question
The core of economics is
answer
individual choice
question
All economic analysis is based on
answer
a set of common principles
question
There is no such thing as a free lunch
answer
everything has a cost, even if it is free. Think time, resources, etc.
question
Resoruces
answer
anything that can be used to make something else
question
Examples of resources
answer
money, fuel, labor, land
question
Resources are scare when
answer
there is not enough of a resource available to satisfy all the potential way in which people want to use it
question
Econmics
answer
is the science of how people, firms, societies make choices under scarcity of resources to satisfy the greatest number of unlimited wants
question
Microeconomics
answer
the study of choices made by household , firms, and the government and how these choices affect the markets for goods and services
question
Macroecomics
answer
the study of the nation's economy as a whole
- if focuses on the issues of inflation, unemployment, and economic growth
- if focuses on the issues of inflation, unemployment, and economic growth
question
Which of the following words best describes what economics is about?
A. Money
B. Economic Growth
C. Choice
D. Stock market;
A. Money
B. Economic Growth
C. Choice
D. Stock market;
answer
C. Choice
question
positive incentives
answer
encourage action by offering rewards or benefits
question
Examples of Positive Incentive
answer
- bonus points to employees that work well
- health benefits encourage people to exercise
- health benefits encourage people to exercise
question
Negative Incentives
answer
discourage action by providing undesirable consequences or costs
question
Examples of negative incentives
answer
- fines for being late to work
question
Adam Smith, The Wealth of Nations
answer
a businessman whose pursuit of his own profit makes the nation wealthier
question
Invisible Hand
answer
Good of one is the goof of many
- individuals pursuing their own interest end up promoting interests of society as a whole
- individuals pursuing their own interest end up promoting interests of society as a whole
question
market economy
answer
production and consumption are the result of decentralized decisions by many firms and individuals
question
United States has a --- economy
answer
market
question
Command Economy
answer
production and production are decided by central authority
question
Market failures
answer
- the invisible hand principle does not always work
- sometimes people pursuing their own interest hurt society as a whole
- sometimes people pursuing their own interest hurt society as a whole
question
Opportunity Cost
answer
what you forgo by not choosing your next best alternative
question
Instead of attending class, one could have worked an extra hour at the café for $10 or watched a neighbor's child for $15. The opportunity cost of attending class is:
a) $5
b) $10
c) $15
d) $25
a) $5
b) $10
c) $15
d) $25
answer
c) $15
The next best alternative to attending class would be watching a neighbor's child since $15 is a greater value than $10
The next best alternative to attending class would be watching a neighbor's child since $15 is a greater value than $10
question
Erik has 3 alternatives of what to do tonight: 1) Play guitar which he values at $30, 2) take a long bike ride which he values at $20, 3) read a book on Neolithic humans which he values at $10. Suppose he chooses to play guitar. His opportunity costs are:
A. $30
B. $25
C. $20
D. $5
E. 0.
A. $30
B. $25
C. $20
D. $5
E. 0.
answer
C ) $20
He can't simultaneously take a bike ride and read a book. Opportunity cost is the value of one best alterative that he didn't choose, in this case it is going for a ride.
He can't simultaneously take a bike ride and read a book. Opportunity cost is the value of one best alterative that he didn't choose, in this case it is going for a ride.
question
Maria quits her administrative job that pays $30,000 a year, to do her four-year college degree. Her annual college expenses are $10,000 for tuition, $700 for books. She also spends $500 on food. The opportunity costs of attending
college for one year is:
A. $11,200
B. $10,700
C. $40,700
D. $41,200
college for one year is:
A. $11,200
B. $10,700
C. $40,700
D. $41,200
answer
C. $40,700
Maria's next best alternative to studying in college is working. If she worked she would have earned: $30,000. She also wouldn't need to spend money on books and tuition.
OC=30,000 + 10,000 + 700=40,700
Maria's next best alternative to studying in college is working. If she worked she would have earned: $30,000. She also wouldn't need to spend money on books and tuition.
OC=30,000 + 10,000 + 700=40,700
question
Maria is choosing between 2 alternatives: 1) going for brunch with her girlfriend which she enjoys at $30 and the cost of this brunch is $10. 2) rereading her favorite Harry Potter book under a fluffy blanket which she values at $35. In the end she picks reading. What are the opportunity cost in this example?
A. $10; B. $20; C. $30; D. $35; E. $65
A. $10; B. $20; C. $30; D. $35; E. $65
answer
B. $20
Value of the next best alternative 30 - 10 = $20
Value of the next best alternative 30 - 10 = $20
question
Tracy got a ticket to a Vance Joy concert as a gift from a friend. Before she got the ticket, she was planning on working on the homework assignment for her economics class. But in the end she decided to go to the concert.
A. The opportunity cost of going to the concert is zero since the ticket was free
B. The opportunity cost of going to the concert is doing the homework assignment;
A. The opportunity cost of going to the concert is zero since the ticket was free
B. The opportunity cost of going to the concert is doing the homework assignment;
answer
B. The opportunity cost of going to the concert is doing the homework assignment
Opportunity cost is never zero! When you choose to do something you always give up something else.
Opportunity cost is never zero! When you choose to do something you always give up something else.
question
Opportunity Cost is never --
answer
Zero !
question
The true cost of something is an ...
answer
opportunity cost
question
Marginal Analysis
answer
Comparing the additional benefits resulting from doing a little more of an activity
question
Maria is choosing between 2 alternatives: 1) going for brunch with her girlfriend which she enjoys at $30 and the cost of this brunch is $10. 2) rereading her favorite Harry Potter book under a fluffy blanket which she values at $35. In the end she picks going to a brunch. What are the opportunity cost in this example?
A. $10
B. $35
C.$30
D. $45
E. $65
A. $10
B. $35
C.$30
D. $45
E. $65
answer
D. $45
=> 35 + 10 = 45
=> 35 + 10 = 45
question
Zening is in between two options: 1) going to her favorite restaurant which she values at $40 and has to pay $20 for the meal. 2) Going to Whitney museum which she values at $50 and has to pay $22 to go to. She goes to a museum. What is her opportunity cost of doing so?
A. $20; B. $28 C. $42; D. $48;
A. $20; B. $28 C. $42; D. $48;
answer
C. $42
=> Value of option not chosen + direct costs of chosen option
40-20 + 22= 42.
=> Value of option not chosen + direct costs of chosen option
40-20 + 22= 42.
question
Saeed decides to get a college degree in marine biology to pursue his career aspirations. Invisible hand principle suggests that this decision will:
A. Improve wellbeing of Saeed but hurt the wellbeing of society as a whole;
B. Improve wellbeing of Saeed and improve the wellbeing of society as a whole.
A. Improve wellbeing of Saeed but hurt the wellbeing of society as a whole;
B. Improve wellbeing of Saeed and improve the wellbeing of society as a whole.
answer
B. Improve wellbeing of Saeed and improve the wellbeing of society as a whole
-> Invisible hand principle states that by advancing their own interests people advance interests of society as a whole. Good of one is the good of many.
-> This principles only works under certain assumptions
-> Invisible hand principle states that by advancing their own interests people advance interests of society as a whole. Good of one is the good of many.
-> This principles only works under certain assumptions
question
ceteris paribus
answer
all things equal
question
Production Possibility Frontier
answer
A model representing the trade-off faced by and economy
question
An economy is efficient if
answer
there are no missed opportunities
- there is no way to produce more of one good without producing less of other goods
- there is no way to produce more of one good without producing less of other goods
question
The graph of the production possibilities frontier shows
answer
the possible (feasible) production combinations of two goods that can be produced given the scarce resources of a society
question
All points on the PPF are ...
answer
efficient ( all resources are used to the fullest)
question
PPF enables us to show
answer
trade-offs graphically
question
On production possibility frontier you can't have
answer
more of one good without having less of the other
question
The slope of the PPF gives
answer
opportunity cost
question
for linear PPF
answer
the slope is constant along the line
question
Are points inside PPF Efficient?
a. Yes
b. No.
a. Yes
b. No.
answer
b. No.
=> Inside PPF we can produce more of one good without producing less of the other.
=> Inside PPF we can produce more of one good without producing less of the other.
question
all points inside the PPF are
answer
feasible but not efficient in production
question
Economic growth
answer
the ability of the economy to produce more goods and services
question
Which of the following statements are correct?
A. Any point on the PPF is a feasible combination of production;
B. At any point on the PPF all the resources in the economy are used fully;
C. The slope of the PPF represents the opportunity costs
D. All of the above are correct
A. Any point on the PPF is a feasible combination of production;
B. At any point on the PPF all the resources in the economy are used fully;
C. The slope of the PPF represents the opportunity costs
D. All of the above are correct
answer
D. All of the above are correct
question
A country was hit by a zombie apocalypse. The following is likely to happen to the PPF of the country:
A. Move to the right and up
B. Move to the left and down
C. Stay the same
A. Move to the right and up
B. Move to the left and down
C. Stay the same
answer
B. Move to the left and down
=> A lot of people will die, some technology will be lost. As a result the country will not be able to produce as many things as before even if it uses the remaining resources fully.
=> A lot of people will die, some technology will be lost. As a result the country will not be able to produce as many things as before even if it uses the remaining resources fully.
question
Economic growth shifts the PPF to
answer
the right
question
Sources of Economic Growth
answer
- increases in resources used for production
- increase in technology
- increase in technology
question
Boeing produces Dreamliners and small jets. In one year Boeing can either produce 20 Dreamliners, or 40 small jets. What is the opportunity cost of producing 1 Dreamliner?
