Microeconomics Exam 1 - Dr Wheeler - Mankiw Chapters 1-6

Economics

the study of how society manages its scarce resources

Scarcity

society has limited resources and therefore cannot produce all the goods and services people wish to have.

Ten Principles of Economics

How People Make Decisions:

1. People face trade-offs

2. The cost of something is what you give up to get it

3. Rational people think at the margin

4. People respond to incentives

How People Interact:

5. Trade can make everyone better off

6. Markets are usually a good way to organize economic activity

7. Governments can sometimes improve market outcomes

How the whole economy works:

8. A country's standard of living depends on its ability to produce goods and services

9. Prices rise when the government prints too much money

10. Society faces a short-run trade-off between inflation and unemployment

The Circular Flow Diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

factors of production

inputs, such as labor, land, and capital

Factor market

people earn from firms when firms purchase factors of production like labor

Product Market

firms earn money when people purchase goods and services from them

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

A point inside the production possibilities frontier

feasible but not efficient

point on the line

feasible

Point outside

unattainable

Positive statements...

are descriptive

Normative statements...

are prescriptice

Which of the following will not shift a country's production possibilities frontier outward?

a. an advance in technology

b. an increase in the capital stock

c. an increase in the labor force

d. a reduction in unemployment

d. a reduction in unemployment

Review differences in Economists Reasons in Chp 2

Thousands of people develop asthma and breathing problems from exposure to air pollution. This is an example a:

a.a market failure caused by market power.

b.a market failure caused by an externality.

c.a perfectly functioning market.

d.a market failure caused by equality.

b.a market failure caused by an externality.

In the 1990s, inflation in the United States was

a.about 3 percent per year.

b.extremely high.

c.referred to as "public enemy number one".

d.zero.

a.about 3 percent per year.

f the Federal Reserve announces that it will be increasing the money supply through its monetary policy tools, it tells us the Federal Reserve is

a.not concerned about the unemployment rate.

b.concerned there is too much inflation.

c.would like to slow down the pace of economic growth.

d.hoping to stimulate demand for goods and services.

d.hoping to stimulate demand for goods and services.

In the United States, real incomes have increased about 2 percent per year. At this growth rate, average income doubles every

a.25 years.

b.15 years

c.45 years.

d.35 years.

d.35 years.

The business cycle refers to the level of growth in the money supply.

True

False

False

In the short run, an increase in the money supply will likely cause

a.a decrease in the unemployment rate and an increase in inflation.

b.a decrease in the unemployment rate and a decrease in inflation.

c.an increase in the unemployment rate and an increase in inflation.

d.an increase in the unemployment rate and a decrease in inflation.

a.a decrease in the unemployment rate and an increase in inflation.

Fluctuations in economic activity are known as the...

business cycle

Both the production of goods and services and the unemployment rate are used to measure the business cycle.

True

False

True

Suppose that you have already spent 45 minutes grocery shopping, but upon arriving at the checkout line, you realize it's going to be another 15 minutes just to purchase your groceries. Marginal thinking tells you that the decision of whether or not to wait in line depends on the cost of an hour of your time.

True

False

False

In the short run, which of the following rates of growth in the money supply is likely to lead to the highest level of unemployment in the economy?

a.4 percent per year

b.5 percent per year

c.2 percent per year

d.3 percent per year

c.2 percent per year (When the rate of growth in the money supply is low, unemployment is high)

Which of the following is not a policy typically used in the United States to exploit the relationship between inflation and unemployment?

a.Increasing government spending

b.Reducing taxes

c.Reducing immigration.

d.Increasing the supply of money

c.Reducing immigration.

In economics, the phrase "no such thing as a free lunch" means

people face trade-offs

Economists who are primarily responsible for advising Congress on economic matters work in which agency?

Federal Reserve

Which of the following is an example of a normative, as opposed to positive, statement?

a.The discount rate is the interest rate the Federal Reserve charges banks to borrow funds.

b.As the price of cars rises, more people choose to take the bus.

c.An increase in the cigarette tax would cause a decrease in the number of smokers.

d.Gasoline prices ought to be lower than they are now.

d.Gasoline prices ought to be lower than they are now. (normative- how the world should be)

Some economists disagree because their scientific judgment differs. Which of the following instances best reflects this source of disagreement?

a.One economist believes that the level of household saving would not be affected by a change in the tax laws; another economist believes that taxing a household's consumption would change a household's saving behavior.

b.One economist believes in taxing cigarette manufacturers in order to try to decrease second-hand smoke; another economist believes the government should not intervene in free markets.

c.One economist believes that everyone should be given free health care; another economist believes that free markets should determine the distribution of health care benefits in a society.

d.One economist believes that we should have a proportional rather than a progressive tax system; another economist believes that those in the top 5% of income earners should pay a higher pe

a.One economist believes that the level of household saving would not be affected by a change in the tax laws; another economist believes that taxing a household's consumption would change a household's saving behavior.

