ECON Unit 1
If Damarius is willing to pay $100 for his economics textbook but instead only has to pay $80, his consumer surplus is:
$20
Which of the following will cause an outward (rightward) shift in supply?
A technological improvement.
Which of the following is consistent with the law of supply?
An increase in the market price of MP3 players causes an increase in the production of MP3 players.
Which of the following terms corresponds to a market where buying and selling take place at prices that violate government price regulations?
Black market
Harry Fletcher is a market analyst at an automobile firm. He forms a hypothesis that an increase in advertising will increase the demand for the firm's cars. Which of the following, if true, may result in the rejection of his hypothesis?
Car buyers base their purchasing decisions on independent reviews.
In what type of economy does the government decide how most economic resources will be allocated?
Centrally planned economy
Choco Dream is a firm that produces both dark chocolates as well as liquor chocolates. During a given month, the firm uses its resources to produce both varieties. Initially, the firm produced 5,000 bars of dark chocolates and 4,000 bars of liquor chocolates in a month. In order to increase production of the latter to 4,500, they had to reduce production of dark chocolates by 800 bars. When demand for liquor chocolates increased further, Choco Dream produced 5,000 bars of liquor chocolates and 3,200 bars of dark chocolates per month. Which of the following inferences can be drawn from the given information?
Choco Dream faces increasing marginal opportunity cost in the production of liquor chocolates.
Uber is a company that offers people transportation by drivers who use their own cars for this purpose. Customers pay for their rides with their smartphone apps. Uber's prices fluctuate with the demand for the service. This "surge pricing" can result in markedly different prices for the same distance traveled at different times of day or days of the week. Annie Lowrey, a writer for the New York Times, explained that she paid $13 for a 10 p.m. two-mile trip in downtown Washington, D.C. on New Year's Eve. Three hours later she paid $47 for the return trip to her home. Source: Annie Lowrey, "Is Uber's Surge-Pricing an Example of High Tech Gouging?" New York Times, January 10, 2014. Did she receive negative consumer surplus on her return trip?
Her willingness to pay was no less than $47, so she did not receive negative consumer surplus from this trip.
Assume the cost of aluminum used by soft-drink companies increases. Which of the following correctly describes the resulting effects in the market for canned soft drinks? I. The demand for soft drinks decreases. II. The quantity of soft drinks demanded decreases. III. The supply of soft drinks decreases. IV. The quantity of soft drinks supplied decreases.
II and III
Which of the following is a positive economic statement?
If minimum wage rates rise, then unemployment will rise.
Why is the demand curve referred to as a marginal benefit curve?
It shows the willingness of consumers to purchase a product at different prices.
Would McDonald's decision have to be all or nothinglong dash—either serve breakfast only up to 10:30 A.M. or serve breakfast all day?
No. McDonald's could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu for a period after 10:30 A.M.
Which of the following countries has an economy where most of the resource allocation is determined by a central planning authority?
North Korea
What is the name given to the highest-valued alternative that must be given up to engage in any activity?
Opportunity cost
Jim declined to take part in a health study on a free basis but changed his mind after being offered $1,000 to participate in the study. Jim's behavior best illustrates which economic principle?
People respond to economic incentives.
Prolonged shortages arise if:
Prices are not allowed to rise to equilibrium
__________ is the difference between what a producer receives for a good or service and the lowest amount they would accept for that good or service
Producer surplus
In the circular flow model, which of the following refers to markets where goods such as computers or services such as medical treatment are offered?
Product markets
Which of the following is not a possible opportunity cost of attending college?
The cost of housing
In his 1776 book, "An Inquiry into the Nature and Causes of the Wealth of Nations," Adam Smith notes that specialization increases productivity. Which of the following was the cause of this phenomenon?
The division of labor
The market for corn is initially in equilibrium. Suppose that the production of biofuels, which use corn as an input, increase, and at the same time, increases in the price of oil cause farm production costs to rise. Which of the following explains the effect on equilibrium price and quantity in the corn market?
The price of corn will rise, but the effect on equilibrium quantity cannot be determined without more information.