A. 0.5 small jet
B. 1 small jet
C. 1.5 small jets
D. 2 small jets
E. None of the above.
A. 0.5 small jet
B. 1 small jet
C. 1.5 small jets
D. 2 small jets
E. None of the above.
answer
D. 2 small jets
- if you can produce 20 dreamliners or 40 small jets
- set up a proportion 1/x = 20 dreamliners / 40 jets and solve for x which gives you 2 small jets per 1 dreamliners
- if you can produce 20 dreamliners or 40 small jets
- set up a proportion 1/x = 20 dreamliners / 40 jets and solve for x which gives you 2 small jets per 1 dreamliners
question
When the PPF bows outward from the origin
answer
the slope and the opportunity cost are increasing as we produce more of a good;
question
When a small amount of a good is produced
answer
an opportunity cost of producing it is relatively low
question
When a relatively large amount of a good is produced opportunity cost are rising
answer
we will have to start using resources which are not particularly suited for production of this good
question
Which of the following statements is correct?
A. Opportunity costs vary along the linear PPF;
B. Opportunity costs remain constant along a liner PPF.
A. Opportunity costs vary along the linear PPF;
B. Opportunity costs remain constant along a liner PPF.
answer
B. Opportunity costs remain constant along a liner PPF
question
Happyland is producing two goods: Chocolate and marshmallows. The PPF is convex (bows outward). Which of the following statements is correct?
A.Opportunity cost is constant along the PPF
B. If Happyland increases production of marshmallows the opportunity costs of producing marshmallows will increase.
C. If Happyland increases production of marshmallows the opportunity costs of producing marshmallows will decrease.
D. None of the above.
A.Opportunity cost is constant along the PPF
B. If Happyland increases production of marshmallows the opportunity costs of producing marshmallows will increase.
C. If Happyland increases production of marshmallows the opportunity costs of producing marshmallows will decrease.
D. None of the above.
answer
B. If Happyland increases production of marshmallows the opportunity costs of producing marshmallows will increase.
question
As you move from right to left along a production possibilities frontier that is bowed out from the origin, the opportunity cost of producing the product on the horizontal axis:
A. decreases.
B. does not change.
C. increases.
D. cannot be determined
A. decreases.
B. does not change.
C. increases.
D. cannot be determined
answer
A. decreases.
question
Benefits from trade
answer
1. A voluntary exchange(trade) makes people better off when their preferences differ;
2. Trade allows individuals to specialize which in turn increases knowledge and productivity
3. To create benefits from trade, specialization should occur based on comparative advantage (opportunity costs).
2. Trade allows individuals to specialize which in turn increases knowledge and productivity
3. To create benefits from trade, specialization should occur based on comparative advantage (opportunity costs).
question
An individual or a country have an absolute advantage in an activity if
answer
he or she can do it better than other people can
question
An individual or a country have a comparative advantage in producing a good or service if
answer
the opportunity cost of producing the good is lower for that country than for the other.
question
opportunity costs of the good determines
answer
comparative advantage
question
In one year Serbia can produce more silverware than Croatia can. In order to benefit from trade ___________ should specialize on producing silverware.
A. Serbia;
B. Croatia;
C. Both countries;
D. Not enough information to answer this question.
A. Serbia;
B. Croatia;
C. Both countries;
D. Not enough information to answer this question.
answer
D. Not enough information to answer this question.
=> Serbia has absolute advantage in silverware production. Gains from trade are based on comparative advantage and opportunity cost which is not presented here.
=> Serbia has absolute advantage in silverware production. Gains from trade are based on comparative advantage and opportunity cost which is not presented here.
question
In one hour Jessica can wash 10 dishes and vacuum 2 rooms. While Justin can wash 6 dishes or vacuum 3 rooms. Which statement is correct?
A. Jessica has comparative advantage in washing dishes;
B. Jessica has comparative advantage;
C. Jessica has absolute advantage in vacuuming;
D. Justin has absolute advantage in washing dishes;
A. Jessica has comparative advantage in washing dishes;
B. Jessica has comparative advantage;
C. Jessica has absolute advantage in vacuuming;
D. Justin has absolute advantage in washing dishes;
answer
A. Jessica has comparative advantage in washing dishes
To find comparative advantage we need to find opportunity costs
Jessica's opportunity costs of 1 dish are: 2/10=1/5 of a room
Jessica's opportunity costs of 1 room are: 10/2=5 dishes
Justin's opportunity costs of 1 dish are: 3/6=1/2 of a room
Justin's opportunity costs of 1 room are: 6/3=2 dishes
=> Note that as long as opportunity cost differ, everyone has a comparative advantage in something! Specializing on that will create overall gains from trade.
To find comparative advantage we need to find opportunity costs
Jessica's opportunity costs of 1 dish are: 2/10=1/5 of a room
Jessica's opportunity costs of 1 room are: 10/2=5 dishes
Justin's opportunity costs of 1 dish are: 3/6=1/2 of a room
Justin's opportunity costs of 1 room are: 6/3=2 dishes
=> Note that as long as opportunity cost differ, everyone has a comparative advantage in something! Specializing on that will create overall gains from trade.
question
Are there potential gains from trade in this example?
answer
- As long as opportunity cost differ there are gains from trade even if one of the trading parties isn't particularly good in anything (does not have absolute advantage in anything)
question
As long as people have different opportunity costs, everyone has a
answer
comparative advantage in something
question
An individual has an ----- in an activity if he or she can do it better than other people can.
answer
absolute advantage
question
An individual has a ---- in producing a good if the opportunity cost of producing the good is lower for that individual than for other people.
answer
comparative advantage
question
----- advantage delivers gains from trade
answer
comparative
question
Sally can type 100 words per minute and David can type 200 words per minute. Given these numbers, society would be better off if which one of the two specialized on being employed as a typist?
a. Sally
b. David
c. It depends
a. Sally
b. David
c. It depends
answer
c. It depends
=> The question tells us that David has absolute advantage in typing. This however does tell us anything about what he should specialize on. Specialization depends on comparative advantage (opportunity cost of typing which is unknown in this case).
=> The question tells us that David has absolute advantage in typing. This however does tell us anything about what he should specialize on. Specialization depends on comparative advantage (opportunity cost of typing which is unknown in this case).
question
Demand Curve
answer
shows how much of a goos people will want and will be able to buy at different prices
- shows the quantity demanded at different prices
- shows the quantity demanded at different prices
question
quantity demanded
answer
the quantity of a good that buyers are willing and able to buy at a specific price
question
Demand curve slopes
answer
down
- has a negative slope
- has a negative slope
question
the lower the price the higher
answer
the quantity demanded
question
Supply curve
answer
how much of a good or a service sellers are willing and able to supply at different prices
question
A supply curve shows the
answer
quantity supplied at different prices
question
The quantity supplied is the amount of a good or service sellers are
answer
willing and able to sell at some specific price
question
Supply curve slopes
answer
upward ( has positive slope)
question
the higher the quantity supplied,
answer
The higher the price
question
Demand curve describes the behavior of:
A. Producers
B. Consumers
C. Both producers and consumer
A. Producers
B. Consumers
C. Both producers and consumer
answer
B. Consumers
=> Demand curve only describes behavior of consumers. Producers are described by supply curve
=> Demand curve only describes behavior of consumers. Producers are described by supply curve
question
Equilibrium price is
answer
a price at which quantity demanded equals quantity supplied
question
Suppose the price is below equilibrium price. This will result in a:
A. Shortage and price will rise
B. Shortage and price will fall
C. Surplus and price will rise
D. Surplus and price will fall.
A. Shortage and price will rise
B. Shortage and price will fall
C. Surplus and price will rise
D. Surplus and price will fall.
answer
A. Shortage and price will rise
- Price always goes back to equilibrium. So if a price is below equilibrium it will have to go up to get to equilibrium. If prices are low there is a shortage: not enough producers willing to sell at such a low price.
- Price always goes back to equilibrium. So if a price is below equilibrium it will have to go up to get to equilibrium. If prices are low there is a shortage: not enough producers willing to sell at such a low price.
question
The price of coffee decreased. This is going to:
A. Increase quantity demanded of coffee
B. Decrees quantity demanded of coffee.
A. Increase quantity demanded of coffee
B. Decrees quantity demanded of coffee.
answer
A. Increase quantity demanded of coffee
question
Reading a demand curve horizontally
answer
how much buyers are willing and able to purchase at a given price
question
Reading a demand curve vertically
answer
Maximum price the buyers are wiling to pay for a given unit of a good
question
The demand curve describes the relationship between price and quantity demanded while
answer
holding all else equal
question
The law of demand says
answer
that a lower price of a good, other things equal, leads people to demand a higher quantity of the good
question
An increase in the demand means
answer
An increase in quantity demanded for every
given price
given price
question
A shift in demand curve right and up
answer
is an increase in demand
- new curve will have a greater quantity demanded at every given price
- greater willingness to pay for the same quantity
- new curve will have a greater quantity demanded at every given price
- greater willingness to pay for the same quantity
question
Factors that shift the demand curve
answer
- Change in population (number of consumers)
- Change in income
- Change in tastes
- Changes in expectations
- Changes in the price of related goods: substitutes
- Changes in the price of of related goods: complement
- Change in income
- Change in tastes
- Changes in expectations
- Changes in the price of related goods: substitutes
- Changes in the price of of related goods: complement
question
What happens to demand for donuts when the price of donuts increases?
A. Shift to the left
B. Shift to the right
C. Not change
D. We can't say
A. Shift to the left
B. Shift to the right
C. Not change
D. We can't say
answer
C. Not change
When a price of donuts increases:
• there is a moment along the demand curve and change in quantity demanded;
• demand (demand curve) for donuts doesn't change.
When a price of donuts increases:
• there is a moment along the demand curve and change in quantity demanded;
• demand (demand curve) for donuts doesn't change.
question
Quantity demanded refers to the
answer
point on the curve and a change in quantity demanded is caused by a change in price. For each demand curve, price can change but everything else is held constant.
question
Demand refers to the
answer
whole curve.
