Midterm 1 Review (Units 1, 2, 8, 9, 10 of The Economy)
asset
anything of value that is owned.
economic rent formula
benefit from option taken − benefit from next best option
money
facilitates exchange
cost formula
(wage × workers) + (price of a ton of item × number of items) or (𝑤×𝐿) + (𝑝×𝑅)
interest rate
(repayment / principal) - 1
participation rate formula
labor force / working age population
What does UK GDP per capita measure? the total output of London's economy the average disposable income of a UK resident the total output of the UK residents, divided by the number of the residents the total output of the UK's economy, divided by the country's population
the total output of the UK's economy, divided by the country's population
diminishing marginal returns to consumption
the value to the individual of an additional unit of consumption declines, the more consumption the individual has.
repayment formula
principal + interest
net income
gross income - depreciation
The GDP per capita of Greece was $22,494 in 2012 and $21,966 in 2013. Based on these figures, the growth rate of GDP between 2012 and 2013 (to two decimal places) was: -2.40% 2.35% -2.35% -0.24%
-2.35%
Look again at Figure 2.14b which depicts the production function of grain for farmers under average growing conditions with the currently available technology. We can ascertain that: In a year with exceptionally good weather conditions, the production function curve will be higher and parallel to the curve above. A discovery of new high-yielding crop seeds would tilt the production function curve higher, pivoted anti-clockwise at the origin. In a year of bad drought, the production curve can slope downwards for large numbers of farmers. If there is an upper limit on the amount of grain that can be produced, then the curve will end up horizontal for large numbers of farmers.
A discovery of new high-yielding crop seeds would tilt the production function curve higher, pivoted anti-clockwise at the origin. If there is an upper limit on the amount of grain that can be produced, then the curve will end up horizontal for large numbers of farmers.
Which of the following statements are correct? A fall in the mortgage interest rate would shift up the demand curve for new houses. The launch of a new Sony smartphone would shift up the demand curve for existing iPhones. A fall in the oil price would shift up the demand curve for oil. A fall in the oil price would shift down the supply curve for plastics.
A fall in the mortgage interest rate would shift up the demand curve for new houses. A fall in the oil price would shift down the supply curve for plastics.
Which of the following variables have followed the so-called 'hockey-stick' trajectory—that is, little to no growth for most of history followed by a sudden and sharp change to a positive growth rate? GDP per capita labor productivity inequality atmospheric CO2
GDP per capita, labor productivity, and atmospheric CO2
Which of the following statements are correct? Contracts are complete in both competitive goods markets and labor markets. In a competitive goods market the buyers are price-takers, while in a labor market the buyers of employment (the firms) are price-setters. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labor markets the sellers receive economic rents. Social norms do not affect the outcomes in either goods markets or in labour markets.
In a competitive goods market the buyers are price-takers, while in a labor market the buyers of employment (the firms) are price-setters. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labor markets the sellers receive economic rents.
Look at the three isocost lines in Figure 2.8. Based on this information, what can we conclude? When the wage is £10 and the price of coal is £5, the combination of inputs at point N is more costly than the inputs at point B. Isocosts MN and FG represent the same price ratio (wage/price of coal) but different total costs of production. Isocost HJ represents a higher (wage/price of coal) ratio than isocost FG. Isocost HJ represents all points that can produce 100 metres of cloth at a particular price ratio.
Isocosts MN and FG represent the same price ratio (wage/price of coal) but different total costs of production.
A good economic model has four attributes
It is clear: It helps us better understand something important. It predicts accurately: Its predictions are consistent with evidence. It improves communication: It helps us to understand what we agree (and disagree) about. It is useful: We can use it to find ways to improve how the economy works.
Which of the following statements about a competitive equilibrium allocation are correct? It is the best possible allocation. No buyer's or seller's surplus can be increased without reducing someone else's surplus. The allocation must be Pareto efficient. The total surplus from trade is maximized.
No buyer's or seller's surplus can be increased without reducing someone else's surplus. The total surplus from trade is maximized.
