Exam 1

An externality is 1. a benefit or cost experienced by someone who is not a producer or consumer of a good or service 2. a cost paid for by the producer of a good or service 3. anything that is external or not relevant to the production of a good or service 4. a benefit realized by the purchaser of a good or service

1. a benefit or cost experienced by someone who is not a producer or consumer of a good or service

Which of the following is an example of a positive externality? 1. planting trees along a sidewalk which add beauty and create shade 2. a police department stops enforcing DUI laws 3. raising the speed limit to 60 mph in school zones 4. permitting smoking on commercial airplanes

1. planting trees along a sidewalk which add beauty and create shade

___________________ is a situation in which a good or service is produced at the lowest possible cost. 1. productive efficiency 2. allocative efficiency 3. equity 4. optimal marginalism

1. productive efficiency

How are the fundamental economic decisions determined in North Korea? 1. Individuals, firms and the government interact in a market to make these economic decisions 2. The United Nations decides because North Korea is a developing economy 3. The government decides because North Korea is a centrally planned economy 4. These decisions are made by the country's elders who have had much experience in answering these questions

3. The government decides because North Korea is a centrally planned economy

The total amount of producer surplus in a market is equal to 1. the area above the market supply curve and below the market price, for each unit traded 2. the area between the demand curve and the supply curve below the market price 3. the area above the market supply curve 4. the difference between quantity supplied an quantity demanded

1. the area above the market supply curve and below the market price, for each unit traded

How are the fundamental economic questions answered in a (pure) market economy? 1. Individuals, firms and the government interact in markets to decide the answers to these questions 2. Households and firms interact in markets to decide the answers to these questions 3. Large corporations alone decide the answer 4. The government alone decides the answer

2. Households and firms interact in markets to decide the answers to these questions

The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called 1. the income effect 2. consumer surplus 3. producer surplus 4. the substitution effect

2. consumer surplus

Free riding refers to a situation in which 1. markets fail to allocate resources efficiently when benefits outweigh costs 2. people consume a pure public good without payment, even though the good. may not be produced if no one chooses to pay 3. high income individuals subsidize the production of goods, such as education, that make society better off 4. the marginal cost of allowing additional consumers to consume a public good is zero

2. people consume a pure public good without payment, even though the good. may not be produced if no one chooses to pay

By definition, economics is the study of 1. supply and demand 2. the choices people make to attain their goals, given their scarce resources 3. how to make money in a market economy 4. how to make money in the stock market

2. the choices people make to attain their goals, given their scarce resources

In September 2006, the Food and Drug Administration recommended that Americans avoid eating bagged raw spinach in the wake of an outbreak of E. coli bacteria. Following this recommendation, the food industry looked at alternatives and many turned to arugula. One Chicago distributor claimed, "The sale of the stuff has gone through the roof" Based on this information 1. the cross price elasticity between arugula and spinach is negative 2. the cross price elasticity between arugula and spinach is positive 3. arugula is a normal good while raw spinach is an inferior good 4. the price elasticity of arugula is positive while the price elasticity of spinach falls to zero

2. the cross price elasticity between arugula and spinach is positive

A product is considered to be rival if 1. you can keep those who did not pay for the item from enjoying its benefits 2. your consumption of the product reduces the quantity available for others to consume 3. you cannot keep those who did not pay for the item from enjoying its benefits 4. it is jointly owned by all members of a community

2. your consumption of the product reduces the quantity available for others to consume

What is the difference between an "increase in supply" and an "increase in quantity supplied"? 1. There is no difference between the two terms: they both refer to a movement along a given supply curve 2. There is no difference between the two terms they both refer to a shift of the supply curve 3. An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" refers to a movement along a given supply curve in response to an increase in price. 4. An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" means at any given price supply has increased

3. An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" refers to a movement along a given supply curve in response to an increase in price.

Economists estimated that the cross price elasticity of demand for a beer and wine is -0.83 and the income elasticity fo wine is 5.03. This means that 1. beer and wine are substitutes and wine is a luxury good 2. beer and wine are complements and wine is an inferior good 3. beer and wine are complements and wine is a luxury good 4. beer and wine are substitutes and wine is an inferior good

3. beer and wine are complements and wine is a luxury good

If the absolute value of the price elasticity of demand for DVD movies is 0.8 then the elasticity of demand of the DVD for the movie The Hangover should be 1. less than 0.8 in absolute value 2. equal to 1 in absolute value 3. greater than 0.8 in absolute value 4. equal to zero because the DVD of this movie has been out for several years

3. greater than 0.8 in absolute value

Which of the following activities create a negative externality? 1. cleaning up the sidewalk on your block 2. repainting the house you live in to improve its appearance 3. keeping a junked car parked on your front lawn 4. graduating from college

3. keeping a junked car parked on your front lawn

The law of demand implies, holding everything else constant, that as the price of bagels increases 1. the demand for bagels will increase 2. the demand for bagels will decrease 3. the quantity of bagels demanded will decrease 4. the quantity of bagels demanded will increase

3. the quantity of bagels demanded will decrease

A product is considered to be non-excludable if 1. it is jointly owned by all members of a community 2. your consumption of the product reduces the quantity available for others to consume 3. you cannot keep those who did not pay for the item from enjoying the benefits 4. you can keep those who did not pay for the item from enjoying its benefits

3. you cannot keep those who did not pay for the item from enjoying the benefits