Principles of Economics Learning Checks

A property owner has 500 acres of flat land and has been approached by two different businesses. One business wants to drill for oil, and the other wants to raise cattle.

Which basic economic question does this scenario answer?

What to produce?

A well-established company has been producing goods and wants to create a new line of production. The company needs to decide whether it should use a current factory or find a new location.

Which basic economic question does this scenario answer?

How to produce it?

To address environmental concerns, Congress is considering a bill that would increase the price of electricity generated by coal. Increasing the price of electricity creates a problem for low-income households.

Which basic economic question does this scenario answer?

For whom to produce?

Which scenario matches Principle 4 of economics—people respond to incentives?

A sales manager offers a higher percentage of commission for a product that is not selling well.

What is a consequence of a government printing more money?

Increased inflation

What is a benefit of using a traditional economic system?

Everyone knows their role in the market.

Which characteristic is associated with a command economy?

Competition is limited.

What is an advantage of a market economy?

Innovation is encouraged and rewarded.

What is a disadvantage of a mixed economic system?

Freedom of choice can fluctuate from too much to too little.

Which economic framework would a student use to study inflation in a country over past years? 

Macroeconomics

Which economic framework would a student use to explain past price changes in a specific industry?

Microeconomics

Which economic reasoning is used in deciding among public policy goals?

Normative statements because fairness of outcomes should be considered

Which economic reasoning is involved when someone wants to study a country's output of gross domestic product (GDP)?

Macroeconomic theory

What are the four factors of production?

Natural resources, labor, capital, entrepreneurship

Which criterion must be satisfied to include capital as a physical good or intellectual discovery?

It has been produced already and is used for producing other goods and services.

Why is technology an important part of entrepreneurship?

Entrepreneurs use technology to best organize production.

What factor of production requires wages as payment?

Labor

What factor of production requires interest as payment?

Capital

What factor of production requires rent as payment?

Land

Why do economists refer to all resources as scarce even though many of the factors of production are plentiful in regard to the production possibility frontier?

Because resources are finite, there are trade-offs that must occur when companies or individuals make decisions regarding their wants or needs with their given resources to buy things.

When analyzing economic problems, especially when confronted with models of choice, economic models use simplifying assumptions to let them focus on choice.

Which simplifying assumption is important for analyzing consumer behavior?

Specific prices

Consider the concept of the production possibility frontier and a limited budget in regard to a model, chart, or graph.

What happens as a consumer decreases spending on one of two choices?

The consumer has more money to spend on the other item.

Just like budget constraints that can be observed when trade-offs are applied between two items for an individual, companies that use the production possibility frontier model also use certain assumptions to simplify the analysis.

What is one of the assumptions?

No resources are wasted.

A seller has 10 hours to either bake cakes or make holiday ornaments to sell at the local farmers market. The seller is currently producing at a point on their production possibility frontier.

Which decision is both attainable and efficient?

Producing less of one good and more of the other good

A country is producing on its production possibility frontier (PPF) with respect to capital and consumption goods. Policy makers are considering policies to help the country grow and produce combinations of goods that it currently finds unattainable.

Which policy will be successful in meeting this goal?

Increasing skilled labor in public and private sectors through relaxed immigration laws

A country has a recent innovation in energy production that is leading to low cost renewable energy.

What will happen to this country's production of both capital and consumption goods?

Its production possibility frontier will shift out, and more combinations of goods will be attainable.

Two countries have entered into a mutually beneficial trade agreement.

What will happen to production technology and the mix of goods produced in these countries?

It will generate greater innovation in production technologies and increase the amount of attainable combinations of goods produced.

Which statement accurately illustrates the condition of people who are very rich and those who are very poor in relation to scarcity?

Both the very rich and the very poor must make trade-offs because of scarcity.

Which characteristic of the production possibility frontier is most directly related to scarcity?

The downward (negative) slope of the frontier

A small business owner wants to add a new product to its current product line, but the business can only produce 10% of what it wants.  

What describes this scarcity situation?

To increase production of the new good, a trade-off is necessary given the available resources and their current production possibilities frontier.