Which of the following statements are correct regarding the principal-agent problem? A principal-agent problem exists in loans due to a positive possibility of the principal not being repaid. The principal-agent problem can be resolved by writing a binding contract for the borrower to exert full effort. One solution for the principal-agent problem in loans is for the borrower to provide equity. The principal-agent problem leads to credit rationing in the loans market.
One solution for the principal-agent problem in loans is for the borrower to provide equity. The principal-agent problem leads to credit rationing in the loans market.
A graph of GDP per capita for West and East Germany, Japan and Spain between 1950 and 1990. Which of the following statements is correct? Having a much lower starting point in 1950 was the main reason for East Germany's poor performance compared to West Germany. The fact that Japan and West Germany have the highest GDP per capita in 1990 implies that they found the optimal economic system. Spain was able to grow at a higher growth rate than Germany between 1950 and 1990. The difference in East and West Germany's performance proves that capitalism always promotes rapid economic growth while central planning is a recipe for stagnation.
Spain was able to grow at a higher growth rate than Germany between 1950 and 1990.
Look again at Figure 2.12 which depicts isocost lines for the 1600s and the 1700s in Britain. Which of the following is true? The flatter isocost line HJ for 1600s Britain indicates higher wages relative to the price of coal. The increase in wages relative to the cost of energy in the 1700s is represented by the outward shift of the isocost line from HJ to the parallel isocost line going through A. Had the wage level fallen together with the falling energy costs (due for example to cheaper transportation), then 1700s Britain would definitely have stayed with technology B. The comparison between isocost line FG and the parallel isocost going through B suggests that an innovation rent was earned in 1700s Britain when firms moved from technology B to A.
The comparison between isocost line FG and the parallel isocost going through B suggests that an innovation rent was earned in 1700s Britain when firms moved from technology B to A.
In Figure 8.9a, the market equilibrium output and price of the bread market is shown to be at (Q*, P*) = (5,000, €2). Suppose that the mayor decrees that bakeries must sell as much bread as consumers want, at a price of €1.50. Which of the following statements are correct? The consumer and producer surpluses both increase. The producer surplus increases but the consumer surplus decreases. The consumer surplus increases but the producer surplus decreases. The total surplus is lower than at the market equilibrium.
The consumer surplus increases but the producer surplus decreases. The total surplus is lower than at the market equilibrium.
Figure 8.14 shows the demand and supply curves for salt, and the shift in the supply curve due to the implementation of a 30% tax on the price of salt. Which of the following statements are correct? In the post-tax equilibrium, the consumers pay P₁ and the producers receive P*. The government's tax revenue is given by (P* - P0)Q1. The deadweight loss is given by (1/2)(P1 - P0)(Q* - Q1). As a result of the tax, the consumer surplus is reduced by (1/2)(Q1 + Q*)(P1 - P*).
The deadweight loss is given by (1/2)(P1 - P0)(Q* - Q1). As a result of the tax, the consumer surplus is reduced by (1/2)(Q1 + Q*)(P1 - P*).
perfect competition
The good or service being exchanged is homogeneous (it does not differ from one seller to another). There are large numbers of potential buyers and sellers of the good, each acting independently of the others. Buyers and sellers can readily know the prices at which other buyers and sellers are exchanging the good.
incomplete contract
a contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others).
credit-constrained
a description of individuals who are able to borrow only on unfavorable terms.
credit-excluded
a description of individuals who are unable to borrow on any terms.
bank
a firm that creates money in the form of bank deposits in the process of supplying credit.
deadweight loss
a loss of total surplus relative to a Pareto-efficient allocation.
competitive equilibrium
a market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded.
balance sheet
a record of the assets, liabilities, and net worth of an economic actor such as a household, bank, firm, or government.