Briefly explain whether you agree with the following statement: "If the current quantity marginal benefit is greater than marginal cost , there will be deadweight loss in the market. However, there is no deadweight loss when marginal cost is greater than marginal benefit."
The statement is incorrect. If marginal cost is greater than marginal benefit (just as when marginal benefit is greater than marginal cost), there will be deadweight loss.
Which of the following statements about a shortage is correct?
There is no shortage of most scarce goods.
Which of the following represents an inferior good?
When consumer income increases, the demand for bologna decreases.
In what type of economy does the government decide how economic resources will be allocated?
a centrally planned economy
When you think of an arrangement or institution that brings buyers and sellers of a good or service together, what are you thinking of?
a market
Ms. Boulware is the best lawyer and the best secretary in town. She has:
an absolute advantage in both jobs
A product produced in a foreign country and purchased by residents of the home country is called:
an import
In the United States, property rights:
are guaranteed by two amendments to the U.S. Constitution
For markets to generate the greatest benefit and function in the most efficient manner they must:
be perfectly competitive
Market price is determined by _________.
both supply and demand
[Related to the Making the Connection] A news story on declining attendance at college football games noted that schools in the central time zone had particular problems with attendance at games that started at 11 a.m. The athletic director at the University of Illinois was quoted as saying, "I'm a big fan of evening games." Source: Adam Rittenberg, "Attendance Challenges Big Deal for B1G," espn.com, February 17, 2014. Playing games in the late afternoon or evening, rather than in the morning, would
change the opportunity cost for students whose alternative activities vary throughout the day.
In the circular flow model of the economy, __________ are the suppliers of goods and services.
firms
Tangible products like cars and televisions are referred to as __________.
goods
If a country has a comparative advantage in the production of a good, then that country:
has a lower opportunity cost in the production of that good
Suppose an increasing number of school districts across the country find themselves with too few teachers at a time of rising enrollments and calls for improved outcomes in terms of student performance. A market-based remedy for this emerging mismatch between the availability of teachers and school districts' needs would likely emphasize
higher compensation to elicit both a larger quantity of teacher services and a greater reliance by districts on non-traditional instruction methods.
How does producer surplus change as the equilibrium price of a good rises or falls? As the price of a good rises, producer surplus ----, and as the price of a good falls, producer surplus
increases, decreases
What is the name given to the development of a new good?
invention
Contracts, insurance, patents and accounting rules are:
inventions that make a market work better
Adam Smith observed that people pursuing their own self-interest in a free market will actually result in the best interest of society as if these actions were guided by a(n):
invisible hand.
Economics:
is concerned with how people respond to incentives
Rent controls:
make tenants less mobile
Economists believe that an individual or firm should continue any activity until:
marginal benefit is equal to marginal cost.
The United States economy is best classified as a:
mixed economy.
If an effective minimum wage is imposed, then:
more workers will be unable to find jobs
The resources provided by nature and used to produce goods and services are also known as:
natural resources
When nations specialize in their comparative advantage and engage in trade:
overall standards of living increase
The stock of computers, factory buildings and machine tools used to produce goods is known as:
physical capital
Macroeconomics is concerned with all of the following except:
political party affiliation
A legally determined maximum that sellers may charge is known as a:
price ceiling
In response to information regarding the salaries of executives at firms receiving bailout funds in the United States, some people called for a limit on the salaries paid to executives. Such a limit on the compensation executives can receive is an example of a:
price ceiling
Economics is the study of choice under conditions of:
scarcity
The principle of opportunity cost evolves from the concept of:
scarcity
Prolonged agricultural surpluses can arise if governments:
set the price above equilibrium
Price controls that put a price ceiling on goods and services create __________.
shortages
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the _ the payoff to devoting additional resources to that activity.
smaller
Price controls that put a price floor on goods and services create __________.
surpluses
Consumer surplus is
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.
Producer surplus is
the difference between the lowest price a firm would be willing to accept and the price it actually receives.
Given linear demand curves, if demand and supply both increase but demand increases by a greater amount than supply, then:
the equilibrium price and quantity both increase.
