Microeconomics Exam 1

Scarcity exists when

there is less of a good or resource available than people wish to have

Which of the following goods best meets the textbook definition of scarcity?

drinkable water in the city

Which of the following falls within the study of economics?

all of the above

In economics, the adage, "There is no such thing as a free lunch," means:

To get something we like, we usually have to give up another thing we like

If Susan works an additional hour to help pay her college expenses,

she gives up an hour that she could have spent studying, exercising, or doing something else of value

Paul decides to spend an hour playing basketball rather than studying or working at $15 per hour. His tradeoff (opportunity cost) is

the benefit to his grades from studying for an hour, or the $15 he could have earned from working

In economics, efficiency means

getting the most benefit from the use of scarce resources relative to their opportunity costs

When government transfer and income redistribution policies are being designed,

there is usually a tradeoff between equity and efficiency: forcing more equal shares of the pie (equity) usually results in decreasing the overall size of the pie (efficiency)

In economics, the cost of something is

what you must give up to get it

The opportunity cost of an item is

what you must give up to get that item

Sometimes, public policies have unintended and costly side-effects because

the policies may alter private incentives in ways often overlooked by policymakers

If Canada is better than the U.S. at producing beer, but the U.S. is better than Canada at producing hockey sticks, then

the U.S. should export and sell hockey sticks to Canada, and should buy imported Canadian beer

In a market economy

all of the above

In his 1776 book The Wealth of Nations, Adam Smith made the most famous observation in all of economics:

Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes and an efficient use of scarce resources even though that was not their intention

The "invisible hand" directs economic activity through

prices and self-interest

When the government prevents prices from adjusting naturally to supply and demand,

it impedes the invisible hand's ability to coordinate the millions of households and firms that make up the economy, adversely affecting the allocation of scarce resources

What do rent control and socialist economic planning have in common?

They both directly control prices and adversely affect the allocation of resource

A market economy rewards people according to

their ability to produce valued things that other people are willing and able to pay for

In economics, a "rational" decision maker takes an action only if

the marginal (additional) benefit is greater than the marginal (additional) cost

Which is the most accurate statement about trade?

Trade can make every nation or person involved in the trade better off

Upon what does a country's standard of living depend?

its ability to produce goods and services that people are willing and able to pay for

Taxing high incomes at a higher rate than low incomes is most likely to alter incentives and do which of the following?

promote equity and hinder efficiency

A worker in China earns $20 per day making athletic shoes on a traditional assembly-line.  A worker in the United States could earn $100 per day making athletic shoes using an AI-automated robotics production process.  What accounts for the difference in wages?

Labor is much more productive making athletic shoes using automation than on a traditional (manual) assembly line

Which is the best statement about the way economists study the economy?

They develop logical theories regarding human behavior, collect data, then analyze the data to test those theories

What would be the best statement about a theory based on assumptions which are not always true?

The theory is nonetheless useful if it helps us to better understand how the world works

Economists use models in order to

learn how the economy works through the simplifying assumptions of the model

On the production possibilities graph shown, which point represents the maximum possible production of apples for this economy?

A

On the production possibilities graph shown, which point represents the maximum possible production of pizzas for this economy?

B

On the production possibilities graph shown, which point or points are inefficient?

E

On the production possibilities graph shown, which point or points are efficient?

A, B, and D

On the production possibilities graph shown below, the opportunity cost to the economy of getting the 10 additional gutters by moving from point A to point B is

10 buns

In the production possibilities graph shown below, the movement of the frontier from A to B can best be described as

economic growth

In the production possibilities graph shown below, what is the opportunity cost to society of the movement from point C to point A?

500 bananas

Which of the following is a topic of study in microeconomics but not macroeconomics?

the impact of minimum-wage laws on employment in the fast-food industry

Positive statements are

descriptive, making a claim about how the world is

Normative statements are

prescriptive, making a claim about how the world ought to be

Economist Milton believes that macroeconomic policy cannot be used effectively to reduce fluctuations in the economy. Economist Paul disagrees. In their capacity as economists, their disagreement can best be described as

a disagreement about the validity of alternative positive economic theories

Fad or populist economic policies, such as trade protectionism or "free" health care or "free" college, often tempt politicians because

politicians in a democracy are eager to find easy solutions to hard and persistent problems, often with short-term visible benefits but long-term hidden costs

Policies such as rent control, minimum wage laws, tariffs and import quotas persist in spite of the fact that economists are nearly united in their opposition to these policies. Which of the following is the best explanation for this situation?

Economists have not yet educated and persuaded the general public (voters in a democracy) to the fact that these policies are undesirable

People who provide you with goods and services in a market economy

do so out of self interest because they get something in return

Which of the following is not correct?

Trade is always based on absolute advantage

The opportunity cost of 1 meal for George is

½ book

The opportunity cost of 1 meal for Martha is

8 books

The opportunity cost of 1 book for Martha is

1/8 meal

The opportunity cost of 1 book for George is

2 meals

Martha has an absolute advantage in __________ and George has an absolute advantage in __________.

both goods, neither good

Martha has a comparative advantage in __________ and George has a comparative advantage in __________.

books, meals

Martha should specialize in __________ and George should specialize in __________.

books, meals

In the absence of trade, if both George and Martha devote 1/2 of their time (20 hours) to the production of each good, total consumption of books will be __________ and total consumption of meals will be __________.