As a student representative, one of your roles is to organize a second-hand textbook market between the current and former first-year students. After a survey, you estimate the demand and supply curves to be the ones shown in Figures 8.1 and 8.2. For example, you estimate that pricing the book at $7 would lead to a supply of 20 books and a demand of 26 books. Which of the following statements is correct? A rumor that the textbook may be required again in Year 2 would change the supply curve, shifting it upwards. Doubling the price to $14 would double the supply. A rumor that the textbook may no longer be on the reading list for the first-year students would change the demand curve, shifting it upwards. Demand would double if the price were reduced sufficiently.
a rumor that the textbook may be required again in Year 2 would change the supply curve, shifting it upwards.
Nash equilibrium
a set of strategies, one for each player in the game, such that each player's strategy is a best response to the strategies chosen by everyone else.
bank run
a situation in which depositors withdraw funds from a bank because they fear that it may go bankrupt and not honor its liabilities (that is, not repay the funds owed to depositors).
Look again at Figure 2.1 and Figure 2.19 showing graphs of real wages in England between 1300 and 2000. You are also told the following facts: During the bubonic plague of 1348 and 1351, between one-quarter and one-third of Europe's population died. In the seventeenth and eighteenth centuries, the wages of unskilled workers relative to the incomes of land owners were only one-fifth of what they had been in the sixteenth century. What can we conclude from this information? According to the Malthusian model, the fall in the population due to the bubonic plague would have led to an increase in the average productivity of workers, causing the observed rise in the real wage post-plague. The doubling and halving of the real wage index over 250 years from around 1350 is contrary to the Malthusian model. The fall in the unskilled workers' share of total output in the seventeenth and eighteenth centuries was due to the fall in their average product of labor. The fall in the relative wages of the unskilled workers in the seventeenth and eighteenth centuries was one of the factors that led to the eventual shooting up of the real wage in the nineteenth century, seen in the graph.
according to the Malthusian model, the fall in the population due to the bubonic plague would have led to an increase in the average productivity of workers, causing the observed rise in the real wage post-plague.
Pareto Efficient Allocation
allocation of goods in which no one can be made better off unless someone else is made worse off
collateral
an asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset.
Imagine that the GDP per capita of a country had doubled every 100 years. You are asked to draw both linear and ratio scale graphs that plot GDP on the vertical axis, and the year on the horizontal axis. What will be the shapes of the curves? Linear scale graph An upward-sloping curve with increasing slope (called convex shape) An upward-sloping straight line An upward-sloping straight line An upward-sloping convex curve
an upward-sloping curve with increasing slope (called convex shape)
Imagine that the GDP per capita of a country had doubled every 100 years. You are asked to draw both linear and ratio scale graphs that plot GDP on the vertical axis, and the year on the horizontal axis. What will be the shapes of the curves? Ratio scale graph An upward-sloping straight line A straight horizontal line An upward-sloping curve with decreasing slope (called concave shape) An upward-sloping convex curve
an upward-sloping straight line
liability
anything of value that is owed
net worth
assets - liabilities
The diagram shows the demand and the supply curves for a textbook. The curves intersect at (Q, P) = (24, 8). Which of the following is correct? At price $10, there is an excess demand for the textbook. At $8, some of the sellers have an incentive to increase their selling price to $9. At $8, the market clears. 40 books will be sold in total.
at $8, the market clears.
Which of the following statements is correct regarding the effects of a rise in the real wage on the labor supply of a worker? The income effect means that the worker will increase his labor supply. The substitution effect means that the worker will increase his consumption of free time. The income and substitution effects always enhance each other, leading to higher labor supply. At high wage levels, the income effect dominates the substitution effect, leading to lower labor supply.
at high wage levels, the income effect dominates the substitution effect, leading to lower labor supply.
market-clearing price
at this price there is no excess supply or excess demand.
