied exceeds quantity demanded.
Graphically, producer surplus is measured as the area
above the supply curve and below the actual price.
The 2010 Health Care Reform Law, also known as "Obamacare," includes a part known as universal coverage which requires everyone to have health insurance. One reason for this is to address the problem of
adverse selection.
Suppose an economist says that "other things equal, the lower the price of bananas, the greater the amount of bananas purchased." This statement indicates that
all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed to be constant.
Specialization—the division of labor—enhances productivity and efficiency by
all of the means identified in the other answers.
The assertion that "there is no free lunch" means that
all production involves the use of scarce resources and thus the sacrifice of alternative goods.
Which of the following is associated with macroeconomics?
an empirical investigation of the general price level and unemployment rates since 1990
Which of the following will cause the demand curve for product A to shift to the left?
an increase in money income if A is an inferior good
In a situation where an externality occurs, the "third party" refers to those who
are not directly involved in the transaction or activity.
A positive statement is one that
focuses on facts, descriptions, and theoretical relationships.
A recent study found that an increase in the federal tax on beer (which would increase the price of beer) would reduce the demand for marijuana. Based on this information we can conclude that
beer and marijuana are complementary goods.
An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that
bicycles are normal goods.
"Consumer sovereignty" means that
buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.
Suppose that Julia receives a $20 gift card for the local coffee shop, where she only buys lattes and muffins. If the price of a latte is $4 and the price of a muffin is $2, then we can conclude that Julia
can buy 5 lattes or 10 muffins if she chooses to buy only one of the two goods.
The market system is also known as ___, while the command system is also known as _____.
capitalism; socialism
Which of the following is a distinguishing feature of a command system?
central planning
The study of economics is primarily concerned with
choices that are made in seeking the best use of resources.
Kara was out jogging and, despite being tired, decided to run one more mile. Based on her actions, economists would conclude that Kara
decided that the marginal benefit of running one more mile would outweigh the cost of the additional mile.
Suppose an excise tax is imposed on product X. We expect this tax to
decrease the demand for complementary good Y and increase the demand for substitute product Z.
Assume in a competitive market that price is initially above the equilibrium level. We can predict that price will
decrease, quantity demanded will increase, and quantity supplied will decrease.
If Z is an inferior good, an increase in money income will shift the
demand curve for Z to the left.
If many people in a community get flu shots, the whole community benefits, including those that did not get flu shots. Therefore, not enough people may decide to get the shots. This is one illustration of
demand-side market failure.
People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a
demand-side market failure.
Property rights are important because they
encourage cooperation by improving the chances of mutually agreeable transactions.
It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem?
evy a Pigovian tax on the producers of paper products and use the tax revenues to clean up the river
If the price in this market was $4,
farmers would not be able to sell all their wheat.
(Last Word) In a cap-and-trade program,
government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other.
The simple circular flow model shows that
households are on the selling side of the resource market and on the buying side of the product market.
Economic systems differ from one another based on who owns the factors of production and
how economic activities are coordinated and directed.
The production possibilities curve illustrates the basic principle that
if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced.
Suppose that an individual sees a tremendous opportunity to produce and sell a new product but dismisses the idea because there is no way to exploit this opportunity for personal gain. This situation best identifies the
incentive problem under communist central planning.
Refer to the diagram, which shows demand and supply conditions in the competitive market for product X. Other things equal, a shift of the supply curve from S0 to S1 might be caused by a(n)
increase in the wage rates paid to laborers employed in the production of X.
An increase in consumer desire for strawberries is most likely to
increase the number of strawberry pickers needed by farmers.
If the demand and supply curves for product X are stable, a government-mandated increase in the price of X will
increase the quantity supplied of X and decrease the quantity demanded of X.
Assume product A is an input in the production of product B. In turn, product B is a complement to product C. We can expect a decrease in the price of A to
increase the supply of B and increase the demand for C.
A government subsidy to the producers of a product
increases product supply.
Broadly defined, competition involves
independently acting buyers and sellers and freedom to enter or leave markets.
Purposeful behavior suggests that
individuals may make different choices because of different desired outcomes.
College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are
inferior goods.
The main function of the entrepreneur is to
innovate.
An economic system
is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
An economic hypothesis
is a possible explanation of cause and effect.
If there is a surplus of a product, its price
is above the equilibrium level.
