Principles of Microeconomics : EC111 : Exam 2 Review Guide

Label each of the following below as either a price ceiling or a price floor: (a) Rent control is an example of a price _____. (b) A minimum wage is an example of a price _____. (c) Usury laws on payday loan companies are an example of a price _____. (d) Canadian price regulations on the minimum price of alcohol are an example of a price _____.

(a) ceiling (b) floor (c) ceiling (d) floor

What is the basic idea behind comparative advantage?

Comparative advantage is based on the idea of opportunity cost. The person who gives up the least to produce an item has a comparative advantage in producing that item. If each item is produced by the person who gives up the least to produce the item, then society will be able to produce as much as possible out of its limited resources.

The price of a cup of coffee goes up. This communicates to Stella that coffee has become more valuable. Price is functioning as a. a signal. b. an incentive. c. a bundle of information. d. a producer.

a. a signal.

Price is functioning as a signal when it a. is a line of communication between buyers and sellers in a market. b. creates incentives for changes in production and consumption. c. broadcasts useful information. d. summarizes all that is happening in the market.

a. is a line of communication between buyers and sellers in a market.

Globalization: a. is the increasing economic, political, and cultural integration of different countries. b. is associated with a reduction in international trade. c. has made all parties involved better off. d. is associated with an increase in barriers to trade.

a. is the increasing economic, political, and cultural integration of different countries.

Which of the following is MOST likely to be traded internationally? a. land b. hair gel c. bowling alleys d. taxi rides

b. hair gel

Statements about what option should be chosen are _____ statements. a. positive b. normative c. valuation d. assessment

b. normative

In markets, prices act as all of the following except a. incentives. b. signals. c. productivity. d. information.

c. productivity.

Measurement of economic efficiency provides important information about the functioning of a market. Why should this information be used cautiously?

Economic efficiency measurement conveys information about the waste or lack of waste in a market and the ways the market contributes to overall welfare. It focuses on results. However, efficiency is not the only goal that society may have, and the measurement of efficiency is not perfect. There are three concerns about a heavy focus on efficiency: (1) it does not address the issue of equity, (2) the demand curve may reflect both the ability to pay as well as marginal benefit rather than solely marginal benefit, and (3) the means may be as important to some as the results.

Pedro attends a university that requires all students, faculty, and staff to have antivirus software on their personal computers and even provides — at no cost to students, faculty, and staff — antivirus software for their personal computers. Why would the university pay for the protection for the personal computers of students, faculty, and staff?

This is an example of company rules targeting externalities. If one person (students, faculty, or staff) gets a virus, that one person a problem that can make the use of his or her private computer more difficult. However, if one person's computer gets a virus, he or she can inadvertently share the virus with others whenever he or she has virtual contact with them through the infected computer. This is a negative externality when it impacts others. When students, faculty, or staff share files, viruses can be spread. If students, faculty, or staff share files from a home computer or through a home computer to a campus computer or system, a virus can be spread to the campus system of computers. For example, a student could upload a file to the university learning management system, or a faculty member or staff member could reply to a student email from a home computer. Once the virus is in the university system, it can spread and be difficult for the university to eradicate. Thus, it is simpler for the university to minimize the risk by paying for all students, faculty, and staff to have antivirus software on their personal or home computers.

What problem results in markets when the good is a public good, and how can the government solve the problem?

Underproduction occurs in the market for a public good. This underproduction can be so severe that the market falls apart and the good is not produced even though it is desired. No one wants to buy the good because each hopes to be a free rider if someone else buys it. With no one buying, sellers do not earn the revenue needed to cover their costs. The government can deal with the free-rider problem by forcing everyone to "buy" the public good by forcing everyone to pay taxes and then using part of the tax revenue to pay for the public good. The government may produce the public good or pay a private firm to produce it, but the government pays for it out of tax revenue. The government may not do this for all public goods but may choose to do this for public goods that it deems important to the welfare of the population.