A change in any of the things held constant (price of related goods, income, tastes, expectations, the number of consumers) will cause the whole curve to shift. This means that, at each and every price, quantity demanded is different.
A change in any of the things held constant (price of related goods, income, tastes, expectations, the number of consumers) will cause the whole curve to shift. This means that, at each and every price, quantity demanded is different.
question
---- causes movement along the demand curve
answer
Change in price
question
---- caused a shift in the demand curve
answer
change in the demand
question
A booming economy and resulting increase in incomes increases home sales:
A. Move along the demand curve (change in quantity demanded);
B. A shift in the demand curve (change in demand).
A. Move along the demand curve (change in quantity demanded);
B. A shift in the demand curve (change in demand).
answer
B. A shift in the demand curve (change in demand).
=> Price of homes didn't change, hence it is not the movement along the demand curve. Incomes changed, it shifts the curve.
=> Price of homes didn't change, hence it is not the movement along the demand curve. Incomes changed, it shifts the curve.
question
Cutting cigarette ads from TV causes cigarette smoking among teens to fall.
A. Move along the demand curve (change in quantity demanded);
B. A shift in the demand curve (change in demand).
A. Move along the demand curve (change in quantity demanded);
B. A shift in the demand curve (change in demand).
answer
B. A shift in the demand curve (change in demand).
=> No change in price of cigarettes. Change in preferences/tastes, hence shift of the demand curve.
=> No change in price of cigarettes. Change in preferences/tastes, hence shift of the demand curve.
question
An increase in the tax on cigarettes
increases cigarette prices. As a result
the sales of cigarettes decrease.
A. Move along the demand curve (change in quantity demanded);
B. A shift in the demand curve (change in demand).
increases cigarette prices. As a result
the sales of cigarettes decrease.
A. Move along the demand curve (change in quantity demanded);
B. A shift in the demand curve (change in demand).
answer
A. Move along the demand curve (change in quantity demanded)
=> The price of cigarettes changed, hence it is the movement along the demand curve (changes the quantity demanded).
=> The price of cigarettes changed, hence it is the movement along the demand curve (changes the quantity demanded).
question
Which of the following statements illustrates the law of demand?
Fewer people go to vacations in Disney because incomes have fallen;
Increase in price of gasoline decreases demand for SUVs;
Consumers buy more computers because prices decreased.
Fewer people go to vacations in Disney because incomes have fallen;
Increase in price of gasoline decreases demand for SUVs;
Consumers buy more computers because prices decreased.
answer
Consumers buy more computers because prices decreased.
=> The law of demand says that a lower price of a good, other things equal, leads people to demand a larger quantity of the good;
=> The law of demand says that a lower price of a good, other things equal, leads people to demand a larger quantity of the good;
question
Which of the following will decrease demand for lemonade?
A. The price of Pepsi and Coke increases dramatically;
B. Lemonade becomes less fashionable/cool to drink;
C. Increase in price of lemonade;
D. Decrease in price of lemonade;
E. Sugar, an ingredient in lemonade production becomes more expensive.
A. The price of Pepsi and Coke increases dramatically;
B. Lemonade becomes less fashionable/cool to drink;
C. Increase in price of lemonade;
D. Decrease in price of lemonade;
E. Sugar, an ingredient in lemonade production becomes more expensive.
answer
B. Lemonade becomes less fashionable/cool to drink
Demand shifts, so something other than price needs to change. Decrease in demand can be triggered by decrease in taste for lemonade.
Demand shifts, so something other than price needs to change. Decrease in demand can be triggered by decrease in taste for lemonade.
question
Which of the following would cause the demand curve for ice cream to shift to the right?
a. A reduction in the price of ice cream.
b. A reduction in the cost of producing ice cream.
c. A rise in the price of popsicles, a substitute for ice cream.
d. An unexpected cold and rainy summer season.
a. A reduction in the price of ice cream.
b. A reduction in the cost of producing ice cream.
c. A rise in the price of popsicles, a substitute for ice cream.
d. An unexpected cold and rainy summer season.
answer
c. A rise in the price of popsicles, a substitute for ice cream
question
When there are more potential buyers, demand increases and
answer
shifts up and right
question
If an increase in income leads to an increase in the demand for concert tickets, than concerts are a(n):
A. Compliment good
B. Normal good
C. Inferior good
D. Substitute good.
A. Compliment good
B. Normal good
C. Inferior good
D. Substitute good.
answer
B. Normal good
question
Normal good causes the demand to
answer
go up when income goes up
question
Inferior good causes the demand to
answer
go down when income goes up
question
Examples of normal good
answer
cars
food in a nice restaurant
clothes
food in a nice restaurant
clothes
question
When people get richer the demand for normal goods ----
answer
goes up and the demand curve shifts to the right
question
Inferior good
answer
one which considered less desirable than other more expensive options
question
examples of inferior goods
answer
Ramen Noodles
Used cars
Generic Cereals
Used cars
Generic Cereals
question
When income goes up demand for the inferior good
answer
goes down and the demand curve shifts left
question
Flare jeans are becoming fashionable
again. The demand for this kind of
jeans will:
A. Shift to the left
B. Shift to the right
C. Not change
D. We can't tell
again. The demand for this kind of
jeans will:
A. Shift to the left
B. Shift to the right
C. Not change
D. We can't tell
answer
B. Shift to the right
- If the tastes change in favor of a good, the demand increases (demand curve shifts right)
- If the tastes change in favor of a good, the demand increases (demand curve shifts right)
question
If the tastes change against the good, fewer people want to buy it at every given price, so demand ..
answer
decreases (shifts left).
question
The price of chocolate is expected to decrease in one month. What will happen to the demand for chocolate now?
A. Increase
B. Decrease
C. Stay the same.
A. Increase
B. Decrease
C. Stay the same.
answer
B. Decrease
question
If people expect a price of a good to decrease in the future they decrease the demand for a good now
answer
=> demand curve shifts left;
question
Expected decrease in a price of a good means there will be
answer
decrease in demand now
question
Expected increase in a price for a good means there will be
answer
increase in demand now.
question
Expected decrease in income
answer
decrease in demand now (for a normal good)
question
If two goods are ---- an increase in price of one good leads to a increase in demand for the other good.
answer
substitutes
question
complements goods
answer
are goods which are usually consumed together, complement each other.
question
example of complement goods
answer
peanut butter and jelly
question
The price of lettuce increased. What is likely to happen to demand for salad dressing?
A. Increase
B. Decrease
C. Stay the same.
A. Increase
B. Decrease
C. Stay the same.
answer
B. Decrease
=> Lettuce and salad dressing are used together. They are complements. The demand of a good decreases when a price of a complement good increases (the price and demand move in the opposite direction).
=> Lettuce and salad dressing are used together. They are complements. The demand of a good decreases when a price of a complement good increases (the price and demand move in the opposite direction).
question
When the price of a good X
decreased, the demand for good Y
decreased in response. From this
information we can conclude that X
and Y are:
A. Inferior goods
B. Normal goods
C. Substitutes
D. Complements.
decreased, the demand for good Y
decreased in response. From this
information we can conclude that X
and Y are:
A. Inferior goods
B. Normal goods
C. Substitutes
D. Complements.
answer
C. Substitutes
When a price of a substitute decreases, demand for the other good decreases too.
Example: Pepsi and Coke.
When a price of a substitute decreases, demand for the other good decreases too.
Example: Pepsi and Coke.
question
The price of chicken decreased. The following is likely to happen to demand for chicken:
A. Demand will increase
B. Demand will decrease
C. Demand will stay the same.
A. Demand will increase
B. Demand will decrease
C. Demand will stay the same.
answer
C. Demand will stay the same.
=> Only quantity demanded changed here (movement along the curve), but the demand does not change.
=> Only quantity demanded changed here (movement along the curve), but the demand does not change.
question
Which of the following will increase demand for a good now?
A. Decrease in price of the good now;
B. Increase in expected income (assuming it is a normal good);
C. Decrease in number of consumers;
D. Decrease in costs of production of the good;
A. Decrease in price of the good now;
B. Increase in expected income (assuming it is a normal good);
C. Decrease in number of consumers;
D. Decrease in costs of production of the good;
answer
B. Increase in expected income (assuming it is a normal good)
question
Supply curve describes the behavior of
answer
producers
question
Reading supply curve horizontally
answer
shows how much of a good sellers are willing and able to supply at a given price.
question
reading supply curve vertically
answer
A minimum price (costs) at which the sellers are willing and able to supply a given quantity of a good
question
The key future of a supple curve is that it slopes
answer
upward (has a positive slope)
question
Producers are willing and and able to supply more when prices
answer
get higher
question
The price of chocolate decreased. The following is likely to happen:
A.the supply of chocolate will increase
B. the supply of chocolate will decrease
C. the quantity supplied of chocolate will increase
D. the quantity supplied of chocolate will decrease
A.the supply of chocolate will increase
B. the supply of chocolate will decrease
C. the quantity supplied of chocolate will increase
D. the quantity supplied of chocolate will decrease
answer
D. the quantity supplied of chocolate will decrease;
=> The supply curve has a positive slope. The lower the price the less sellers are willing to supply.
=> The supply curve has a positive slope. The lower the price the less sellers are willing to supply.
question
----- refers to a point and supply refers to the whole curve.
answer
Quantity supplied
question
For each supply curve, price can change but everything else is -----
answer
held constant.
If any of the things held constant changes the whole curve will shift.
If the curve shifts, at each and every price, quantity will be different.
If any of the things held constant changes the whole curve will shift.
