Business Economics test

The demand curve for oil has a _____ slope because a _____ price of oil signals that consumers will use oil  in its _____ valuable uses.

negative; lower; less

The demand curve:

shows how much buyers are willing and able to buy at different prices.

Which statement about consumer surplus is TRUE?

Consumer surplus is the gains from trade on the part of the consumer that result from a market transaction.

New research suggests that cholesterol may not be as unhealthy as previously thought. If so, what will happen to the demand for eggs, a high-cholesterol food?

It will increase because of consumers' taste for food that is perceived to be healthier.

In the worldwide coronavirus epidemic:

current demand for medical-grade face masks increased.

If the demand curve for a normal good shifts downward and to the left:

income has decreased.

Which variable is NOT a demand shifter?

price of raw materials

Coke and Pepsi are substitute soft drinks. Which of these would cause the demand curve for Pepsi to shift to the left?

The price of Coke decreases.

The quantity supplied is the quantity that sellers are:

willing and able to sell at a given price.

The supply curve:

illustrates the quantity supplied at different prices.

Which of these statements about the supply curve is TRUE?

As the price of a good rises, it becomes profitable to sell the higher-cost good.

Suppose that Saudi Arabia can produce oil at $4 per barrel, Iran at $10 per barrel, and Canada at $25 per barrel. If the price of oil is $90 per barrel, what is total producer surplus per barrel for world suppliers?

$231

A change in which factor would shift the supply curve?

production technology

Which of these would shift the supply curve to the left?

an increase in taxes on production

A government subsidy to producers causes the supply:

of the product to increase.

The enormous variety of goods and services that we consume each day can be attributed mainly to:

specialization and trade.

Which is typically a result of the division of knowledge?

Labor productivity is higher.

Fourteenth-century potters in the Chinese city of Jingdezhen developed the technology to heat a kiln at 1,300 degrees Celsius and produce porcelain, or "china," which was particularly popular in Persia, where the Koran forbade serving food on gold or silver and wealthy families were anxious for a legal way to impress their dinner guests. The potters also imported Persian cobalt to create the blue dye for the porcelain (local cobalt was not as bold in color). Which advantage(s) from trade is(are) illustrated in this passage?

all of these advantages

Economic growth in the modern era is primarily due to the:

creation of new knowledge.

Compared to Denmark's economy, the U.S. economy is huge. The United States can probably out-produce Denmark in everything the two countries make. Why is trade with Denmark still beneficial to the United States?

comparative advantage

Adam Smith:

argued that it is beneficial to buy a product if the seller can sell it to us cheaper than we can make it for ourselves, regardless of the product's country of origin.

High-productivity workers fear trade because they think they cannot compete with workers in low-productivity countries. Low-productivity workers fear trade because they think they cannot compete with workers in high-productivity countries. Which of these fears is justified?

Neither set of fears is justified.

When a rich country that has absolute advantages in all products begins trading with a poor country the wages in:

both countries will go up.

Which is TRUE regarding trade and wages?

Countries with low productivity levels will always have lower wages than high-productivity nations whether they trade or not.

When economists say that an individual or country has a comparative advantage in the production of a good, it means that they:

are the lowest-opportunity-cost producer of the good.

A production possibilities frontier shows:

all combinations of goods that a country can produce given its productivity and supply of inputs.

The trade networks of the Roman Empire:

fell apart in the medieval era, leading to the Dark Ages.

A tax on the seller of a product:

causes the supply curve for the product to shift to the left.

A tax on the seller of a product causes the buyer to _____ if the tax had been placed on the buyer.

pay the same price as

If consumers pay 100% of a commodity tax, what could one conclude?

The commodity in question has a perfectly elastic supply curve.

Which of these statements is TRUE?

When demand is elastic, buyers pay little of the tax because buyers can choose from many substitutes.