A country is producing capital and consumption goods, and its resources and technology are fixed in quantity and quality. The country wants to expand production of both capital and consumption goods without changing its resources or technology.

When is this goal possible?

It is possible if there are underutilized resources, so the production point moves to the frontier.

The price of coffee is $3 at a cafe and $0.50 when made at home. The individual drinks one coffee per day.

What is the seven day opportunity cost of buying coffee each morning at a cafe instead of making it at home?

$17.50

What is the opportunity cost of producing one ton of bananas in a country that can produce either five tons of bananas or 10 tons of flowers in a season?

2 tons of flowers

The graph shows the PPF for a country that produces robots and corn. When production moves from combination A to combination B, which of the following statements is true?

20 robots are given up, and 15 units of corn are gained. The opportunity cost of a unit of corn is 1.3 robots.

What happens to the opportunity cost of the two goods when the production point moves from Point A to Point E?

The opportunity cost of bikes increases as the opportunity cost of hats decrease.

An economist is trying to identify how consumer appetite for a particular good is influenced by the price of the good. The researcher hopes to produce a table that will list how much of the good consumers desire at several specific price points.

What is the economist producing?

Demand schedule

Which concept refers to the amount of a good or service consumers both desire and are able to purchase at a variety of price levels and at a given time?

Demand

Dairy producers have recently experienced a sharp decrease in demand for their product.

Which factor explains this decrease?

A lower price for a substitute product

A family has recently experienced an increase in household income.

Which outcome results from this increase?

Increase in demand of normal goods

What is the relationship between price and quantity supplied?

As price goes up, quantity supplied goes up.

A supply curve is graphed with quantity supplied on the x-axis and price on the y-axis.

How does technology affect this type of curve?

Moves the curve outward to the right

A supply curve is graphed with quantity supplied on the x-axis and price on the y-axis.

What happens to the supply curve when there is a decrease in supply?

The line shifts to the left or inwards.

A supply curve is graphed with the quantity supplied on the x-axis and price on the y-axis.

How does increasing the number of suppliers affect this curve?

Moves the curve outward to the right

What causes a change in a market's equilibrium?

When market events shift either the supply or demand curves, the market equilibrium will shift.

What is the outcome when the price is above the equilibrium?

Suppliers will produce more than the quantity demanded, and a surplus will exist.

Which response should be expected if a competitive coffee market is in equilibrium and consumers in the market see an increase of income across the board?

Which response should be expected if a competitive coffee market is in equilibrium and consumers in the market see an increase of income across the board?

What is expected to happen if production costs increase for a particular good in a competitive market?

Decrease in the supply of the good

In the market for hats, the absolute value of the price elasticity of demand in the relevant price range is equal to 2, and the market price increases by 5%.

What happens to the equilibrium quantity in the hat market under these conditions?

Decreases by 10%

Consider the annual markets for food, new cars, and new houses.

Which market is most likely to have the highest absolute value for its price elasticity of demand around its relevant range of prices?

New houses because the price of a new house would represent the largest portion of a consumer's budget.

In the relevant price range, the market for gasoline has an absolute value of the price elasticity of demand equal to 0.5 and an absolute value of the price elasticity of supply equal to 0.8.

Which side of this market is more responsive to price changes?

Sellers that are price inelastic

An industry is operating in an inelastic range of the market demand curve.

What happens to the total revenue in the industry if the market supply increases?

It decreases because the market price decreases in an inelastic portion of the demand curve.

An individual moves to a city that imposes rent control on apartment rentals. If rental controls were not imposed, the market price would be $800 per month. The rent control price is $600 per month.

What is the likelihood that an individual will easily find an apartment for rent under these conditions?

It is unlikely because a shortage will persist in the market.

Farmers are ready to sell soybeans, and the current market price is $8 per bushel. Legislators are considering imposing a $12 per bushel price floor on the soybean market.

Will this action help the farmers sell more soybeans?

No, a surplus would emerge, and more soybeans will be produced than are sold.

The current market price for soybeans is $8 per bushel. Legislators are considering imposing a $10 price support and buying the surplus soybeans.

How will this action impact soybean farmers' sales?

Farmers will sell more soybeans since the government will be buying the surplus.

