Economics 202 online Test 3 TAMU

The three economic fundamental questions that must be answered by any economy include:

How much to produce, how to produce it and who gets the goods

PxMPx>W

(output price)x(marginal product)>(wage)

The key advantage of market exchange compared to one-on-one (barter) trade is that

-barter limits trade because each person must want what the other has -markets use money which is generally better -markets are more organized

Advantages of trade include that

-it permits some people to produce more than they consume -it permits specialization -it takes advantage of comparative advantage

If you have a competitive equilibrium for a two market economy consisting of tacos and enchiladas then

-the market equilibrium quantity of tacos is efficient -the market equilibrium quantity of enchiladas is efficient

Using basic assumptions you can determine

-why markets are efficient -which markets are efficient -when government intervention helps or hurts economic performance

consider a used car market in which half of the cars are bad(lemons) and the other half are good. Suppose the average price of a bad car (lemon) is $3000 and the average price of a good car is $9000. If a rational buyers are willing to pay $6000 for a used car, then the sellers will agree to sell mostly lemons at this price. What is the term used to describe this situation?

Adverse Selection

The steps needed to evaluate the best way to organize an economy include:

Determining what will be produced, how it will be produced, and who gets it and then evaluating these outcomes.

In economics, the term ________ means "additional" or "extra"

Marginal

Adam Smith's proposition or theorem consists of

Market out are efficient, those outputs are are produced efficiently and those outputs are located among the buyers in the most efficient way.

Which of the ways did the video not indicate that americans were rich compared to other societies today:

Rap music

The __________ received from the sale of an addition of a product of is marginal cost

Revenue

What is likely to happen happen in a used car market if the buyers feel the best thing they can do is buy a lemon?

The entire markets shuts down

signaling takes place in markets with

asymmetric information

Marginal Benefit refers to the additional benefit that your activity provides you

True

T/F The additional cost to a producer of hiring an additional unit of product is a marginal cost

True

Scarcity generates which general questions in an economy?

What to produce how to produce it and who gets it?

A major question that faced societies 250 years ago was

What would happen if you organized more of the economy with markets?

variable cost

costs that change with the level of output.

Which of the following is an example of adverse selection?

a customer buying a defective appliance from a used goods market

marginal decision

a firm's decision about what output level to produce. firms can control directly and immediately

_________ occurs when one agent in a transaction knows about the hidden characteristics of a good.

adverse selection

law of diminishing returns

as successive units of a variable resource are added to a fixed resource beyond some point the extra or marginal product that can be attributed to each additional unit of the variable resource will decline

Adverse Selection arise in the health insurance market because

buyers have private information

Adam Smith's Invisible Hand Theorem indicates that competitive markets are efficient because

competitive markets ensure efficient amounts of each good, produce that good at least cost, and allocate the good among costumer in the best way possible

Making "how much" decisions involves

determining the additional benefits and the additional costs of that activity

diseconomies of scales

difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large scale producer

High Premiums

discourage low risk individuals from seeking health insurance

The___of any resource used to produce a good is the value or worth the resource would have in its best alternative use

economic cost

Marginal revenue product for a competitive seller is

equal to the marginal product of labor multiplied by the output price

___ are the monetary payments a firm makes to those who provide the factors or input to production

explicit cost

When buyers and sellers operate in a competitive market, they are

following their own self interests doing whatever serves them best.

Which of the following helps in reducing the problem of adverse selection in health insurance markets?

insurance mandates

signaling

is a market based solution to the problem of adverse selection

Which of the following is not an economic question

is it better for stores to close on Sundays?

signaling

is the idea that one party credibly conveys some information about itself to another party

what is moral hazard?

it refers to the actions people take after they have entered into a transaction that makes the other party worse off.

average product

labor productivity, output per unit of labor input

Scarcity in an economy emerges from

limited resources and infinite wants

Early agricultural societies

limited the economic choices of many society members, featured significant central control of land and water

The purpose of the guilds include

managing entry, ensuring quality, keeping prices high

The extra cost associated with undertaking an activity is called

marginal cost

A restaurant sells a large soft drink at a fixed price of $1.79. A term used by economist to describe the money received from the sale of an additional large soft drink is

marginal revenue

information asymmetry in a market can lead to

market failure

The video describes the steps in simple arithmetic as proceeding from

numbers to cardinal numbers to addition to subtraction to multiplication to division

The highest valued alternative that must be given up to engage in an activity is the definition of

opportunity cost

People do not "feel" rich because

people always want more

In which of the following ways did the video not indicate that you were rich compared to King George?

power

According to the video, recycling is an economic problem because

recycling requires and produces economic resources

What is adverse selection?

refers to a situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction

when a firm's total__ exceeds all its economic costs, the residual goes to the entrepreneur

revenue

The _______ sale of an additional unit of a product is a marginal benefit to the firm

revenue received from

Economics is the study of

scarcity

a warranty is an example of

signaling

what is the difference between labor's marginal product and marginal revenue product?

the marginal product of labor is the additional labor's contribution to the firm's total output. While the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.

A firm's demand for labor curve is also known as

the marginal revenue product of labor curve

what does it mean to the entrepreneur when economic profit

the entrepreneur is covering all explicit and implicit costs including a normal profit

marginal product

the extra output or added product associated with adding a unit of a variable resources, in this case labor, to the production process

explicit cost

the monetary payments a firm makes to those from whom it must purchase resources that it does not own.

implicit cost

the opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash.

economic cost

the payment that must be made to obtain and retain the services of a resource.

economic profit

the result of subtracting all of your economic costs both explicit and implicit costs from revenue.

Adam Smith's book, the Wealth of Nations, investigated

the role of markets in determining economic efficiency

fixed costs

those costs that do not vary with changes in output, must be paid even if the output is zero

the function of the agent in the principal-agent relationship is

to perform tasks for the principal

average fixed cost formula

total fixed cost(tfc) divided by output(q)

Implicit costs are the firm's opportunity costs of using its self-owned and self-employed resources

true

The additional cost to a producer of hiring an additional unit of labor is called the marginal cost

true

When voluntary exchange takes place both, parties gain from the exchange

true

When voluntary exchange takes place, both parties gain from the exchange

true

marginal benefit refers to the additional benefit that your activity provides you

true

the average variable cost curve is

u shaped

Economics teaches us that people fundamentally

want more goods

Making optimal decisions "at the margin" requires

weighing the costs and benefits of decision before deciding if it should be persued