If the curve shifts, at each and every price, quantity will be different.
question
An increase in the supply means
answer
An increase in quantity supplied for every given price
question
increase in supply
answer
a rightward shift of the supply curve
question
What is the main factor for supply to increase (shift)?
answer
Reduction in costs of producers or sellers
question
When costs decrease
answer
supply increases (curve shifts right and down)
question
Decrease in supply is a shift
answer
to the left and up
question
Increase in cost
answer
decreases supply
question
input
answer
any good or service which is used to produce a good or service
question
price of inputs reflect
answer
costs
question
An increase in a price of an input will
answer
decrease supply
question
A decrease in a price of an input will
answer
increase supply
question
Technological innovations....
answer
lower costs and increase supply
question
An increase in a tax is equivalent to
answer
an increase in cost
question
an increase in tax will --- supply
answer
decrease
it shifts the supply curve left
it shifts the supply curve left
question
Which of the following will decrease supply of wooden furniture?
A. Decrease in price of wooden furniture;
B. Decrease in taste for wooden furniture (it becomes less fissionable);
C. Decrease in taxes for furniture;
D. Increase in the price of wood.
A. Decrease in price of wooden furniture;
B. Decrease in taste for wooden furniture (it becomes less fissionable);
C. Decrease in taxes for furniture;
D. Increase in the price of wood.
answer
D. Increase in the price of wood
=> Wood is an input in production of wooden furniture, so when it gets more expensive supply decreases: producers have to charge more for every quantity of furniture produced.
=> Wood is an input in production of wooden furniture, so when it gets more expensive supply decreases: producers have to charge more for every quantity of furniture produced.
question
A new cherry picking machine makes it easier to pick cherries. As a result supply of cherries will ___________, and the supply curve for cherries will__________.
A. Increase; shift to the left.
B. Decrease; shift to the left.
C. Increase; shift to the right.
D. Decrease; shift to the right.
A. Increase; shift to the left.
B. Decrease; shift to the left.
C. Increase; shift to the right.
D. Decrease; shift to the right.
answer
C. Increase; shift to the right
=>When supply increases it shifts to the right and down (larger quantity is supplied at each price since thanks to the machine the producers can collect more cherries)
=>When supply increases it shifts to the right and down (larger quantity is supplied at each price since thanks to the machine the producers can collect more cherries)
question
---- is the only factor which changes both supply and demand
answer
Changes in expected price
question
A price of sleeping bags (a substitute in production of jackets) increased. What is going to happen to supply of jackets?
A. It will stay the same
B. It will increase
C. It will decrease.
A. It will stay the same
B. It will increase
C. It will decrease.
answer
C. It will decrease
question
Entry of produces ---- supply
answer
increases
question
Exit of produces --- supply.
answer
decreases
question
Which of the following will shift the supply curve for cars to the left?
A. Improvement in car production technology
B. An increase in number of car sellers
C. Higher subsidies for the car industry
D. Increase in wages in car industry
A. Improvement in car production technology
B. An increase in number of car sellers
C. Higher subsidies for the car industry
D. Increase in wages in car industry
answer
D. Increase in wages in car industry
=> All the other changes (except D) decrease the costs of producing cars and hence increase supply => shift the supply curve to the right.
=> All the other changes (except D) decrease the costs of producing cars and hence increase supply => shift the supply curve to the right.
question
An improvement in technology of production of airplanes will:
A. Shift the demand curve for airplanes to the right
B. Shift the supply curve for airplanes to the right
C. Shift the demand curve for airplanes to the left
D. Shift the supply curve for airplanes to the left
A. Shift the demand curve for airplanes to the right
B. Shift the supply curve for airplanes to the right
C. Shift the demand curve for airplanes to the left
D. Shift the supply curve for airplanes to the left
answer
B. Shift the supply curve for airplanes to the right
- Changes in technology only affect producers that is why only the supply curve shifts. Demand curve is affected by things affecting consumers.
- Improvement in technology means lower costs and hence increases supply.
- Changes in technology only affect producers that is why only the supply curve shifts. Demand curve is affected by things affecting consumers.
- Improvement in technology means lower costs and hence increases supply.
question
Which of the following will
increase supply of potatoes now?
A.Increase in price of a squash (a good produced in climate conditions similar to those of potatoes);
B. Decrease in expected price of potatoes
C. Increase in price of potatoes now;
D. Increase in price of fertilizer
increase supply of potatoes now?
A.Increase in price of a squash (a good produced in climate conditions similar to those of potatoes);
B. Decrease in expected price of potatoes
C. Increase in price of potatoes now;
D. Increase in price of fertilizer
answer
B. Decrease in expected price of potatoes
=> If the prices of potatoes are expected to decrease, producers will increase the supply now while they are more expensive.
=> If the prices of potatoes are expected to decrease, producers will increase the supply now while they are more expensive.
question
The price of cars decreased. The following is likely to happen:
A. the supply of cars will increase
B. the supply of cars will decrease
C. the quantity supplied of cars will increase
D. the quantity supplied of cars will decrease
A. the supply of cars will increase
B. the supply of cars will decrease
C. the quantity supplied of cars will increase
D. the quantity supplied of cars will decrease
answer
D. the quantity supplied of cars will decrease
=> When price is the only thing which changes, quantity supplied is affected but the supply curve remains unchanged.
=> When price is the only thing which changes, quantity supplied is affected but the supply curve remains unchanged.
question
Equilibrium price is a price at which quantity demanded
answer
equals quantity supplied
question
The market price is likely to rise when:
A. quantity supplied and quantity demanded are equal.
B. quantity supplied is greater than quantity demanded.
C. quantity supplied is less than quantity demanded.
D. market equilibrium is reached.
A. quantity supplied and quantity demanded are equal.
B. quantity supplied is greater than quantity demanded.
C. quantity supplied is less than quantity demanded.
D. market equilibrium is reached.
answer
C. quantity supplied is less than quantity demanded
- Qs<Qd means that there is a shortage
- not enough good for everyone who wants to buy it
- the price will increase because people will be willing to pay more and producers will realize that they can charge higher price and still sell all the goods they have.
- Qs<Qd means that there is a shortage
- not enough good for everyone who wants to buy it
- the price will increase because people will be willing to pay more and producers will realize that they can charge higher price and still sell all the goods they have.
question
If the market price is above the equilibrium price, there is a
answer
- surplus
- more producers want to sell the good than there are buyers
- more producers want to sell the good than there are buyers
question
The market price falls if it is
answer
above the equilibrium price
question
If the market price is above the equilibrium price, there is a
answer
shortage
- more buyers want to get the good than suppliers are willing and able to supply at this price
- more buyers want to get the good than suppliers are willing and able to supply at this price
question
The market price increases if it is
answer
below the equilibrium price
question
Who is usually in charge of decreasing prices back to equilibrium if there is a surplus on a competitive market?
A. The government;
B. Financial intermediaries;
C. No one: pries decrease because consumers and firms respond to incentives
D. Stock brokers
A. The government;
B. Financial intermediaries;
C. No one: pries decrease because consumers and firms respond to incentives
D. Stock brokers
answer
C. No one: pries decrease because consumers and firms respond to incentives
question
The income of middle class families in U.S. increased. How is it likely to affect the equilibrium price and quantity of restaurant meals (a normal good).
A. Increase price; decrease quantity
B. Increase price; increase quantity
C. Decrease price; decrease quantity
D. Decrease price; increase quantity
A. Increase price; decrease quantity
B. Increase price; increase quantity
C. Decrease price; decrease quantity
D. Decrease price; increase quantity
answer
B. Increases price; increases quantity
question
Steps to solve questions about supply and demand correctly
answer
Step 1: draw a graph and mark an equilibrium before a change;
Step 2: Identify whether a change is affecting consumers (demand) or producers (supply);
Step 3: Figure out which way the curve shifts, left or right;
Step 4: Draw a shift on the graph;
Step 5: Mark changes in equilibrium price and quantity on the graph.
Note: do not attempt to do it without drawing graphs.
Step 2: Identify whether a change is affecting consumers (demand) or producers (supply);
Step 3: Figure out which way the curve shifts, left or right;
Step 4: Draw a shift on the graph;
Step 5: Mark changes in equilibrium price and quantity on the graph.
Note: do not attempt to do it without drawing graphs.
question
Farmers in California are now required by law to provide bigger houses for chickens. How is it affecting equilibrium price and quantity of eggs?
A. Increases price; decreases quantity B. Increases price; increases quantity; C. Decreases price; decreases quantity
D. Decreases price; increases quantity
A. Increases price; decreases quantity B. Increases price; increases quantity; C. Decreases price; decreases quantity
D. Decreases price; increases quantity
answer
A. Increases price; decreases quantity
question
A price of cookies (a substitute for cupcakes) decreased. How is it going to affect equilibrium price and quantity of cupcakes?
A. Increase price; decrease quantity; B. Increase price; increase quantity;
C. Decrease price; decrease quantity;
D. Decrease price; increase quantity;
A. Increase price; decrease quantity; B. Increase price; increase quantity;
C. Decrease price; decrease quantity;
D. Decrease price; increase quantity;
answer
C. Decrease price; decrease quantity
=> We are interested in the market for cupcakes. When a price of a substitute good (cookies) decreases, the demand for cupcakes decreases (shifts left)
=> We are interested in the market for cupcakes. When a price of a substitute good (cookies) decreases, the demand for cupcakes decreases (shifts left)
question
You notice that the price of oranges falls and the quantity of oranges sold increases. This set of observations can be the result of the:
A. supply of oranges decreased.
B. demand for oranges increased.
C. demand for of oranges decreased. D. supply of oranges increased.
A. supply of oranges decreased.
B. demand for oranges increased.
C. demand for of oranges decreased. D. supply of oranges increased.
answer
D. supply of oranges increased
question
Suppose that the price of beef rises significantly. What happens in the market for fast-food hamburgers?