21, 4.5

If both George and Martha specialize in the good in which they have a comparative advantage, total production of books will be __________ and total production of meals will be __________.

40, 4

Comparative advantage is based on

relative opportunity costs

Trade is based on

relative opportunity costs

Trade can benefit society as a whole because it allows

all of the above are true of trade

Adam Smith

all the above are true of Adam Smith

David Ricardo

developed the concept of comparative advantage to argue in favor of Britain following a free-trade policy and abolishing trade barriers with Europe

Adam Smith was the author of

An Inquiry Into the Nature and Causes of the Wealth of Nations

Economists generally support

free international trade

If wages in the U.S. are higher than in Mexico,

the U.S. may still benefit from trade with Mexico due to comparative advantage

In a free market, what ultimately determines how much of a good will be sold and the price at which it is sold?

both producer-suppliers and consumer-demanders together

A market is

a group of demanders and suppliers of a particular good or service

If a good is a "normal good," then an increase in one's income will result in

an increase in the demand for the good

If the price of a substitute to good X increases, then, all else equal,

the demand for good X will increase

Suppose that a decrease in the price of X results in less of good Y sold. This would likely mean that goods X and Y are

substitute goods

If a decrease in income increases the demand for a good, then, all else equal,

the good is an inferior good

The only determinant of quantity demanded or quantity supplied is

the price of the good itself

All else equal, what will happen in the rice market if buyers (rice consumers) are expecting higher prices in the near future?

The demand for rice will intensify (increase) now

Whenever we talk of "movement along" a fixed or stable demand curve,

all non-price determinants of demand are assumed to be held constant

Ceteris Paribus is a Latin phrase that literally means

“all other things being held equal”

Market demand, or the market demand curve for a particular good or service,

is the (horizontal) sum of all the individual demands or demand curves for a particular good or service in the market

All else equal, if the number of buyers in the market decreases

the demand in the market will decrease

Suppose that scientists find evidence that reveals a direct correlation between eating chocolate pudding and hair growth. It appears that the consumption of chocolate pudding increases hair growth in men who are balding.  All else equal, and assuming men generally prefer hair to being bald, we would expect to see

an increase in the demand for chocolate pudding among balding men

All else equal, when the price of a good or service changes,

there is a movement along a stable demand curve

Suppose that John receives a pay increase. All else equal, we would expect

John's demand for inferior goods to decrease

The downward-sloping demand curve reflects which of the following?

There is an inverse relationship between price and quantity demanded

What is the law of demand?

When the price of a good or service falls, buyers respond by purchasing more, all else equal

The relationship between price and quantity supplied is

positive, or direct

Price acts as

all of the above answers are correct

Other things equal, when the price of a good falls, the quantity supplied of the good also falls. This is

the law of supply

Technological advancement

all of the above answers regarding technology are correct

A supply curve slopes upward because

an increase in price gives producers an incentive to supply a larger quantity, all else equal

All else equal, an increase in the price of oranges would

lead to a movement upwards along the supply curve for oranges, increasing the quantity supplied

All else equal, at the equilibrium price for a good,

the amount sellers are able and wish to sell equals the amount buyers are able and wish to buy at that price

All else equal, when there is excess supply in a market,

there is downward pressure on price

In most free markets,

all of the above are correct

All else equal, buyers generally buy more of a normal good when

all of the above are correct

In general, in economics, the definition of elasticity is

a measure of how much buyers and sellers respond to changes in market conditions, such as prices

Economists use the concept of price elasticity of demand to

measure how much buyers respond to changes in the price of the good

Demand is said to be price elastic

if the quantity demanded responds substantially to changes in the price of the good

Demand is said to be price inelastic

if the quantity demanded changes only slightly when the price of the good changes substantially

If a good is considered a necessity by the consumer, their price elasticity of demand for the good would tend to be

inelastic

All else equal, price elasticity of demand for a good would tend to be more price sensitive, or more price elastic,

the longer the period of time there is at hand in which to make a buying decision

The demand for a good tends to be more price sensitive, or more price elastic,

all of the above are correct

Economists compute the standard (or "arc") price elasticity of demand as

the percentage change in the quantity demanded divided by the percentage change in price

Suppose that the price of product X is reduced from $1.45 to $1.25 and, as a result, the quantity of X demanded increases from 2,000 to 2,200 units. Using the midpoint method to calculate the price elasticity of demand, the demand for X in the given price range

is inelastic

If the price elasticity of demand for a good is 1.22, then using the standard "arc" (not midpoint) method of computing price elasticity, a 10 percent increase in price would be expected to result in a

12.2 percent decrease in the quantity demanded

The main reason for using the midpoint method to compute the coefficient of elasticity is

that it gives the same answer regardless of the direction of change in price and quantity

A perfectly elastic demand curve implies that

any rise in price above that represented by the demand curve will result in no output demanded

In any market, total revenue (TR) is

the price of the good multiplied by the quantity of the good sold

Suppose that you own a business that makes and sells jewelry boxes. A business consultant tells you that she has determined that you face an elastic demand for your jewelry boxes due to so many close substitutes (competitors) in the market. Assuming all other forces remain unchanged, if you want to increase your total revenue, you would

decrease the price of your jewelry boxes

When demand is price elastic in the current price range,

an increase in price would decrease total revenue because the reduction in quantity demanded is so great that it more than offsets the increase in price