Given linear demand curves, if demand and supply increase by identical amounts, then:
the equilibrium price stays the same and the equilibrium quantity rises.
Given linear demand curves, if demand increases and supply decreases, then __________.
the equilibrium price will increase but the effect on the equilibrium quantity will be ambiguous
All of the following scenarios depict the characteristics of complements except:
the price of coffee increases and the demand for cream increases.
According to a news story about the International Energy Agency, the agency forecast that "the current slide in [oil] prices won't [reduce] global supply." Source: Sarah Kent, "Plunging Oil Prices Won't Dent Supply in Short Term," Wall Street Journal, December 12, 2014. Would a decline in oil prices ever cause a reduction in the supply of oil?
No, a decline in oil prices would reduce the quantity of oil supplied, not the supply of oil.
How does consumer surplus change as the equilibrium price of a good rises or falls? As the price of a good rises, consumer surplus ---- and as the price of a good falls, consumer surplus -----
Decreases, increases
According to the rationality assumption, people:
Do not intentionally make decisions that would leave them worse off.
Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors? Why or why not?
Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is."
Economic decisions are made at every level in society. When we try to decide which production method to use among several alternatives, which of the following key economic questions are we trying to answer?
How do we produce the products?
A student makes the following argument: "When a market is in equilibrium, there is no consumer surplus LOADING... . We know this because in equilibrium, the market price is equal to the price consumers are willing to pay for the good." Briefly explain whether you agree with the student's argument.
The student is incorrect because the price consumers are willing to pay and the market price are only equal for the last unit consumed.
The sugar quota in the United States creates winners and losers. The winners are __________ and the losers are __________.
U.S. sugar producers, U.S. sugar consumers
What are copyrights designed to accomplish?
What are copyrights designed to accomplish?
Other things remaining equal, the law of demand says that higher prices will lead to:
a smaller quantity demanded and lower prices to a larger quantity demanded.
Economists assume that when there is a change in demand and/or supply, that prices reach a new equilibrium:
after an adjustment period that varies.
According to the theory of comparative advantage, specialization and free trade will benefit:
all trading partners who specialize in goods where they have comparative advantage
__________ goods and services are those bought by businesses to be used to increase efficiency or enhance production.
capital
The difference between the highest price a consumer is willing to pay for a good or service, and the price they actually pay is called:
consumer surplus.
Complete the following statement: "When there is a shortage LOADING... of a good
consumers compete against one another by bidding the price upward.
In late 2014, oil prices were falling but some energy traders were convinced that oil prices would begin to rise within a few months. According to a news story, these expectations were causing some "traders to put oil in storage while they wait for prices to rise." Source: Nicole Friedman, "Saudi Arabia's Surprise Move Spurs Quirk for U.S. Oil Futures," Wall Street Journal, November 4, 2014. Holding some oil in storage rather than selling it would
decrease the supply of oil, shifting it to the left.
One of the first steps in deciding whether to complete your education is to:
evaluate the marginal cost and marginal benefit of that decision.
Black markets may arise if:
price ceilings exist
Do producers tend to favor price floors or price ceilings? Why? Producers favor
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
Absolute advantage is the ability of an individual, firm, or country to:
produce more of a good or service than competitors using the same amount of resources
At the market equilibrium price:
quantity demanded equals quantity supplied.
The role of the entrepreneur always involves:
taking risks
Marginal benefit is
the additional benefit from consuming one more unit.
A news story titled "Auto Sales Zoom, Helped by Low Prices at the Pump" includes a graphic showing increasing car and truck sales in one panel and decreasing gasoline prices in the other panel. Source: "Auto Sales Zoom, Helped by Low Prices at the Pump," Wall Street Journal, December 3, 2014. The graphic described assumes that autos and gasoline are
complements, because if the price of gasoline decreases, the demand for its complements, cars and trucks, increase.