A. Supply increases, pushing prices higher.
B. Supply increases, pushing prices lower.
C. Supply decreases, pushing prices higher.
D. Supply decreases, pushing prices lower.
A. Supply increases, pushing prices higher.
B. Supply increases, pushing prices lower.
C. Supply decreases, pushing prices higher.
D. Supply decreases, pushing prices lower.
answer
C. Supply decreases, pushing prices higher.
- Higher cost in an input of production of beef result in decrease in supply. Draw the graphs to see how it affects price.
- Higher cost in an input of production of beef result in decrease in supply. Draw the graphs to see how it affects price.
question
Consider the market for Nike shoes (a normal good). Incomes increased. At the same time the materials used in sports shoes production become cheaper. The following is likely to happen on the market for Nike shoes:
A. Both price and quantity sold will increase;
B. The price will increase and the quantity can increase, decrease or stay the same;
C. The quantity will decrease and the price will increase, decrease or stay the same;
D. The quantity will increase and the price will increase, decrease or stay the same.
A. Both price and quantity sold will increase;
B. The price will increase and the quantity can increase, decrease or stay the same;
C. The quantity will decrease and the price will increase, decrease or stay the same;
D. The quantity will increase and the price will increase, decrease or stay the same.
answer
D. The quantity will increase and the price will increase, decrease or stay the same.
question
If there is simultaneous increase in both supply and demand the equilibrium quantity will increase for sure then the price change is
answer
ambiguous!
question
Tips for solving questions when both supply and demand shift simultaneously
answer
- When both supply and demand shift simultaneously expect that either the change in price or quantity will be ambiguous;
- Draw the shifts of similar magnitude to determine which one is ambiguous.
- Draw the shifts of similar magnitude to determine which one is ambiguous.
question
Fiberglass (an input in production of surfboards) becomes more expensive. At the same time the number of people who like surfing increases. The equilibrium quantity of surfboards will ________, while equilibrium price of surfboards will __________.
A. increase; Increase, decrease or stay the same;
B. Decrease; Increase, decrease or stay the same;
C. Increase, decrease or stay the same; Decrease.
D. increase, decrease or stay the same; Increase.
E. Increase; increase.
A. increase; Increase, decrease or stay the same;
B. Decrease; Increase, decrease or stay the same;
C. Increase, decrease or stay the same; Decrease.
D. increase, decrease or stay the same; Increase.
E. Increase; increase.
answer
D. increase, decrease or stay the same; Increase.
- Increase in demand, decrease in supply. If both curves shift simultaneously either the direction of demand or supply shift will be ambiguous.
- Increase in demand, decrease in supply. If both curves shift simultaneously either the direction of demand or supply shift will be ambiguous.
question
The following events happen simultaneously: number of producers of whiskey increased, the price of glasses (complement good for whiskey) decreased, stricter drunk driving laws make whiskey less popular, cost of barrels used in production of whiskey decreased. How will those events affect the equilibrium price of whiskey?
A. Increase price
B. Decrease price
C. Will have an ambiguous effect on price
A. Increase price
B. Decrease price
C. Will have an ambiguous effect on price
answer
C. Will have an ambiguous effect on price
=> Decrease in a price of complement pushes the demand to increase, while stricter driving laws push demand to decrease. Since we do not know which way demand shift the effect on price and quantity will be ambiguous.
=> Decrease in a price of complement pushes the demand to increase, while stricter driving laws push demand to decrease. Since we do not know which way demand shift the effect on price and quantity will be ambiguous.
question
The following events happen simultaneously: number of producers of whiskey increased, the price of glasses (complement for whiskey) increased, stricter drunk driving laws make whiskey less popular, cost of barrels used in production of whiskey decreased. How will those events affect the equilibrium price of whiskey?
A. Increase price;
B. Decrease price;
C. Will have an ambiguous effect on price
A. Increase price;
B. Decrease price;
C. Will have an ambiguous effect on price
answer
B. Decrease price
=> Simultaneous increase in supply and decrease in demand decrease price and have an ambiguous effect on equilibrium quantity.
=> Simultaneous increase in supply and decrease in demand decrease price and have an ambiguous effect on equilibrium quantity.
question
Consider a market for fresh roses. The supply of roses increases and at the same time demand for roses increases. The change in supply is substantially larger than the change in demand. What will happen to the equilibrium price of roses?
A. The price will increase
B. The price will decrease
C. The change in price will be ambiguous.
A. The price will increase
B. The price will decrease
C. The change in price will be ambiguous.
answer
B. The price will decrease
-- Since we know that the shift in supply is going to be larger, we can determine what happens to the price: it falls down. The increase in supply dominates and increase in supply pushes prices down. Draw graphs.
-- If increase in demand was larger in magnitude, the price would increase.
-- Knowing which shift is larger allows us to determine the direction of change of both price and quantity.
-- Since we know that the shift in supply is going to be larger, we can determine what happens to the price: it falls down. The increase in supply dominates and increase in supply pushes prices down. Draw graphs.
-- If increase in demand was larger in magnitude, the price would increase.
-- Knowing which shift is larger allows us to determine the direction of change of both price and quantity.
question
competative market
answer
a market in which there are many buyers and sellers for the same good or service;
question
Key feature of a competitive market
answer
No individual producer or buyer has a noticeable effect on the price at which the good or service are sold
question
Examples of competitive markets
answer
- corn market (an individual farmer has no effect on a market price)
- coffee market (even Starbucks is only responsible for a small fraction of transactions)
- coffee market (even Starbucks is only responsible for a small fraction of transactions)
question
Consumer surplus
answer
the difference between what the buyer would have been willing to pay and what the buyer actually pays for a good.
question
Cosumer surplus =
answer
Willingness to pay - price
question
Consumer Surplus is never
answer
zero
question
Total consumer surplus
answer
is the sum of the individual consumer surpluses of all the buyers of a good
question
Jamele values a pair of shoes at $100, Courtney values the same shoes at $70 and Elena values them at $50. The actual price of shoes is $60. What is the total consumer surplus for the three girls?
A. $220;
B. $110;
C. $160;
D. $50;
E. $40;
A. $220;
B. $110;
C. $160;
D. $50;
E. $40;
answer
D. $50
(100-60) + (70-60) + 0 =50.
(100-60) + (70-60) + 0 =50.
question
a decrease in price increases consumer surplus =>
answer
consumers become better off;
question
Producer surplus
answer
is actual price received for the good minus the the costs of producing that quantity of a good
question
Producer surplus =
answer
Price - Costs
question
Producer surplus is never
answer
negative
question
Boris is willing to mow lawns for $10 each, Samuel is willing to mow lawns for $20 each, and Ahmed is willing to mow lawns for $30 each. If the going rate for lawn mowing is $12, what is the total producer surplus received by the 3 of them?
A. $2
B. $32
C.$50
D. -$24
A. $2
B. $32
C.$50
D. -$24
answer
A. $2
12-10 + 0 + 0=2.
12-10 + 0 + 0=2.
question
The producer surplus from sales of the good at a given price on a graph is
answer
the area above the supply curve and below that price.
question
The price of milk decreased. Other things equal the following is likely to happen:
A. Producer surplus will decrease;
B. Producer surplus will increase;
C. Consumer surplus will decrease.
A. Producer surplus will decrease;
B. Producer surplus will increase;
C. Consumer surplus will decrease.
answer
A. Producer surplus will decrease;
=> When prices go down producers are worse of, which is reflected in lower Producer Surplus.
=> When prices go down producers are worse of, which is reflected in lower Producer Surplus.
question
Consumer surplus can be represented graphically as an area:
A. Below the price;
B. Above the price;
C. Below the price and above the supply curve;
D. Above the price and below the demand curve;
E.Below the supply curve;
A. Below the price;
B. Above the price;
C. Below the price and above the supply curve;
D. Above the price and below the demand curve;
E.Below the supply curve;
answer
D. Above the price and below the demand curve
question
Consider a market for corn. Suppose farmers had an unusually good harvest. The following is likely to happen:
A. Consumer surplus will decrease;
B. Consumer surplus will increase;
C. Consumer surplus will not change;
D. The change in consumer surplus is ambiguous;
A. Consumer surplus will decrease;
B. Consumer surplus will increase;
C. Consumer surplus will not change;
D. The change in consumer surplus is ambiguous;
answer
B. Consumer surplus will increase
question
Total surplus
answer
is the sum of consumer and producer surplus
- represents gains from trade: when trading at equilibrium price both buyers and sellers who trade gain from it
- represents gains from trade: when trading at equilibrium price both buyers and sellers who trade gain from it
question
Anthony is selling a couch on craigslist for $150. Ting is willing to pay up to $100 for this kind of a couch. What is the total surplus on this market?
A. 250; B. 50; C. 0; D. -50;
A. 250; B. 50; C. 0; D. -50;
answer
C. 0
=> This transaction will not take place because the willingness to pay is below the costs. Hence TS=0. Only mutually beneficial transactions take place.
=> This transaction will not take place because the willingness to pay is below the costs. Hence TS=0. Only mutually beneficial transactions take place.
question
Sarah is willing to pay $4 for a latte. The actual price of a latte is $3. The cost of making one latte is $1. What are the Consumer, Producer and Total surplus in this example?
A. CS=3; PS=3; TS=6.
B. CS=1; PS=2; TS=3.
C. CS=0; PS=0; TS=0.
D. CS=2; PS=1; TS=3
A. CS=3; PS=3; TS=6.
B. CS=1; PS=2; TS=3.
C. CS=0; PS=0; TS=0.
D. CS=2; PS=1; TS=3
answer
B. CS=1; PS=2; TS=3.
CS=WTP-P
=4-3=1
PS=P-Cost
=3-1=2
TS=CS+PS
= WTP-Cost
=1+2=3.