Which of the following are examples of markets? wartime food rationing auction websites such as eBay touts selling tickets outside concert halls sale of illegal arms
auction websites such as eBay, touts selling tickets outside concert halls, and sale of illegal arms
total surplus formula
sum of WTPs of consumers − sum of MCs of producers
Which of the following statements is correct? Money is the cash (coins and notes) used as the medium of exchange to purchase goods and services. Bank money is the total money in the savers' deposit accounts at the bank. Base money is broad money minus bank money. Liquidity transformation occurs when the banks transform illiquid deposits into liquid loans.
base money is broad money minus bank money.
base money
cash held by households, firms, and banks, and the balances held by commercial banks in their accounts at the central bank, known as reserves; the liability of the central bank.
growth rate equation
change in income / original income
Which of the following are examples of private property? computers belonging to your college a farmer's land in Soviet Russia shares in a company a worker's skills
computers belonging to your college and shares in a company
consumer surplus formula
sum of WTPs − sum of prices paid
producer surplus formula
sum of prices received − sum of MCs of each unit
incentive
economic reward or punishment, which influences the benefits and costs of alternative courses of action.
law of one price
holds when a good is traded at the same price across all buyers and sellers. If a good were sold at different prices in different places, a trader could buy it cheaply in one place and sell it at a higher price in another.
Mr Bond has wealth of £500,000. He has a market income of £40,000 per year, on which he is taxed 30%. Mr Bond's wealth includes some equipment, which depreciates by £5,000 every year. Based on this information, which of the following statements is correct? Mr Bond's disposable income is £40,000. Mr Bond's net income is £28,000. The maximum amount of consumption expenditure possible for Mr Bond is £23,000. If Mr Bond decides to spend 60% of his net income on consumption and the rest on investment, then his investment is £9,200.
if Mr Bond decides to spend 60% of his net income on consumption and the rest on investment, then his investment is £9,200. (60% of his net income is £13,800, leaving £9,200 to spend on investment)
Figure 2.3 shows different technologies for producing 100 meters of cloth. From the graph, what can we conclude? Technology D is more energy-intensive than technology C. Technology B dominates technology D. Technology A is the cost-minimizing technology at all prices of coal and wages. Technology C can sometimes be a cheaper technology than A.
technology B dominates technology D.
Which of the following statements is correct? To maximize profits, firms set the wage at the level where the workers are indifferent between working and not working. Firms aim to set as high a price as possible. In equilibrium, the wage clears the labor market, so there is no unemployment. If all firms set the same price and pay the same nominal wage, then the higher the real wage that they pay, the lower is their markup.
if all firms set the same price and pay the same nominal wage, then the higher the real wage that they pay, the lower is their markup.
willingness to accept (WTA)
minimum price a seller will accept for a good
bank money
money in the form of bank deposits created by commercial banks when they extend credit to firms and households; the liability of commercial banks.
pure impatience
this is a characteristic of a person who values an additional unit of consumption now over an additional unit later, when the amount of consumption is the same now and later.
Which of the following statements are correct? Your material wealth is the largest amount that you can consume without borrowing, which includes the value of your house, car, financial savings, and human capital. Net income is the maximum amount that you can consume and leave your wealth unchanged. In economics, investment means saving in financial assets such as stocks and bonds. Depreciation is the loss in your financial savings due to unfavorable movements in the market.
net income is the maximum amount that you can consume and leave your wealth unchanged.
perfectly competitive equilibrium
no buyer or seller can benefit by altering the price they are demanding or offering. They are both price-takers. All potential gains from trade are realized.
employment rate formula
number of employed / labor force
unemployment rate formula
number of unemployed / labor force
economic rent
payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option).
myopia (short-sightedness)
people experience the present satisfaction of hunger or some other desire more strongly than they imagine the same satisfaction at a future date.
prudence
people know that they may not be around in the future, and so choosing present consumption may be a good idea.