A market
is an institution that brings together buyers and sellers.
A normative statement is one that
is based on value judgments.
An efficiency loss (or deadweight loss)
is measured as the combined loss of consumer surplus and producer surplus.
The four factors of production are
land, labor, capital, and entrepreneurial ability.
The economizing problem is one of deciding how to make the best use of
limited resources to satisfy virtually unlimited wants.
At the optimal quantity of a public good,
marginal benefit equals marginal cost.
Where there is asymmetric information between buyers and sellers,
markets can produce efficient outcomes
If consumer incomes increase, the demand for product X
may shift either to the right or left.
Which of the following is a distinguishing feature of laissez-faire capitalism?
minimal government intervention
the most efficient combination of resources in producing a given output is the combination that
minimizes the cost per unit of output.
Which of the following is not considered by economists to be an economic resource?
money
Money is not an economic resource because
money, as such, does not produce anything.
Refer to the diagram. An increase in quantity supplied is depicted by a
move from point y to point x.
The market system does not produce public goods because
private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the _____ market.
product; resource
Which of the following is a fundamental characteristic of the market system?
property rights
Copyrights and trademarks are examples of
property rights.
If the production of a product or service involves external benefits, then the government can improve efficiency in the market by
providing a subsidy to correct for an underallocation of resources.
Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services they purchase. This is a reflection of
purposeful behavior.
From society's point of view, the economic function of profits and losses is to
reallocate resources from less-desired to more-desired uses.
Suppose that tacos and pizza are substitutes, and that soda and pizza are complements. We would expect an increase in the price of pizza to
reduce the demand for soda and increase the demand for tacos.
Market failures
result in overproduction or underproduction of a good
Specialization in production is important primarily because it
results in greater total output.
Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread, and potatoes are a consumer substitute for bread, we would expect the price of wheat to
rise, the supply of bread to decrease, and the demand for potatoes to increase.
In deciding whether to study for an economics quiz or go to a concert, one is confronted by the idea(s) of
scarcity and opportunity costs.
Refer to the diagram. A decrease in demand is depicted by a
shift from D2 to D1.
Refer to the diagram. A decrease in supply is depicted by a
shift from S2 to S1.
If products C and D are close substitutes, an increase in the price of C will
shift the demand curve for D to the right.
A decrease in the price of digital cameras will
shift the demand curve for memory cards to the right.
An improvement in production technology will
shift the supply curve to the right.
If the price of product L increases, the demand curve for close-substitute product J will
shift to the right.
An increase in money income
shifts the consumer's budget line to the right.
A fundamental difference between the command system and laissez-faire capitalism is that, in command systems,
the division of output is decided by central planning rather than by individuals operating freely through markets.
Macroeconomics approaches the study of economics from the viewpoint of
the entire economy.
Steve went to his favorite hamburger restaurant with $3, expecting to buy a $2 hamburger and a $1 soda. When he arrived, he discovered that hamburgers were on sale for $1 each, so Steve bought two hamburgers and a soda. Steve's response to the decrease in the price of hamburgers is best explained by
the income effect.
According to the concept of diminishing marginal utility, consumers will purchase more of a good when the price falls because
the marginal benefit of additional units of the good now outweigh the marginal cost.
A production possibilities curve shows
the maximum amounts of two goods that can be produced, assuming the full use of available resources.
At the output level defining allocative efficiency,
the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output. Correct
Allocative efficiency involves determining
the mix of output that will maximize society's satisfaction.
In moving along a supply curve, which of the following is not held constant?
the price of the product itself.
If there are external benefits associated with the consumption of a good or service,
the private demand curve will underestimate the true demand curve.
By an "increase in demand," economists mean that
the quantity demanded at each price in a set of prices is greater.
When the price of Nike soccer balls fell, Ronaldo purchased more Nike soccer balls and fewer adidas soccer balls. Which of the following best explains Ronaldo's decision to buy more Nike soccer balls?
the substitution effect
Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the third unit of a public good. Also, assume that the marginal cost of the third unit is $17. We can conclude that
the third unit should be produced.
Productive efficiency refers to
the use of the least-cost method of production.
In economics, the pleasure, happiness, or satisfaction received from a product is called
utility.
A product market is in equilibrium
where the demand and supply curves intersect.
Economic systems differ according to which two main characteristics?
who owns the factors of production and the methods used to coordinate economic activity