CS=WTP-P
=4-3=1
PS=P-Cost
=3-1=2
TS=CS+PS
= WTP-Cost
=1+2=3.
question
Price ceiling
answer
a government sets a maximum price of the good, the price can't be higher than that
question
Price floor
answer
a government sets a minimum price of the good, the price can't get lower than that
question
Price ceiling or floor are binding
answer
if they prevent the market from getting to equilibrium and non-binding otherwise.
question
A binding price ceiling decreases the incentives of producers to sell more of a good as a result there is a
answer
shortage
question
total surplus without a price ceiling
answer
total surplus is maximized
question
The quantity bought/sold with binding price ceiling
answer
will equal quantity supplied
question
Deadweight loss
answer
is a lost surplus associated with the transactions that no longer occur (quantity sold/bought below the equilibrium)
question
If the government puts a binding
price ceiling on college tuition it is
likely that:
A. More students will get a college degree.
B. Less students will get a college degree.
price ceiling on college tuition it is
likely that:
A. More students will get a college degree.
B. Less students will get a college degree.
answer
B. Less students will get a college degree.
-If college education market is competitive, setting price below the equilibrium will result in
lower quantity sold on the market ( colleges can not supply that much at a lower price).
-If college education market is competitive, setting price below the equilibrium will result in
lower quantity sold on the market ( colleges can not supply that much at a lower price).
question
How a price ceiling creates inefficiency
answer
- Shortage;
- Deadweight loss: Inefficiently low quantity
purchased on the market;
- Wasted resources by consumers to purchase the good;
- Low quality;
- Illegal markets
- Deadweight loss: Inefficiently low quantity
purchased on the market;
- Wasted resources by consumers to purchase the good;
- Low quality;
- Illegal markets
question
Suppose equilibrium price of almonds is $8 per pound. The government introduces a price ceiling of $9 per pound. What are going to be the
effects of this price ceiling?
A. Shortage of almonds
B. Low quality of almonds
C. Wasted resources of consumers
D. All of the above
E. None of the above.
effects of this price ceiling?
A. Shortage of almonds
B. Low quality of almonds
C. Wasted resources of consumers
D. All of the above
E. None of the above.
answer
None of the above.
- This price ceiling is non binding (Producers can still charge the equilibrium price of $8). Hence this ceiling will not have any effect on almonds market.
- If the price ceiling was binding (say the government set the price at $7, than D would be a correct answer).
- This price ceiling is non binding (Producers can still charge the equilibrium price of $8). Hence this ceiling will not have any effect on almonds market.
- If the price ceiling was binding (say the government set the price at $7, than D would be a correct answer).
question
How a binding price floor creates inefficiency:
answer
- Surplus;
- Deadweight loss: inefficiently low quantity
purchased on the market;
- Inefficiently high quality;
- Illegal activity
- Deadweight loss: inefficiently low quantity
purchased on the market;
- Inefficiently high quality;
- Illegal activity
question
The equilibrium price of milk is $3 per gallon. The government tells that the maximum price producers can charge is $5. This is an example of:
A. Binding price floor
B. Binding price ceiling
C. Non-binding price ceiling
D. Non-binding price floor
A. Binding price floor
B. Binding price ceiling
C. Non-binding price ceiling
D. Non-binding price floor
answer
C. Non-binding price ceiling
question
All of the following are the effects of a binding price floor, except for:
A. Surplus of a good
B. Inefficiently low quality of a good; C. Deadweight loss
D. Potential increase in illegal activity
A. Surplus of a good
B. Inefficiently low quality of a good; C. Deadweight loss
D. Potential increase in illegal activity
answer
B. Inefficiently low quality of a good
=> Surplus creates inefficiently high quality. low quality is triggered by binding price ceiling.
=> Surplus creates inefficiently high quality. low quality is triggered by binding price ceiling.
question
The government introduces a binding price floor. As a result:
A. Efficiency of the market will increase
B. Efficiency of the market will decrease
C. Efficiency of the market will not change
A. Efficiency of the market will increase
B. Efficiency of the market will decrease
C. Efficiency of the market will not change
answer
B. Efficiency of the market will decrease
- Efficiency will decrease: some mutually beneficial transactions would not take place anymore (decrease in total surplus due to deadweight loss)
- Efficiency will decrease: some mutually beneficial transactions would not take place anymore (decrease in total surplus due to deadweight loss)
question
A state is affected by a hurricane. As a result demand for bottled water increases. The government doesn't let the stores sell the water above the initial equilibrium price. This will result in:
A. Surplus of bottled water
B. Shortage of bottled water
C. Neither a shortage nor a surplus of water
A. Surplus of bottled water
B. Shortage of bottled water
C. Neither a shortage nor a surplus of water
answer
B. Shortage of bottled water
-When demand increases equilibrium price and quantity increase. But because of price restriction is in essence a binding price ceiling. That creates a shortage.
-When demand increases equilibrium price and quantity increase. But because of price restriction is in essence a binding price ceiling. That creates a shortage.
question
The government introduces a binding price floor on milk to aid milk farmers. As a result the following will happen:
A. More producers will sell milk
B. Less producers will sell milk
C. The sales of milk will remain the same.
A. More producers will sell milk
B. Less producers will sell milk
C. The sales of milk will remain the same.
answer
B. Sales of milk will decrease
=> At this new higher price less consumers will be willing and able to buy the good. We can't make consumers buy the good if they don't want too, so there will be a surplus: not so many people willing to buy and a lot of producers willing to sell
=> At this new higher price less consumers will be willing and able to buy the good. We can't make consumers buy the good if they don't want too, so there will be a surplus: not so many people willing to buy and a lot of producers willing to sell
question
Which of the following illustrates equity-efficiency tradeoff?
A. Government intervention can increase efficiency of the markets;
B. Actions intended to make economic outcomes more fair can cause the size of the economy to decrease;
C. It is often possible to reach maximum equality and maximum efficiency at the same time.
A. Government intervention can increase efficiency of the markets;
B. Actions intended to make economic outcomes more fair can cause the size of the economy to decrease;
C. It is often possible to reach maximum equality and maximum efficiency at the same time.
answer
B. Actions intended to make economic outcomes more fair can cause the size of the economy to decrease;
question
Taxes on coffee increased. Which of the following will happen on the coffee market?
A. Equilibrium price and quantity of coffee will increase;
B. Equilibrium price and quantity of coffee will decrease;
C. Equilibrium price will increase while equilibrium quantity will decrease;
D. Equilibrium price will decrease while equilibrium quantity will increase;
A. Equilibrium price and quantity of coffee will increase;
B. Equilibrium price and quantity of coffee will decrease;
C. Equilibrium price will increase while equilibrium quantity will decrease;
D. Equilibrium price will decrease while equilibrium quantity will increase;
answer
C. Equilibrium price will increase while equilibrium quantity will decrease
- shift in supply curve to the left ( decrease in supply)
- shift in supply curve to the left ( decrease in supply)
question
The price of software (a complement for laptops) decreased, at the same time incomes in the economy increased. What will happen to producer surplus on the market for laptops (laptops are a normal good)?
A. Producer surplus will decrease
B. Producer surplus will increase
C. Producer surplus will not change
D. The change in Producer surplus is ambiguous;
A. Producer surplus will decrease
B. Producer surplus will increase
C. Producer surplus will not change
D. The change in Producer surplus is ambiguous;
answer
B. Producer surplus will increase
question
The price of corn (a substitute in production of soy) decreased. What will happen to the producer surplus on the market for soy?
A. Producer surplus will decrease;
B. Producer surplus will increase;
C. Producer surplus will not change;
D. The change in Producer surplus is ambiguous;
A. Producer surplus will decrease;
B. Producer surplus will increase;
C. Producer surplus will not change;
D. The change in Producer surplus is ambiguous;
answer
D. The change in Producer surplus is ambiguous
=> Supply will increase (shift to the right), producer surplus will be pushed down by price decrease and pushed up by quantity increase. It is not clear which of the two effects is larger, it depends on the shape of the curve
=> Supply will increase (shift to the right), producer surplus will be pushed down by price decrease and pushed up by quantity increase. It is not clear which of the two effects is larger, it depends on the shape of the curve
question
Happyland and Friendshipland only produce spaghetti and tomato sauce. Happyland can produce more pasta and more sauce in one year than Friendshipland can. Can the two countries still benefit from trade with each other?
A. The cannot benefit from trade;
B. Both can benefit from trading with each other if each country specializes on what its absolute advantage is;
C. Both can benefit from trading with each other if each country specializes on what its comparative advantage is;
D. Only Happyland can benefit from trade;
E. Only Friendshipland can benefit from trade.
A. The cannot benefit from trade;
B. Both can benefit from trading with each other if each country specializes on what its absolute advantage is;
C. Both can benefit from trading with each other if each country specializes on what its comparative advantage is;
D. Only Happyland can benefit from trade;
E. Only Friendshipland can benefit from trade.
answer
C. Both can benefit from trading with each other if each country specializes on what its comparative advantage is
- Comparative advantage determines gains from trade. Happyland has absolute advantage but this is not what matters for trade.
- Comparative advantage determines gains from trade. Happyland has absolute advantage but this is not what matters for trade.
question
Number of consumers of donuts decreased. At the same time the technology of producing donuts improved.Equilibrium price will_____________, equilibrium quantity will__________.
A. change ambiguously; increase;
B. change ambiguously; decrease
C. decrease; change ambiguously
D. increase; change ambiguously;
E. change ambiguously; change ambiguously;
A. change ambiguously; increase;
B. change ambiguously; decrease
C. decrease; change ambiguously
D. increase; change ambiguously;
E. change ambiguously; change ambiguously;
answer
C. decrease; change ambiguously
- Decrease in demand, increase in supply.