equilibrium
something of interest does not change unless an outside or external force is introduced that alters the economic model's description of the situation
Look again at Figure 2.20, which plots real wages against population in England from the 1280s to the 1860s. According to Malthus, with diminishing average product of labor in production and population growth in response to increases in real wages, an increase in productivity will result in a larger population but not higher real wages in the long run. Based on the information above, which of the following statements is correct? Between the 1800s and the 1860s, population grows as real wages rise. This is entirely in line with Malthus's description of the economy's growth. There is a clear evidence of a persistent and continuous Malthusian trap between the 1280s and the 1800s. The Malthusian traps seem to occur in a cycle of 60 years. The Malthusian model does not take into account the possibility of a persistent positive technology shock that may offset the diminishing average product of labor.
the Malthusian model does not take into account the possibility of a persistent positive technology shock that may offset the diminishing average product of labor.
nominal wage
the actual amount received in payment for work, in a particular currency.
broad money
the amount of broad money in the economy is measured by the stock of money in circulation; the sum of bank money and the base money that is in the hands of the non-bank public.
income
the amount of profit, interest, rent, labour earnings, and other payments
Figure 2.1 shows an index of average real wages of skilled workers in London between 1264 and 2001. What can we conclude? Skilled workers were paid about £100 in 1408. The average wage in 1850 was about the same as that in 1408 in nominal terms (pounds). The average real wage was more or less constant between 1264 and 1850. The average real wage increased by around 600% between 1850 and 2001.
the average real wage increased by around 600% between 1850 and 2001.
The following example is a simplified balance sheet of a commercial bank. Based on this information, which of the following statements is correct? The bank's base money consists of cash and reserves and financial assets. Secured borrowing is borrowing with zero default risk. The bank's net worth is its cash and reserves of £2 million. The bank's leverage is 33.3.
the bank's leverage is 33.3. (leverage is total assets divided by net worth, here £100 million/£3 million = 33.3)
Look again at Figure 1.11. Which of these conclusions is suggested by the graph? The Communist Party rule in the former Soviet Union before 1990 was a complete failure. The contrasting performances of Botswana and Nigeria illustrate that rich natural resources alone do not guarantee higher economic growth, but that higher quality institutions (government, markets and firms) may also be necessary. The impressive performance of South Korea's economy implies that other countries should copy their economic system. The evidence from the Russian Federation and the former Soviet Union after 1990 shows that the replacement of central planning by capitalism led to immediate economic growth.
the contrasting performances of Botswana and Nigeria illustrate that rich natural resources alone do not guarantee higher economic growth, but that higher quality institutions (government, markets and firms) may also be necessary.
comparative advantage
the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country's cost to produce the same two goods.
Which of the following is an economic rent? The amount you pay your landlord for the use of an apartment. The amount you pay to hire a car for a weekend. The extra profit that a successful innovator makes on bringing a new product to the market before its competitors. The extra profit that a firm makes when it doubles in size and there are no changes to costs or the price for each unit of its output.
the extra profit that a successful innovator makes on bringing a new product to the market before its competitors.
Figure 8.8 shows the equilibrium of the bread market to be 5,000 loaves per day at price €2. A year later, we find that the market equilibrium price has fallen to €1.50. What can we conclude? The fall in the price must have been caused by a downward shift in the demand curve. The fall in the price must have been caused by a downward shift in the supply curve. The fall in price could have been caused by a shift in either curve. At a price of €1.50, there will be an excess demand for bread.
the fall in price could have been caused by a shift in either curve.
absolute advantage
the inputs one uses to produce this good are less than in some other person or country
subsistence level
the level of living standards (measured by consumption or income) such that the population will not grow or decline.
ceteris paribus
the literal meaning of the expression is 'other things equal'. In an economic model it means an analysis 'holds other things constant'.
depreciation
the loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence).
reservation price
the lowest price at which someone is willing to sell a good (keeping the good is the potential seller's reservation option)
Figure 8.5 shows a price-taking bakery's marginal and average cost curves, and its isoprofit curves. The market price for bread is P*= €2.35. Which of the following statements is correct? The firm's supply curve is horizontal. At the market price of €2.35, the firm will supply 62 loaves, at the point where the firm makes zero profit. At any market price, the firm's supply is given by the corresponding point on the average cost curve. The marginal cost curve is the firm's supply curve.
the marginal cost curve is the firm's supply curve.
