Econ Midterm Exam

A marginal change is a

small, incremental adjustment.

A rational decision maker takes an action if and only if

the marginal benefit of the action exceeds the marginal cost.

According to Adam Smith, the success of decentralized market economies is primarily due to

individuals' pursuit of self-interest.

The "invisible hand" refers to

the free market.

A certain production possibilities frontier shows production possibilities for two goods, jewelry and clothing. Which of the following concepts cannot be illustrated by this model?

the flow of dollars between sellers of jewelry and clothing and buyers of jewelry and clothing

A model can be accurately described as a

simplification of reality.

A normative economic statement such as "The minimum wage should be abolished"

would require values and data to be evaluated.

A production possibilities frontier can shift outward if

there is a technological improvement.

A country that currently does not trade with other countries could benefit by

not restricting trade.

Abby bakes brownies and Liam grows flowers. In which of the following cases is it impossible for both Abby and Liam to benefit from trade?

Abby does not like flowers and Liam does not like brownies.

Absolute advantage is found by comparing different producers'

input requirements per unit of output.

Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, then

All of the above are correct.

A competitive market is a market in which

no individual buyer or seller has any significant impact on the market price.

A downward-sloping demand curve illustrates

the law of demand.

A market supply curve is determined by

horizontally summing individual supply curves

A rightward shift of a demand curve is called a(n)

increase in demand.

A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the current municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?

The answer depends on the price elasticity of demand.

A drug interdiction program that successfully reduces the supply of illegal drugs in the United States likely will

raise the price, reduce the quantity, increase total revenues, and increase crime.

A key determinant of the price elasticity of supply is

the ability of sellers to change the amount of the good they produce.

A perfectly inelastic demand implies that buyers

purchase the same amount as before when the price rises or falls.

A binding minimum wage

alters both the quantity demanded and quantity supplied of labor.

A shortage results when a

binding price ceiling is imposed on a market.

Rent control policies tend to cause

relatively smaller shortages in the short run than in the long run because supply and demand tends to be more inelastic in the short run than in the long run.

The minimum wage, if it is binding, lowers the incomes of

only those workers who become unemployed

A seller is willing to sell a product only if the seller receives a price that is at least as great as the

seller's cost of production.

Cameron visits a sporting goods store to buy a new set of golf clubs. He is willing to pay $750 for the clubs but buys them on sale for $575. Cameron's consumer surplus from the purchase is

$175

Consumer surplus in a market can be represented by the

area below the demand curve and above the price.

Efficiency in a market is achieved when

the sum of producer surplus and consumer surplus is maximized.

A tax

Both b) and c) are correct.

The amount of deadweight loss that results from a tax of a given size is determined by

the price elasticities of demand and supply.

The Laffer curve illustrates that

tax revenue first rises, then falls as a tax increases.

Which of the following events always would increase the size of the deadweight loss that arises from the tax on gasoline?

The amount of the tax per gallon of gasoline increases

A tariff on a product makes

domestic sellers better off and domestic buyers worse off.

Assume, for England, that the domestic price of wine without international trade is higher than the world price of wine. This suggests that, in the production of wine,

other countries have a comparative advantage over England and England will import wine.

Countries that restrict foreign trade are likely to

have more firms with domestic market power.

Domestic producers of a good become worse off, and domestic consumers of a good become better off, when a country begins allowing international trade in that good and

the country becomes an importer of the good as a result.

A negative externality will cause a private market to produce

more than is socially desirable.

According to the Coase theorem, in the presence of externalities

private parties can bargain to reach an efficient outcome.

Karen's potted plant causes Danny to sneeze. Karen values her potted plant at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem,

Danny should pay Karen $325 to give away her potted plant.

​Josiah installed a metal sculpture in his front yard. A positive externality arises if the sculpture

​increases the value of other properties in the neighborhood.

An example of a private good would be

a sleeping bag.

The commercial value of ivory is a threat to the elephant, but the commercial value of beef is a guardian of the cow. This is because

cows are private goods, while elephants tend to roam freely without owners.

The Tragedy of the Commons for sheep grazing on common land can be eliminated by the government doing each of the following except

subsidizing sheep flocks

Which of the following goods is not excludable and not rival in consumption?

a tornado siren

If New York City imposed a 50 cent tax on soft-drink beverages that contain sugar or high-fructose corn syrup, it would

be an excise tax.

If your income is $40,000 and your income tax liability is $5,000, your

average tax rate is 12.5 percent.

The average tax rate measures the

fraction of income paid in taxes

The income tax requires that taxpayers pay 10 percent on the first $50,000 of income and 20 percent on all income over $50,000. Andy paid $9,000 in taxes. What were his marginal and average tax rates?

20 percent and 13 percent, respectively

Economic profit

will never exceed accounting profit.

In the long run,

Inputs that were fixed in the short run become variable.

Marginal cost tells us the

amount by which total cost rises when output is increased by one unit.

The things that must be forgone to acquire a good are called

opportunity costs

In order to maximize profits in the short run, a firm should produce where

marginal cost equals marginal revenue.