Discussions of the economic results of rent control and of federal farm programs would be considered ________ analysis, and discussions of whether rent control and the farm programs are good or bad policies would be considered ________ analysis.
positive; normative
A legally determined minimum price that sellers must receive is known as a:
price floor
According to the FBI Bank Crime Statistics, there were nearly 4,000 bank robberies in the United States in 2014. The FBI claims that banks have made themselves easy targets by refusing to install clear acrylic partitions, called bandit barriers, that separate bank tellers from the public. According to a special agent with the FBI, "Bandit barriers are a great deterrent. We've talked to guys who rob banks, and as soon as they see a bandit barrier, they go find another bank." Sources: U.S. Department of Justice, Federal Bureau of Investigation, "Bank Crime Statistics (BCS) Federally Insured Financial Institutions, January 1, 2014-December 31, 2014," www.fbi.gov; and Richard Cowen, "FBI: Banks Are to Blame for Rise in Robberies," NorthJersey.com, March 10, 2009. Despite this finding, many banks have been reluctant to install these barriers. Wouldn't banks have a strong incentive to install bandit barriers to deter robberies? Why, then, do so many banks not do so?
Banks have no economic incentive to install the barriers.
Washington state had a bumper apple crop this year, significantly increasing the supply of apples in the U.S. Given this information, choose the statement that correctly describes the effect on the U.S. apple market.
The quantity of apples demanded will increase as the price of apples falls.
A country that imports a substantial amount of gasoline every year imposed a $1.2 per gallon excise tax on gasoline, to be paid by sellers. The equilibrium price of gasoline prior to the tax was $4 per gallon. Gasoline being a necessary good, its demand curve is steep and the consumers had to bear the bulk of the tax burden. The post-tax price of gasoline went up to $5 per gallon, causing the country's media to claim that it was unfair that people should have to pay so high a price for such an important consumption item. They further believed that such a high tax was inefficient and could not be justified. Which of the following inferences can be drawn from this information?
The sellers of gasoline now receive 20 cents less than the pre-tax price.
[Related to Solved Problem #4] The demand for grapefruitsgrapefruits is highest during summer and lowest during winter. Yet grapefruitgrapefruit prices are normally lower in summer than in winter. What must be happening to the supply of grapefruitsgrapefruits, from winter to summer, for the equilibrium price to fall?
The supply increases more than the demand increases.
Recent medical research revealed that the presence of gluten in oats can cause celiac disease in the elderly. Since the elderly are an important consumer segment in this market, industry experts predicted a fall in the price of commercially-available oats. However, after the publication of the research, the price of oats actually increased. Which of the following, if true, would explain this outcome?
The supply of oats came down drastically, with some major participants exiting the market.
Which of the following is critical to the success of the market system?
To allow individuals or firms to have exclusive use of their property
[Related to Solved Problem #1] McDonald's typically serves breakfast until only 10:30 a.m. on weekdays and 11:00 a.m. on weekends. In 2015, the company began to experiment with serving breakfast all day at various locations in San Diego. Several owners of McDonald's restaurants, however, point out that offering breakfast 24 hours a day presents two logistical problems: (1) Burgers and other meats need to be cooked at a higher temperature than eggs, so it would be difficult for employees to set the grill at the right temperature for both foods; and (2) scrambled eggs require employees to continually stir, while hamburgers don't require this attention. In addition, some customers might buy the cheaper breakfast than the more expensive lunch or dinner meals. Source: Associated Press, "McDonald's Gives All-Day Breakfast a Test Try," usatoday.com, March 30, 2015; and Susan Befield and Leslie Patton. "What So Hard About a 24/7 McMuffin?" Bloomberg Busines Week, May 12, 2013. From an economics perspective, to determine whether to serve breakfast all day, McDonald's should
compare the marginal revenue from serving breakfast all day with the marginal cost of serving breakfast all day.
Macroeconomics can be used to understand all of the topics listed below, except:
how a consumer decides between the purchase of two different cars
Some people believe there should be a legally determined minimum price for farm products such as milk. A limit on the price of milk would be an example of:
price floor
A numerical limit on the quantity of a good that can be imported is a:
quota
Price performs a(n) __________ function. Inputs or outputs go to the __________ bidders if people are free to exchange voluntarily in the markets without government intervention or other market friction.
rationing, highest
In a price system:
relative prices change constantly to reflect changes in supply and demand.