The unskilled labor market wage rate equilibrium is $7 per hour. Legislators are considering imposing a $20 per hour minimum wage.

Will this action help unskilled workers who want to work more hours?

No, since this will motivate employers to hire fewer workers for less hours.

A consumer is deciding between shopping in-store or online for a personalized sweater that will require the consumer to identify size, type of image, and style of stitching desired without seeing the final product before production. All purchases are final.

Which venue will present the greatest level of uncertainty for the consumer?

Online retail venue

A salesperson is salaried and is not evaluated based on the number of sales closed; he is evaluated on customer satisfaction. The sales manager assigns him to contact a startup business to introduce the product line and secure a sale by the end of the month. He chooses to wait until the following sales cycle to contact the business.

Which behavior is the salesperson exhibiting?

Moral hazard related to performance

A market for a product has only a small number of sellers and an equally small number of buyers. Buyers have trouble determining market quality.

What will be the outcome of this situation?

A thin market with volatile market prices

A used car dealership is trying to specialize in selling exceptionally well-maintained used cars. However, the maintenance of its used cars is unverifiable to buyers. The dealership would like to convince buyers to pay a higher price than found in the market for its used cars based on the idea that they will last longer.

Is it possible for the dealership to convince buyers of this fact?

Yes, if the dealership offers a low-cost service contract to overcome the asymmetric information problem

A few major companies recently announced plans to move to a midsized city. Homeowners in that city, who are not connected to any of the new companies, recognized an immediate increase in home values.

What have the homeowners experienced?

Positive externality

An economist is doing research to consider the total gains, both private and external, that result from making particular investments.

What is this economist identifying?

Social benefit

How will the arrival of a new company that generates high levels of pollution affect the economic environment?

It will generate negative externalities and increase social costs in the local community.

A new landfill was recently announced near a small city. Homeowners in the city, who were not involved in the decision to open the landfill, recognized an immediate decrease in home values following the announcement.

What have the homeowners experienced?

Negative externality

Which equation reflects total economic profit?

Total Revenue – (Explicit Cost + Implicit Cost)

Which equation reflects accounting profit?

Total Revenue – Explicit Cost

Which statement represents an implicit cost?

Owner's time and effort

When are all costs variable costs?

When planning for the long run

A pizza shop plans to sell 12,000 pizzas. Each pizza costs the shop $7 in labor and ingredients.

The shop has the following annual costs:

• Rent: $18,000

• Utilities: $7,000

• Insurance: $5,000

What is this pizza shop's expected total costs?

$114,000

A company produces and plans to sell 13,000 small, electronic devices. They will need to pay $17 for materials and labor cost for each device produced. The firm also has the following annual costs:

• Rent: $12,000

• Utilities: $6,000

• Insurance: $3,000

What is the company's expected total costs?

$242,000

A specialty motorcycle manufacturer created a table to display its costs as seen below:

What is the marginal cost of each motorcycle when increasing from 32 motorcycles to 50?

$1,555.55

A specialty watch manufacturer has the following costs:

What is the average cost per watch when producing 30 watches?

$400

A tire manufacturer is deciding the quantity of tires to produce over the next year. The firm is operating in a leased factory, has two years left on its lease, and has no other contractual obligations that would prevent it from altering its production technology.

Which time frame should the tire manufacturer consider given this set of circumstances?

The short run since it has a fixed input in the period under consideration.

A manufacturer is producing its product in two different plants that are located in two different countries. The main difference between the two countries is that labor cost is lower in one of the countries.

Which statement is true of the lower labor cost country?

The LRAC for the plant will be vertically lower.

A firm has estimated the levels of production it will need in the future. It has determined that over its likely range of output, long-run average costs will decrease up to a point and afterward remain constant.

Which region description is consistent with the firm's operating plans?

It will remain in the constant returns to scale range without change.

An entrepreneur is considering opening a fast food restaurant that is similar to various fast food restaurants in the area. The entrepreneur researches the other restaurants and learns that they are producing the same quantity of output.

What does this suggest about the constant returns to scale range of restaurants in this industry?

The flat area of their long-run average cost curves is very small.