Prices function as signals, incentives, and bundles of information. Explain what these functions are and how each is a distinct function.

When price functions as a signal, price is communicating to buyers and sellers. A change in price alerts buyers that something is going on related to supply and alerts sellers that something is going in related to demand. The direction of a change in price creates an incentive for buyers and sellers to change their behavior. If price goes up, buyers are induced to buy less, and sellers want to produce and sell more. If price goes down, the incentives are the opposite. Price is determined by the interaction of supply and demand. Supply and demand are based on the actions of many buyers and sellers. In a sense, the price pulls together and summarizes the desires of all these decision-makers. Thus, it provides information on how, in total, the actions of all these decision-makers come together. It gives insight.

Which of the following is an example of a quota? a. A government limits the amount of a product that can be sold in a market. b. A government sets a minimum or maximum price that can be charged. c. A government sets a limit on how many inputs can be used in the production process. d. A government places a regulation on how many consumers are allowed in a market.

a. A government limits the amount of a product that can be sold in a market.

Jane sells bowls of noodles for $6 at her noodle shop. The average price of a bowl of noodles in the city starts rising. In response to this, Jane starts to produce more bowls of noodles and raises her price to $6.50. This is an example of price functioning as a. an incentive. b. a currency. c. a bundle of information. d. a signal.

a. an incentive.

Markets allocate a. resources, goods, and services. b. money and services but not goods and resources. c. money and resources but not goods and services. d. resources and goods but not services.

a. resources, goods, and services.

"Cap and trade" means that each business has: a. the right to emit unlimited pollution. b. a set level of taxes to pay in order to trade. c. external costs and private costs and that it faces demand that includes both. d. permits to emit a certain quantity of pollutants and can trade or sell those permits to other companies.

b. a set level of taxes to pay in order to trade.

The economic burden of a tax is the: a. government-designated burden of a tax payment. b. burden created by the change in after-tax prices faced by buyers and sellers. c. percentage increase in the tax on an item. d. laws governing sales taxes in a country.

b. burden created by the change in after-tax prices faced by buyers and sellers.

Which of the following statements is TRUE regarding economic efficiency? a. Efficient outcomes will make everyone better off. b. Efficient outcomes are also equitable. c. Efficient outcomes rarely make everyone happy. d. Efficiency is associated with minimizing economic surplus.

c. Efficient outcomes rarely make everyone happy.

Which of the following statements about international trade is TRUE? a. After trade, one country gains, and the other is worse off. b. If trade occurs, people's welfare will worsen. c. Producers in different countries should specialize in the production of goods for which their opportunity cost is low. d. International trade is based on absolute advantage.

c. Producers in different countries should specialize in the production of goods for which their opportunity cost is low.

An externality is defined as: a. the effect of an activity undertaken outside a building rather than inside a building. b. an effect of market activity that impacts the opposite side of the market from the side whose decision caused the effect. c. a side-effect of an activity that affects bystanders whose interests are not taken into account. d. the impact of an activity on buyers and sellers in the market where the activity takes place.

c. a side-effect of an activity that affects bystanders whose interests are not taken into account.

When looking at a demand and supply graph, if a tax is implemented on a seller, the vertical distance between the old and new supply curves at the new equilibrium quantity will be equivalent to the a. economic burden of the tax on the seller. b. economic burden of the tax on the buyer. c. amount of the tax. d. price of the item.

c. amount of the tax.

The socially optimal amount of an externality is: a. zero. b. one-half of the amount of the externality that the market would produce. c. based on cost-benefit analysis. d. the amount that market forces would produce.

c. based on cost-benefit analysis.

The principle of comparative advantage applies to interactions a. between people but not in business production decisions. b. in business production decisions but not between people. c. between people as well as in business production decisions. d. in neither business production decisions nor between people.

c. between people as well as in business production decisions.