- Decrease in demand, increase in supply.
question
Demand for flowers increased and at the same time supply of flowers decreased. The shift in supply is larger than shift in demand. Equilibrium price will_____________,
equilibrium quantity will__________.
A. change ambiguously; increase;
B. increase; change ambiguously;
C. decrease; increase;
D. increase; increase.
E. increase; decrease.
equilibrium quantity will__________.
A. change ambiguously; increase;
B. increase; change ambiguously;
C. decrease; increase;
D. increase; increase.
E. increase; decrease.
answer
E. increase; decrease.
question
Trevon is choosing between going to a movie and going on a long bike ride. The ticket to the movie costs $8 and he values watching it at $15. He values the bike ride at $20 and doesn't need to pay for it (already has the bike). He chooses to go on the bike ride. What are his opportunity cost in this case?
A. 0; B. $7; C. $8; D. $15; E. $20.
A. 0; B. $7; C. $8; D. $15; E. $20.
answer
B. $7
=> Opportunity cost is the value of the next best alternative. 15-8=7 value of going to the movie.
=> Opportunity cost is the value of the next best alternative. 15-8=7 value of going to the movie.
question
Suppose the price of ceramic cups increases. This will:
A. Decrease demand for ceramic cups;
B. Increase supply of ceramic cups;
C. Decrease supply of ceramic cups;
D. Increase quantity supplied of ceramic cups;
E. Decrease quantity supplied of ceramic cups;
A. Decrease demand for ceramic cups;
B. Increase supply of ceramic cups;
C. Decrease supply of ceramic cups;
D. Increase quantity supplied of ceramic cups;
E. Decrease quantity supplied of ceramic cups;
answer
D. Increase quantity supplied of ceramic cups
=> when price is the only thing that changes, only quantity supplied changes (movement along the supply curve) no change in supply (shift in supply)
=> when price is the only thing that changes, only quantity supplied changes (movement along the supply curve) no change in supply (shift in supply)
question
Which points of the following points are feasible given the current state of technology?
A. Points on the PPF
B. Points under the PPF
C. Points above PPF
D. A and B;
E. A and C;
A. Points on the PPF
B. Points under the PPF
C. Points above PPF
D. A and B;
E. A and C;
answer
D. A and B
=> Points above PPF are currently not feasible
=> Points above PPF are currently not feasible
question
Suppose a country is only producing goods X and Y. Suppose the PPF is linear. The country started to produce more of a good X. As a result:
A. Opportunity costs of good X will increase;
B. Opportunity costs of good X will decrease;
C. Opportunity costs of good X will stay the same.
A. Opportunity costs of good X will increase;
B. Opportunity costs of good X will decrease;
C. Opportunity costs of good X will stay the same.
answer
C. Opportunity costs of good X will stay the same.
question
Suppose a country is only producing goods X and Y. Suppose the PPF is bowing outward from the origin. The country started to produce more of a good X. As a result:
A. Opportunity costs of good X will increase;
B. Opportunity costs of good X will decrease;
C. Opportunity costs of good X will stay the same.
A. Opportunity costs of good X will increase;
B. Opportunity costs of good X will decrease;
C. Opportunity costs of good X will stay the same.
answer
A. Opportunity costs of good X will increase;
=> The more of the good is produced the higher the opportunity cost.
=> The more of the good is produced the higher the opportunity cost.
question
In one week Shuo can print 30 hoodies or 150 t-shirts. In one week Ignacio can print 40 hoodies or 80 t- shirts. What would be an acceptable terms of trade for them?
A. Ignacio gives Shuo 1 hoodie in return for 1 t-shirt;
B. Ignacio gives Shuo 1 hoodie in return for 3 t-shirts;
C. Ignacio gives Shuo 1 hoodie in return for 4 t-shirts;
D. Ignacio gives Shuo 1 hoodie in return for 6 t-shirts;
E. Both B and C.
A. Ignacio gives Shuo 1 hoodie in return for 1 t-shirt;
B. Ignacio gives Shuo 1 hoodie in return for 3 t-shirts;
C. Ignacio gives Shuo 1 hoodie in return for 4 t-shirts;
D. Ignacio gives Shuo 1 hoodie in return for 6 t-shirts;
E. Both B and C.
answer
E. Both B and C.
Opportunity cost
SHUNO
30H=150T => 1H=150/30=5T. 1T=1/5H
Ignacio40H=80T => 1H=80/40=2T 1T=1/2H
Ignacio has comparative advantage in hoodies (2T<5T) and hence should specialize in hoodies
Opportunity cost
SHUNO
30H=150T => 1H=150/30=5T. 1T=1/5H
Ignacio40H=80T => 1H=80/40=2T 1T=1/2H
Ignacio has comparative advantage in hoodies (2T<5T) and hence should specialize in hoodies
question
Which of the following statements about total surplus is true?
A. Total surplus measures gains from trade
B. Total surplus decreases when binding price controls are introduced
C.Both of the above
D. None of the above
A. Total surplus measures gains from trade
B. Total surplus decreases when binding price controls are introduced
C.Both of the above
D. None of the above
answer
C.Both of the above
question
Which of the following statements illustrates the law of demand?
A. People drink less coffee because prices have increased
B. Lower cost of camera decrease the costs of cellphone production
C. Winter sports become more popular due to winter Olympics and more people want to ice-skate
D. Due to higher incomes more people want to get organic food
A. People drink less coffee because prices have increased
B. Lower cost of camera decrease the costs of cellphone production
C. Winter sports become more popular due to winter Olympics and more people want to ice-skate
D. Due to higher incomes more people want to get organic food
answer
A. People drink less coffee because prices have increased
question
Which of the following always increases demand for all goods?
A. Change in tastes
B. Increase in income
C. Decrease in cost of producing a good
D. Increase in price of a substitute good
A. Change in tastes
B. Increase in income
C. Decrease in cost of producing a good
D. Increase in price of a substitute good
answer
D. Increase in price of a substitute good
question
The price of gold is expected to decrease. Which of the following is true:
A. Supply of gold now will increase
B. Demand for gold now will decrease
C. Both A and B are true
D. None of the above
A. Supply of gold now will increase
B. Demand for gold now will decrease
C. Both A and B are true
D. None of the above
answer
C. Both A and B are true
question
The price of gas (a complement for cars) increased. At the same time new technology allowing cheaper production of batteries (a car part) was developed. The following is likely to happen in the car market: equilibrium price will__________________, equilibrium quantity will____________________
A. decrease; increase
B. decrease; change ambiguously
C. change ambiguously; increase
D. change ambiguously; decrease
A. decrease; increase
B. decrease; change ambiguously
C. change ambiguously; increase
D. change ambiguously; decrease
answer
B. decrease; change ambiguously
question
Which of the following will decrease demand for sparkling wine:
A. An increase in price of sparkling wine
B. An improving in technology of producing sparkling wine
C. Increase in expected price of sparkling wine
D. None of the above
A. An increase in price of sparkling wine
B. An improving in technology of producing sparkling wine
C. Increase in expected price of sparkling wine
D. None of the above
answer
D. None of the above
question
Which of the following is NOT an effect of a binding price ceiling:
A. Deadweight loss
B. Inefficiently low quality
C. Potential for illegal markets
D. Quantity actually sold on the market is above equilibrium quantity
A. Deadweight loss
B. Inefficiently low quality
C. Potential for illegal markets
D. Quantity actually sold on the market is above equilibrium quantity
answer
D. Quantity actually sold on the market is above equilibrium quantity
question
In 1 hour Camilla can solve 5 math problems or 10 econ problems. In one hour Sonya can solve 8 math problems or 24 econ problems. Which of the following statements is true:
A. Camilla should specialize in math problems since she has comparative advantage in math
B. Camilla should specialize in econ problems since she has comparative advantage in econ
C. Sonya should specialize both in math and econ problems since she has comparative advantage in both
A. Camilla should specialize in math problems since she has comparative advantage in math
B. Camilla should specialize in econ problems since she has comparative advantage in econ
C. Sonya should specialize both in math and econ problems since she has comparative advantage in both
answer
A. Camilla should specialize in math problems since she has comparative advantage in math
question
The equilibrium price of beer is $7 per pack. The government requires the minimum price of beer to be at least $5 per pack. This is an example of:
A. Binding price ceiling
B. Binding price floor
C. Non-binding price ceiling
D. Non-binding price floor
A. Binding price ceiling
B. Binding price floor
C. Non-binding price ceiling
D. Non-binding price floor
answer
D. Non-binding price floor
question
In one day Norway can produce 7 tones of tuna or 14 tones of salmon. In one day Japan can produce 4 tones of tuna or 16 tones of salmon. Which of the following terms of trade will Norway agree too (find beneficial):
A. Norway gives away one tone of tuna to Japan to get 1.5 tones of salmon
B. Norway gives one tone of tuna to Japan to get 3 tones of salmon
C. Both of the above
D. None of the above
A. Norway gives away one tone of tuna to Japan to get 1.5 tones of salmon
B. Norway gives one tone of tuna to Japan to get 3 tones of salmon
C. Both of the above
D. None of the above
answer
B. Norway gives one tone of tuna to Japan to get 3 tones of salmon
question
Suppose there are NO price controls in the market for furniture. Suppose the price of furniture is currently below equilibrium. The following is likely to happen in the furniture market;
A. The price will increase because there is a shortage;
B. The price will decrease because there is a shortage;
C. The price will increase because there is a surplus;
D. The price will decrease because there is a surplus;
E. The price will remain exactly the same.
A. The price will increase because there is a shortage;
B. The price will decrease because there is a shortage;
C. The price will increase because there is a surplus;
D. The price will decrease because there is a surplus;
E. The price will remain exactly the same.
answer
A. The price will increase because there is a shortage;
question
Elisa is willing to pay $650 for a snowboard. Joshua is willing to pay $500 for a snowboard. Max is willing to pay $400 for a snowboard. The actual price of a snowboard is $450. What is a total consumer surplus in this example?