A firm has estimated the levels of production it will need in the future. It has determined that over its likely range of output, long-run average costs will decrease up to a point and afterward remain constant.

Which region description is consistent with the firm's operating plans?

It will operate in the economies of scale range then return to constant.

A manufacturer is producing its product in two different plants that are located in two different countries. The main difference between the two countries is that labor cost is lower in one of the countries.

Which statement is true of the lower labor cost country?

The LRAC for the plant will be shifted to the right.

A tire manufacturer is deciding the quantity of tires to produce over the next year. The firm is operating in a leased factory, has two years left on its lease, and has no other contractual obligations that would prevent it from altering its production technology.

Which time frame should the tire manufacturer consider given this set of circumstances?

The short run since the lease lasts longer than one year.

An entrepreneur is considering opening a fast food restaurant that is similar to various fast food restaurants in the area. The entrepreneur researches the other restaurants and learns that they are producing the same quantity of output.

What does this suggest about the constant returns to scale range of restaurants in this industry?

There is not likely to be a flat area in the restaurants’ long-run average cost curves.

A new electronics company recently began selling an identical product to other competitors in a market that has many buyers and sellers. They entered the market because there are relatively few barriers to entry, and they know that they can easily leave.

Which market structure is this company entering?

Perfectly competitive

A new fast food restaurant owner recently opened a location in a town with low costs to open that type of establishment. There are many other restaurants in the town that sell a variety of food types.

What type of market type is the owner entering?

Monopolistic competition

A utility company is the only electricity provider in its market. The local government allows the company to determine prices and has created regulations that make it difficult for competitors to enter the market.

What type of market is this company working in?

Monopoly

There are a few firms providing cloud services, and these firms directly respond to each other's pricing strategies. It is expensive for other firms to enter the market.

What type of market are these firms operating in?

Oligopoly

The market price of a product is lower than the average total cost to produce the product.

Which outcome stems from this type of market?

Firms will leave the market.

Which description illustrates the nature of an oligopoly?

Tacit collusion is possible.

Which description illustrates a monopoly's pricing strategy?

Consumer demand constrains price.

Which statement accurately describes the impact of successful advertising in a monopolistic competitive market?

It causes the demand to increase.

What are the two methods used to calculate the monopoly power of an industry?

The concentration ratio and the Herfindahl-Hirschman index

Which two developments have made it increasingly difficult to define markets for the purpose of determining concentration of market power?

Technology advances and globalization of markets

How should the the four-firm concentration ratio be calculated?

The market share of the four largest firms in an industry are added together.

The Herfindahl-Hirschman Index (HHI) is calculated using the sum of the squares of the market share of each firm in an industry. Then the Federal Trade Commission (FTC) historically uses the results to decide whether there is an antitrust concern.

Which statement accurately describes how the FTC determined the presence of a concern in the 1980s?

The FTC would try to halt a merger if the merger would put the HHI over 1,800.

What are firms paying for when they make payments to households in the circular flow model?

Factors for production

What does the circular flow diagram illustrate?

Macroeconomic payments

How does the expanded circular flow diagram incorporate interactions with other countries?

It incorporates imports and exports.

Which measure combines the four sources of expenditures in the circular flow model?

Aggregate demand

Which form of spending contributes the greatest amount to gross domestic product (GDP) in the United States?

Consumption expenditures

Which description illustrates a business cycle that starts from a trough?

The output of the economy moves from a trough to an expansion, then to a peak followed by a recession until it returns to another trough.

A consumer buys a bed for $1,000. The bed is assembled in the United States, but the manufacturer used $200 worth of materials that were imported from another country. In addition, the manufacturer used $300 of materials that were bought from suppliers in the United States.

How is the value of the bed counted in gross domestic product (GDP) for the United States using the expenditure approach?

The purchase price of $1,000 is counted in consumption expenditures, and $200 of the material imported is subtracted from net export expenditures.

An economist wants to compare the standard of living between different countries.

Which measure should be used for this purpose?

Real GDP per capita

A reporter is discussing current record low unemployment, and an economist mentions that the numbers being reported leave out individuals who have stopped looking for work.

Which group is being referred to by the economist?

Discouraged workers