What type of good is rival and nonexcludable? a. private goods b. club goods c. common resources d. public goods

c. common resources

When goods are allocated in a way that creates the largest economic surplus: a. output is evenly allocated across firms. b. production is minimized. c. efficient allocation has been achieved. d. the marginal benefit of the last unit bought is the maximum marginal benefit.

c. efficient allocation has been achieved.

Marginal private cost is the: a. the marginal cost that is kept secret and not reported to the public. b. the marginal cost faced in the nongovernmental sector. c. the cost paid by the seller in producing one additional unit of output. d. the additional cost faced by private bystanders when a seller produces and sells an extra unit of output.

c. the cost paid by the seller in producing one additional unit of output.

The highest price that Duke would be willing to pay for a particular video game is: a. the most equitable price for the game. b. the most economically efficient price for the game. c. the marginal benefit he would receive from the game. d. his consumer surplus on the game.

c. the marginal benefit he would receive from the game.

Chin purchases five protein bars at a price of $3 each. The marginal benefit he receives from each bar is $5 for the first bar, $4.50 for the second bar, $4 for the third bar, $3.50 for the fourth bar, and $3 for the fifth bar. The marginal cost of producing the bars is $2.50 each. What is Chin's total consumer surplus from the five bars that he purchased? a. $0 b. $.50 c. $2.50 d. $5

d. $5

Suppose that one hour of labor in Singapore can produce 20 computers or 40 cellphones. Further, suppose that one hour of labor in Ireland can produce 10 computers or 15 cellphones. _____ has a comparative advantage in the production of computers. _____ has a comparative advantage in the production of cellphones. a. Singapore; Singapore b. Ireland; Ireland c. Singapore; Ireland d. Ireland; Singapore

d. Ireland; Singapore

What is positive analysis? a. It prescribes what should happen which involves value judgments. b. It puts the options that are available in order of the priorities held by the decision maker. c. It is based on beliefs about what is most important. d. It describes what is happening explains why it is happening or predicts what will happen.

d. It describes what is happening, explains why it is happening, or predicts what will happen.

How does the accuracy of prediction markets compare to public opinion polls? a. Prediction markets' accuracy varies widely. b. They both are equally accurate. c. Prediction markets provide less accurate forecasts. d. Prediction markets provide more accurate forecasts.

d. Prediction markets provide more accurate forecasts.

A binding price ceiling is: a. the minimum price that a seller can charge in a market. b. always at the equilibrium price. c. always above the equilibrium price. d. always below the equilibrium price.

d. always below the equilibrium price.

Marjean walks to work every day along a busy road. As she does so, she breathes in the fumes of many cars, often arriving at work coughing. The economic term for the impact of the cars on Marjean is: a. an alternative action. b. a nonmarket repercussion. c. exploitative supply. d. an externality.

d. an externality.

Voluntary exchange occurs when: a. either the buyer or the seller will gain from the trade with no loss to the other. b. either the buyer or the seller will gain from the trade at the expense of the other. c. society in general rather than the participants will gain from the trade. d. both the buyer and the seller will gain from the trade.

d. both the buyer and the seller will gain from the trade.

A key difference between equity and efficiency is that equity deals with _____ and efficiency focuses on _____. a. equality; minimizing costs b. minimizing costs; equality c. maximizing welfare; fairness d. fairness; maximizing economic surplus

d. fairness; maximizing economic surplus

A corrective subsidy: a. removes choice by requiring production to change for goods with externalities. b. provides more alternatives so that satisfaction rises with few units sold. c. incentivizes a reduction in the output when negative externalities exist. d. incentivizes an increase in the output when positive externalities exist.

d. incentivizes an increase in the output when positive externalities exist.

From an economic perspective, the outcome that yields the greatest economic surplus is the: a. least cost outcome. b. outcome with the highest benefit. c. outcome of least benefit-cost gap. d. most efficient outcome.

d. most efficient outcome.