In the circular-flow diagram, which of the following items does NOT flow from households to firms?

a.Labor

b.Goods and services

c.Revenue

d.Factors of production

b.Goods and services

In the markets for the factors of production, households provide the inputs that firms use, such as labor, land, and capital, to produce?

goods and services

Economists make assumptions to

focus their thinking

The ability to produce a good using fewer inputs than another producer

absolute advantage

the ability to produce a good at a lower opportunity cost than another producer

Comparative advantage

When the economy is self-sufficient, an economy's production possibilities frontier is also its consumption possibilities frontier.

True

False

True

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

Suppose there are five barbers in the town of Crossroads. If we add the respective quantities of haircuts that each firm would be willing to sell when the price of a haircut is $12 per haircut, $15 per haircut, and $18 per haircut, and so forth, we have found the

a.market supply curve.

b.quantity demanded.

c.market demand curve.

d.quantity in equilibrium.

a.market supply curve.

A change in the price of a good does what to a demand curve

does not shift the good's demand curve but does cause a movement along it.

Supply is determined by

sellers

Demand is determined by

buyers

If the price of cheeseburgers rose to $12 per cheeseburger, producers would produce more cheeseburgers than if the price were $10 per cheeseburger. If the price of hotdogs fell to $3 per hotdog, producers would produce fewer hotdogs than if the price were $5 per hotdog. These relationships illustrate

Law of Supply

In competitive markets,

a.sellers can influence the market price more easily than buyers.

b.each seller's products differ from those of other sellers in the same market.

c.both buyers and sellers are price takers.

d.there is a single seller of a product and this seller sets the price.

c.both buyers and sellers are price takers.

normal good

a good that consumers demand more of when their incomes increase

inferior good

a good that consumers demand less of when their incomes increase

When the price of pizza increases, the

a.supply of pizzas decreases.

b.quantity supplied of pizza increases.

c.quantity supplied of pizza decreases.

d.supply of pizzas increases.

b.quantity supplied of pizza increases.

An increase in the price of a good would

a.increase the quantity demanded of the good.

b.decrease the demand for the good.

c.decrease the quantity demanded of the good.

d.decrease the supply of the good.

c.decrease the quantity demanded of the good.

Which of the following was a reason OPEC failed to keep the price of oil high?

a.OPEC members remained loyal to the agreement in spite of pressure from non-OPEC oil producers.

b.Consumers replaced old cars with sport utility vehicles.

c.Oil producers outside of OPEC restricted their output to drive down the market price.

d.Over the long run, producers of oil outside of OPEC responded to higher prices by expanding their production.

d. Over the long run, producers of oil outside of OPEC responded to higher prices by expanding their production.

Which of the following statements helps to explain why government drug interdiction increases drug-related crime?

a.Interdiction changes the market for drugs such that the equilibrium quantity increases.

b.Interdiction results in an increase in the amount of money needed to buy the same amount of drugs.

c.Interdiction reduces the demand for drugs.

d.The demand for illegal drugs is elastic.

b.Interdiction results in an increase in the amount of money needed to buy the same amount of drugs.

Suppose researchers discover a new shape for cranberry bogs that allow cranberry growers to harvest more cranberries than with the old shape. If the demand for cranberries is relatively inelastic, the discovery will

a.lower price and raise total revenues.

b.raise price and lower total revenues.

c.lower both price and total revenues.

d.raise both price and total revenues.

a.lower price and raise total revenues.

if the income elasticity is less than zero or negative, is it inferior or a normal good?

inferior (move in opp directions)

Normal goods move in the ___________ direction?

same

Complements move in the __________ direction?

opposite

If demand is inelastic, will total revenue increase or decrease?

increase

More time

More substitutes

It is a luxury

Narrow category

Would make a good more elastic

A decrease in the price of one complement does what to the other complement?

Increases demand for the other

A decrease in the price of one substitute does what to the other substitute?

Decreases the demand for the other

In cross-price elasticity, if elasticity is negative, are the goods substitutes or complements?

complement (change in opp directions)

If income elasticity is positive, what type of good is it?

normal good

A perfectly inelastic demand implies that buyers would

a.decrease their purchases by 100% when the price rises by 10%.

b.increase their purchases by 100% when the price rises by 10%.

c.increase their purchases by 10%when the price falls by 10%.

d.purchase the same amount as before when the price rises by 10%.

d. purchase the same amount as before when the price rises by 10%.

Because the demand for corn tends to be inelastic, the development of a new, pest-resistant strain of corn would tend to

a.decrease the supply of corn.

b.increase the total revenue of corn farmers.

c.increase the demand for corn.

d.decrease the total revenue of corn farmers.

d.decrease the total revenue of corn farmers.