Which of these statements is TRUE? The buyer will pay more of the tax burden if the good:

I. is a luxury good.

II. is a necessity.

III. has no substitutes.

II and III only

The typical teenage smoker has a more elastic demand for cigarettes than does a typical older smoker. We expect a given cigarette tax to _____ a teenage smoker's consumption by _____ than an older smoker's consumption.

reduce; more

Who bears most of the burden of a mandate requiring employers to provide health insurance?

workers, since labor supply is less elastic than labor demand

A senator stated, "It is time to put people before profits; that is why I am sponsoring legislation that requires all businesses to purchase health insurance for their workers." Given that the demand for labor is more elastic than the supply of labor, what will be the result of this proposed legislation?

Workers will pay for their employer-provided health insurance in the form of lower wages.

The economist Henry George argued that the best tax that a government can impose is a tax on land. What was the basis of his argument?

The supply of land is highly inelastic, so taxes on land will raise lots of revenue with little deadweight loss.

Which of these statements is correct for a specific good or service?

Whoever bears the burden of a tax also receives the benefit of the subsidy.

If the percentage change in quantity demanded is calculated using the midpoint method, then the:

answer will be the same regardless of which quantity is used as the base.

The demand curve for physician office visits is quite inelastic; therefore a:

large increase in price causes quantity demanded to decrease by very little.

Why is the demand curve for Coca-Cola elastic?

There are many widely available substitutes for Coca-Cola.

The elasticity of demand measures how sensitive the:

quantity demanded is to a change in price.

The price of wheat increases, but few people cut back on their consumption of bread because:

the price of bread is low compared to income, and thus the demand for bread is inelastic.

If a 3% increase in the price of restaurant meals causes a 4% decline in the quantity of restaurant meals demanded, the demand for restaurant meals is:

elastic

The elasticity of demand for a good is −0.75. A 4% increase in price will cause a:

3.00% decrease in quantity demanded.

Marge tutors English students. If she raises her rate, her revenue increases. Brad tutors biology students. If he lowers his rate, his revenue increases. Which is TRUE?

Marge's demand is inelastic, and Brad's demand is elastic.

Why is the war on drugs hard to win?

Drug dealers get greater revenue following successful government prohibition efforts.

Increases in farm productivity lowered the prices of many agricultural products. Farm revenues decreased, which implies that the:

demand for many agricultural products is inelastic.

Which statement is FALSE?

The supply curve of oil is more inelastic in Texas than it is globally.

The BEST description of the supply curve for Picasso paintings is:

perfectly inelastic.

The day after a hurricane has hit the coast of Florida, you would expect the supply of generators to be _____ the supply of generators two weeks following the hurricane.

relatively less elastic than

A free market achieves an equilibrium price and quantity due to:

the combined actions of buyers and sellers.

Imagine a free market in which quantity supplied is 50 units and quantity demanded is 40 units at the current price. The market is experiencing a(n):

surplus.

In a free market equilibrium, prices and quantities are uniquely:

stable

Gains from trade are maximized at the:

equilibrium price and quantity.

When producers produce more than the equilibrium quantity:

resources are wasted because goods are produced at a higher cost than consumers are willing to pay.

Vernon Smith tested the supply and demand model in the laboratory and found that:

buyers and sellers quickly converged on the predicted equilibrium.

When supply decreases, there is a _____ at the old equilibrium price, which puts _____ pressure on price until the market reaches the new equilibrium.

shortage; upward

Many home buyers use mortgages to purchase new homes. What effect does an increase in interest rates have on the market for new homes?

The demand for new homes decreases, decreasing the price of new homes.

If demand increases, what happens with the supply curve?

There is a movement rightward along the supply curve.

What is the difference between a change in demand and a change in quantity demanded?

A change in demand shifts the entire curve; a change in quantity demanded means that the price changed.

OPEC is able to raise oil prices by:

decreasing the supply of oil by cutting production.

In The Meaning of Competition, economist Friedrich Hayek questioned an assumption of so-called perfect competition—that all products are identical. He wrote that the goal of all businesspeople is to make their products differ from those of their competitors. How does this relate to Schumpeter's thoughts on the textbook emphasis of pushing price down to average cost?

Competition is about innovation.

Change:

is constant in a free market.

If there are normal short-run profits in an industry, there will be:

no entry or exit.