Look again at Figure 8.18, which shows the market for Choccos and for all chocolate bars. Based on the two diagrams, which of the following statements is correct? The firm that makes Choccos chooses to produce at the bottom of the U-shaped isoprofit curve. All chocolate bars will be sold at the same price P*. The existence of many competitors means that the firm is a price-taker. The market marginal cost (MC) curve is approximately the sum of the MC curves of all the producers of the chocolate bars.
the market marginal cost (MC) curve is approximately the sum of the MC curves of all the producers of the chocolate bars.
There are two different types of producers of a good in an industry where firms are price-takers. The marginal cost curves of the two types are given below: Type A is more efficient than Type B: for example, as shown, at the output of 20 units, the Type A firms have a marginal cost of $2, as opposed to a marginal cost of $3 for the Type B firms. There are 10 Type A firms and 8 Type B firms in the market. Which of the following statements is correct? At price $2, the market supply is 450 units. The market will supply 510 units at price $3. At price $2, the market's marginal cost of supplying one extra unit of the good will depend on the type of the firm that produces it. With different types of firms, we cannot determine the marginal cost curve for the market.
the market will supply 510 units at price $3... Type A firms supply 35 units and type B firms supply 20 units. So the market supply is (10 × 35) + (8 × 20) = 510.
willingness to pay (WTP)
the maximum amount that a buyer will pay for a good
real wage
the nominal wage, adjusted to take account of changes in prices between different time periods. It measures the amount of goods and services the worker can buy.
central bank
the only bank that can create base money. Usually part of the government.
Malthusian Trap
the point at which resources are exhausted by population increase, resulting in suffering, misery, famine, starvation, and population decline.
relative price
the price of one good or service compared to another (usually expressed as a ratio).
credit rationing
the process by which those with less wealth borrow on unfavorable terms, compared to those with more wealth.
Figure 9.20 depicts the effect of union wage-setting. What can we conclude from this figure? Compared to A, at C the effort per hour is higher and therefore the firm's profit is higher. The resulting bargained wage-setting curve will be above the wage-setting curve with no union. The effect of a strong union will always be to increase unemployment. Under union wage-setting, the firm is still setting the wage that maximizes its profits.
the resulting bargained wage-setting curve will be above the wage-setting curve with no union.
liquidity risk
the risk that an asset cannot be exchanged for cash rapidly enough to prevent a financial loss.
involuntary unemployment
the state of being out of work, but preferring to have a job at the wages and working conditions that otherwise identical employed workers have
Figure 8.17 shows the effect of a tax intended to reduce the consumption of butter. The before-tax equilibrium is at A = (2.0 kg, 45 kr) and the after-tax equilibrium is at B = (1.6 kg, 54 kr). The tax imposed is 10 kr per kg of butter. Which of the following statements is correct? The producers receive 45 kr per kg of butter. The tax policy would be more effective if the supply curve were less elastic. The very elastic supply curve implies that the incidence of the tax falls mainly on consumers. The loss of consumer surplus due to tax is (1/2) × 10 × (2.0 - 1.6) = 2.0.
the very elastic supply curve implies that the incidence of the tax falls mainly on consumers.
In an economy with a population of 100, there are 80 farmers and 20 lenders. The farmers use the funds to finance the planting and tending of their crops. The rate of profit for the harvest is 12.5%, while the interest rate charged is 10%. Compare the following two cases: Case A: All farmers are able to borrow. Case B: Only 50 farmers are able to borrow. Based on this information, which of the following statements is correct? The share of total output received by the farmers who can borrow is 25%. The Gini coefficient for Case A is 0.5. The Gini coefficient for Case B is 0.6. There is a 16.7% increase in the Gini coefficient in Case B compared to Case A.
there is a 16.7% increase in the Gini coefficient in Case B compared to Case A. (0.7 is 16.7% higher than 0.6)
average product of labor
total output produced / quantity of workers