Both Denis and Carol produce cupcakes and cookies. If Denis's opportunity cost of 1 cupcake is 3 cookies and Carol's opportunity cost of 1 cupcake is 4 cookies, then

a.Denis has a comparative advantage in the production of cupcakes.

b.Denis has a comparative advantage in the production of cookies.

c.Denis has a comparative advantage in the production of both cupcakes and cookies.

d.Carol has a comparative advantage in the production of cupcakes.

a. Denis has a comparative advantage in the production of cupcakes (losing the least amount of cookies, so should produce cupcakes

The production possibilities frontier illustrates the combinations of output that an economy should produce.

True

False

False (can produce)

When a tax is placed on BUYERS what happens to the market and price for buyers?

Market decreases and price increases

price ceiling below equilibrium

binding, shortage

Price floor above equilibrium

binding, surplus

If demand is more elastic than supply:

sellers/suppliers pay most of the tax burden

If supply is more elastic than demand:

buyers will bear most of the tax burden

A survey of professional economists revealed that more than three-fourths of them agreed with a number of statements. Which of the following statement is NOT one of those propositions?

a.Local and state governments should eliminate subsidies to professional sports franchises.

b.Economic growth in developed countries like the United States leads to greater levels of well-being.

c.The United States should restrict employers from outsourcing work to foreign countries.

d.The United States should eliminate agricultural subsidies.

c.The United States should restrict employers from outsourcing work to foreign countries.

Michael is a financial adviser. He bills his clients $100 an hour for his services. He can also mow his lawn in 45 minutes. He can hire someone to mow his lawn who takes 90 minutes. Of the following prices, which is the highest Michael would pay someone to mow his lawn?

a.$100

b.Michael would always mow his own lawn because he can do it faster.

c.$59

d.$74

d.$74 (At an hourly rate of $100, this means that the 45 minutes it takes for him to mow his lawn is worth $75. Therefore, of the prices listed, the highest price Michael would pay someone to mow his lawn is $74.)

If sellers expect lower prices in the near future, the current

a.supply will be unaffected.

b.demand will increase.

c.supply will increase.

d.supply will decrease.

c.supply will increase.

A decrease in quantity demanded is different from shifting the demand curve to the left because a decrease in quantity demanded

a.is caused by a change in a nonprice determinant of demand while a shift to the left is caused by a price increase.

b.is caused by a price decrease while a shift to the left is caused by a change in a nonprice determinant of demand.

c.is caused by a price increase while a shift to the left is caused by a change in a nonprice determinant of demand.

d.is caused by a change in a nonprice determinant of demand while a shift to the left is caused by a price decrease.

c.is caused by a price increase while a shift to the left is caused by a change in a nonprice determinant of demand.

The local restaurant makes such great nachos that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, she should

a.raise the price of the nachos.

b.start using cheaper chips in the production of her nachos.

c.leave the price of the nachos unchanged.

d.lower the price of the nachos.

a.raise the price of the nachos. (When demand is inelastic, price and total revenue move in the same direction so raising the price of nachos will result in higher revenue.)

A concert venue sells 15,000 tickets to a show, regardless of the market price. For this firm, the price elasticity of supply is

a.one.

b.negative one.

c.zero.

d.infinity.

c.zero. (If all of the tickets sell, regardless of the price, then the sellers have perfectly inelastic supply. With perfectly inelastic supply, elasticity equals zero.)

A binding minimum wage

a.affects only the supply of labor; it does not affect the demand for labor.

b.alters both the demand for and supply of labor.

c.alters both the quantity demanded of labor and the quantity supplied of labor.

d.affects only the demand for labor; it does not affect the supply of labor.

c.alters both the quantity demanded of labor and the quantity supplied of labor.

Rent control is

a.considered to be an inefficient way to help the poor raise their standard of living.

b.likely to cause a large shortage of housing in the short run, but a small shortage in the long run.

c.considered to be an efficient way to help the poor raise their standard of living.

d.likely to cause a small shortage of housing in both the short run and the long run.

a.considered to be an inefficient way to help the poor raise their standard of living.

Suppose the government has imposed a price floor on cheese. Which of the following events could transform the price floor from one that is binding to one that is not binding?

a.A bovine disease affects half of the cow population resulting in a higher price for milk.

b.Consumption of cheese is found to cause cancer.

c.The price of crackers, a complement to cheese, increases.

d.New technology makes the production of cheese cheaper.

a.A bovine disease affects half of the cow population resulting in a higher price for milk. . (When a price floor is binding, the price is higher than the market price. If the price of milk, an input into cheese, increases, the supply of cheese decreases resulting in a higher price of cheese. This new higher market price could exceed the price floor, making the price floor non-binding.)

Slope is always ___________ in a PPF

negative

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

a.income elasticity of demand.

b.price elasticity of supply.

c.cross-price elasticity of demand.

d.price elasticity of demand.

d.price elasticity of demand.

A is 1.8 and B is .8. Which of the following is consistent with the elasticities given?

a.A is a good several years after a price increase, and B is that same good several days after the price increase.

b.A is a carbonated beverage, and B is cola.

c.A is a necessity and B is a luxury.

d.A has fewer substitutes than B.