Profit-maximizing firms in a competitive market produce an output level where

marginal cost equals marginal revenue

Suppose that a firm operating in perfectly competitive market sells 50 units of output. Its total revenues from the sale are $500. Which of the following statements is correct? \n (i) \n Marginal revenue equals $5. \n (ii) \n Average revenue equals $10. \n (iii) \n Price equals $15

(ii) only

Which of the following industries is least likely to exhibit the characteristic of free entry?

satellite radio

A monopolist will choose to increase output when

at the present level of output, marginal revenue exceeds marginal cost.

Patents, copyrights, and trademarks

All of the above are correct.

The deadweight loss associated with a monopoly occurs because the monopolist

produces an output level less than the socially optimal level

When a certain monopoly sets its price at $8 it sells 64 units. When the monopoly sets its price at $10 it sells 60 units. The marginal revenue for the firm over this range is

$22

If a firm experiences diminishing marginal productivity of labor, the marginal product

decreases as total product increases.

Suppose that a college physics experiment goes horribly wrong and releases an electronic pulse that renders all electronic equipment in the cities of Columbus, Cleveland and Cincinnati, Ohio permanently useless. No people are hurt, and no buildings are damaged. After the accident, the wages earned by Ohio workers will

decrease because the marginal productivities of Ohio workers will decrease.

The equilibrium rental income paid to landowners at any point in time equals the

value of the marginal product of land.

Which of the following events would bring about a change in the value of the marginal product of labor?

All of the above are correct.

Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the substitution effect by itself will

cause the consumer to buy more of good Y and less of good X.

Hannah and Chris each like jewelry and music by the Rolling Stones. If we were to graph an indifference curve with jewelry on the horizontal axis and CDs by the Rolling Stones on the vertical axis, then

Because we do not know the intensity of each woman's preferences, we do not have enough information to compare their indifference curves.

If the price of a good increases, all else equal, consumers perceive

a decrease in purchasing power.

Two economists found empirical evidence that when the price of rice decreased in the Hunan province of China, local residents consumed less rice than before the price decrease. The study provides a real-world example of a(n)

Giffen good.

When one party is better informed about an economic situation than another party, economists describe the problem as one of

asymmetric information.

Which of the following relationships involves asymmetric information?

All of the above are correct.

​A car mechanic knowing more about what's wrong with your vehicle than you do is best explained by which of the following concepts:

​Asymmetric information

Which of the following is best explained with behavioral economics rather than traditional economics?

How people tend to be overconfident in certain situations

The money supply decreases if

households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans.

When prisoners use cigarettes or some other good as money, cigarettes become

commodity money and function as a unit of account.

Which of the following is a store of value?

cash and stocks

Which type of money has intrinsic value?

commodity money

Net exports equal

exports minus imports.

Nominal GDP will definitely increase when

prices increase and output increases.

Transfer payments

All of the above are correct

When economists talk about growth in the economy, they measure that growth as the

percentage change in real GDP from one period to another.

Inventors often obtain patents on new products and processes, thereby turning new ideas into

private goods and increasing the incentive to engage in research.

Over the last ten years productivity grew faster in Mapoli than in Romeria while the population and total hours worked remained the same in both countries. It follows that

real GDP per person grew faster in Mapoli than in Romeria.

Productivity is the

key determinant of living standards, and growth in productivity is the key determinant of growth in living standards.

Sandra uses her sewing machine, thread, and yards of denim to produce jean skirts. The sewing machine is an example of​

physical ​capital.

Minimum-wage laws, unions, and efficiency wages contribute to

both structural unemployment and the natural rate of unemployment.

More generous unemployment insurance would

raise frictional unemployment.

The introduction of a union into an industry creates a

surplus of labor and so raises unemployment.

The invention of the telegraph led to the loss of jobs for those who had delivered mail by horse but created jobs for telegraph operators and delivery persons. This is an example of

frictional unemployment created by sectoral shifts

The consumer price index is subject to substitution bias because

the law of demand applies to most, if not all, goods

The price index was 120 in 2012 and 126 in 2013. What was the inflation rate?

5\.0 percent

When ranking movies by nominal box office receipts, what important fact is overlooked?

Prices, including those for movie tickets, have been rising over time

When the relative price of a good decreases, consumers respond by buying

a larger quantity of that good and a smaller quantity of substitutes for that good.

Katarina puts money into an account. One year later she sees that she has 6 percent more dollars and that her money will buy 4 percent more goods.

The nominal interest rate was 6 percent and the inflation rate was 2 percent.

On a Sunday morning, Tom sold 300 cups of coffee for a total of $750.

The $750 is a nominal variable. The 300 cups of coffee is a real variable.

Suppose the United States unexpectedly decided to pay off its debt by printing new money. Which of the following would happen?

All of the above are correct.

When deflation exists,

the real interest rate is greater than the nominal interest rate

Jill, a U.S. citizen, uses some dollars to purchase a bond issued by a French vineyard. This exchange

increases U.S. net capital outflow by the value of the bond.

Net capital outflow

is always equal to net exports.

Which of the following is correct? Since 1950

U.S. exports and U.S. imports each about tripled.

You buy a new car built in Sweden. Other things the same, your purchase by itself

raises U.S. imports and lowers U.S. net exports.