If an industry is highly profitable, it is an indication that:

the marginal value of resources is high, and more resources need to flow into the industry.

The iconic blue-and-white Chinese porcelain sold to people all over the world (particularly between the fourteenth and the sixteenth centuries) was so successful that entrepreneurs in Persia, the Netherlands, Syria, Iberia, Mexico, and many other areas attempted to copy it. The actual process for creating such high-quality ceramics was kept secret, but in 1708 a German alchemist finally found a way to replicate the ancient art. What do you expect happened to the price of porcelain after 1708, and why?

It should have fallen because of the increased competition.

Which of these BEST help(s) entrepreneurs identify low-value industries versus high-value industries?

price signals

The elimination principle illustrates the idea that:

above-normal profits will be eliminated by the entry of new firms into the industry.

In a competitive market, firms acting in their own interest will _____ total industry costs of production.

minimize

In the long run, firms will exit industries where price is:

less than average cost.

If every firm knows its marginal cost but a central planner cannot know every firm's marginal cost, then:

competitive markets will outperform central planners.

In a perfectly competitive market:

total industry costs of production are minimized.

Suppose that you own two farms on which to grow corn. To lower the cost of production, you determine to increase production on farm 1 and reduce it on farm 2. This implies that the marginal cost of production on farm 1 is:

less than the marginal cost of production on farm 2.

Competitive firms want to produce the quantity such that:

P = MC.

A competitive firm maximizes profit when marginal cost:

equals the price.

It's worthwhile to grow roses in Kenya because:

the gains from selling roses that are grown in an ideal climate are greater than the costs of transporting them around the world.

South Africa, with large natural diamond deposits, is famous for its diamond exports. The international demand for diamonds for industrial and other purposes, such as jewelry, has led to the production of synthetic diamonds by other countries, such as the United States. Which of these BEST describes the concept highlighted in this scenario?

Prices provide incentives for sellers.

Ethanol and sugar are both made from sugar cane, and ethanol can be used as a fuel substitute for oil. An increase in the price of oil will cause the demand for ethanol to increase. This will cause the _____ sugar to _____ and its price to _____.

supply of; decrease; increase

Central planning fails because:

it has problems relating to information and incentives.

Large-scale central planning has been abandoned throughout the world (except in North Korea and Cuba) because of _____ and _____ problems.

information; incentive

The market solves the incentive problem when allocating resources because:

consumers will pay for a good only if its value is greater than its price.

Suppose there is no "great economic problem." Which of these conditions would have to hold for this to be true?

Resources are no longer scarce.

A common, contemporary alternative to central planning at the national level is a:

market system with currency pricing.

Which statement(s) is(are) TRUE?

I. A high price for a good encourages consumers to economize on its use, seeking out alternatives.

II. Rising prices give firms an incentive to bring more goods to market.

III. Firms that experience rising input prices will seek out substitute inputs and develop production technologies that conserve on the use of costly inputs.

I, II, and III

In a successful economy, firms should be:

making profits, breaking even, or going bankrupt.

Can speculators who expect prices to rise actually cause those prices to rise in the short run?

Yes; if they buy up enough of the good, they will increase demand and thus raise the price of the product.

When arbitrage occurs, goods will move from markets with _____ prices to markets with _____ prices, and prices will become _____ in both markets.

low; high; the same

Jeff agrees to buy 40,000 pounds of frozen pork bellies for delivery one year from now; upon delivery, he will pay $32,400. This transaction is called a:

futures contract.

How can a futures contract mitigate exchange rate risk for an exporting firm?

Exporters can pin down the exact exchange rate they want to trade at and ensure a certain income stream.

With speculation, prices:

become less volatile than they otherwise would be.

After the September 11 attacks, one division of the Pentagon began to set up a Policy Analysis Market (PAM), a prediction market for political events in the Middle East. U.S. senators canceled the program after discovering that it would allow futures contracts for assassinations and terrorist attacks. Had the PAM survived, how might it have helped the U.S. government?

by aggregating dispersed information about political events into a single, readable signal