A. $700;
B. $250;
C. $200;
D. None of the above.
A. $700;
B. $250;
C. $200;
D. None of the above.
answer
B. $250
question
Holding other things equal, what happens to producer surplus when price decreases?
A. Producer surplus increases;
B. Producer surplus decreases;
C. Producer surplus stays the same;
D. The change in producer surplus is ambiguous.
A. Producer surplus increases;
B. Producer surplus decreases;
C. Producer surplus stays the same;
D. The change in producer surplus is ambiguous.
answer
B. Producer surplus decreases;
question
Which of the following points on the PPF graph are efficient:
A. Points below the PPF;
B. Points above the PPF;
C. Points on the PPF;
D. All of the above.
A. Points below the PPF;
B. Points above the PPF;
C. Points on the PPF;
D. All of the above.
answer
C. Points on the PPF;
question
Alan can make much more pancakes per hour than George. Which of the two men should specialize in making pancakes?
A. George should specialize on making pancakes;
B. Alan should specialize on making pancakes;
C. There is not enough information to answer this question.
A. George should specialize on making pancakes;
B. Alan should specialize on making pancakes;
C. There is not enough information to answer this question.
answer
C. There is not enough information to answer this question.
question
There is a simultaneous decrease in demand and supply. Decrease in demand is larger in magnitude than the decrease in supply. Which of the following is true:
A. Both equilibrium price and quantity will increase;
B. Both equilibrium price and quantity will decrease;
C. Change in both quantity and price will be ambiguous;
D. Equilibrium price will increase while equilibrium quantity will decrease.
A. Both equilibrium price and quantity will increase;
B. Both equilibrium price and quantity will decrease;
C. Change in both quantity and price will be ambiguous;
D. Equilibrium price will increase while equilibrium quantity will decrease.
answer
B. Both equilibrium price and quantity will decrease;
question
Nicolas usually eats croissants and caramel together. This means that for him croissants and caramel are:
A. Inferior goods;
B. Normal goods;
C. Substitutes;
D. Complements.
A. Inferior goods;
B. Normal goods;
C. Substitutes;
D. Complements.
answer
D. Complements.
question
There used to be a binding price floor in the soy market. The government removes this binding price floor. As a result of this removal the following is likely to happen on the soy market:
A. More soy will be purchased;
B. Less soy will be purchased;
C. The amount of soy purchased will remain the same.
A. More soy will be purchased;
B. Less soy will be purchased;
C. The amount of soy purchased will remain the same.
answer
A. More soy will be purchased;
question
The following events happen simultaneously: Snowboarding becomes more popular after the Winter Olympics, price of skis (substitute in production of snowboards) decrease, the price of ski lifts in Vermont (complement for snowboarding) falls, government starts to subsidize production of snowboards. How will it affect the equilibrium quantity of snowboards?
A. Increase;
B. Decrease;
C. Will have an ambiguous effect on quantity.
A. Increase;
B. Decrease;
C. Will have an ambiguous effect on quantity.
answer
A. Increase;
question
Which of the following will shift the demand curve for nail polish to the left?
A. Ingredients of nail polish become more expensive;
B. Nail polish becomes more expensive;
C. Manicure services (complement for nail polish) become more expensive;
D. Number of consumers of nail polish decreases.
A. Ingredients of nail polish become more expensive;
B. Nail polish becomes more expensive;
C. Manicure services (complement for nail polish) become more expensive;
D. Number of consumers of nail polish decreases.
answer
C. Manicure services (complement for nail polish) become more expensive;
question
Which of the following points on the PPF graph are feasible?
A. Points on the PPF;
B. Points below PPF;
C. Points above PPF;
D. Both A and B are correct.
A. Points on the PPF;
B. Points below PPF;
C. Points above PPF;
D. Both A and B are correct.
answer
D. Both A and B are correct.
question
To receive gains from trade countries should specialize on their_________________ , the activity with ___________________ .
a. Comparative advantage; lowest opportunity cost
b. Comparative advantage; highest opportunity cost
c. Absolute advantage; lowest opportunity cost
d. Absolute advantage; highest opportunity cost
a. Comparative advantage; lowest opportunity cost
b. Comparative advantage; highest opportunity cost
c. Absolute advantage; lowest opportunity cost
d. Absolute advantage; highest opportunity cost
answer
a. Comparative advantage; lowest opportunity cost
question
An increase in the price of chocolate now will:
A. Increases supply for chocolate
B. Decrease demand for chocolate
C.Both A and B
D. None of the above
A. Increases supply for chocolate
B. Decrease demand for chocolate
C.Both A and B
D. None of the above
answer
D. None of the above
question
Melanie has 3 alternatives on what to do on Sunday: study for medical school exams, (which she values at $30); go to a free theater show with a friend (which she values at $40); watch the new season of her favorite TV-show at home (which she values at $45 and has to pay $10 to see). Melanie chooses to go to the theater. What are her opportunity costs in this case?
A. 30
B. 35
C. 40
D. 45
A. 30
B. 35
C. 40
D. 45
answer
B. 35
question
William's income increased. His consumption of bread decreased as a result. This suggests that for William bread is
A. A substitute good
b. A complement good
c. A normal good
d. An inferior good
A. A substitute good
b. A complement good
c. A normal good
d. An inferior good
answer
d. An inferior good
question
Which of the following results in a shortage?
A. Binding price ceiling
b. Binding price floor
c. Non-binding price ceiling
d. Non-binding price floor
A. Binding price ceiling
b. Binding price floor
c. Non-binding price ceiling
d. Non-binding price floor
answer
A. Binding price ceiling
question
Olivia is willing to tutor economics for $25 an hour. Bill is willing to tutor economics for $20 per hour. Susan is willing to tutor economics for $15. The actual price paid for tutoring is $22 per hour. What is a total producer surplus for one hour in this example?
a. 3
b. 6
c. 9
d. 13
a. 3
b. 6
c. 9
d. 13
answer
c. 9
question
Which of the following always increases demand for all goods:
A. Change in tastes
B. Increase in income
c. Decrease in cost of producing a good
d. Increase in price of a substitute good
A. Change in tastes
B. Increase in income
c. Decrease in cost of producing a good
d. Increase in price of a substitute good
answer
d. Increase in price of a substitute good
question
Consider a PPF for two goods which is bowing outward. As we produce more of a good depicted on the vertical access (moving from right to left on the PPF), the opportunity cost of producing the good on the vertical access:
A. Remains the same
b. Decreases
c. Increases
A. Remains the same
b. Decreases
c. Increases
answer
c. Increases
question
Which of the following will decrease supply of oranges?
a. Decrease in price of oranges
b. Decrease in price of fertilizer used in production of oranges
c. Increase in price of clementine (a fruit which grows at a climate similar to orange)
d. Increase in incomes (assuming orange is a normal good)
a. Decrease in price of oranges
b. Decrease in price of fertilizer used in production of oranges
c. Increase in price of clementine (a fruit which grows at a climate similar to orange)
d. Increase in incomes (assuming orange is a normal good)
answer
c. Increase in price of clementine (a fruit which grows at a climate similar to orange)
question
The price of both goods X and Y increased by 10%. The quantity demanded of good Y decreased by 5% as a result. While the quantity demanded of good X decreased by 15%. Which of the following statements is true:
A. Demand for good X is more elastic than demand for good Y
B. Demand for good Y is more elastic than demand for good X
C. We can't demand for which good is more elastic
A. Demand for good X is more elastic than demand for good Y
B. Demand for good Y is more elastic than demand for good X
C. We can't demand for which good is more elastic
answer
A. Demand for good X is more elastic than demand for good Y
question
Kayla's books is a perfectly competitive book seller. Currently the marginal revenue of selling one more book are exactly equal to a price of a book. To maximize profit Kayla's books should
A. Increase production
B. Decrease production
C. Do nothing since profit is already maximized
D. Not enough information to answer this question
A. Increase production
B. Decrease production
C. Do nothing since profit is already maximized
D. Not enough information to answer this question
answer
D. Not enough information to answer this question
question
Claudia is a monopolist for potted plants production in her town. Currently the price of potted plants is above the minimum of Average Total Cost. This will result in______________ new firms and ______________________ in price of potted plants.
A. no entry of, no change
B. entry of , decrease
C. entry of, increase
D. exit of; increase
A. no entry of, no change
B. entry of , decrease
C. entry of, increase
D. exit of; increase
answer
A. no entry of, no change
question
Which of the following can experience positive economic profits in the short run?
A. Monopolist
B. Perfectly competitive firm
C. Both A and B
A. Monopolist
B. Perfectly competitive firm
C. Both A and B
answer
C. Both A and B
question
Elisa owns the only pesto making firm in town, she is a single-price monopolist. If Elisa charges $10 per a can of pesto, she gets 10 customers. If she wanted to get an 11th customer, she would have to lower her price to $8. What is Elisa's marginal revenue of selling 11th can of pesto?
A. -$12
B. $8
C. $12
D. $88
A. -$12
B. $8
C. $12
D. $88
answer
A. -$12
question
Which of the following describes a supply curve of a perfectly competitive firm in the long run:
A. Average Total Cost curve when it is below Marginal Cost
B. Average Total Cost curve when it is above Marginal Cost
C. Marginal Cost curve above the minimum of Average Variable Cost
D. Horizontal line with price at the minimum of Average Total Costs
A. Average Total Cost curve when it is below Marginal Cost
B. Average Total Cost curve when it is above Marginal Cost
C. Marginal Cost curve above the minimum of Average Variable Cost
D. Horizontal line with price at the minimum of Average Total Costs
answer
D. Horizontal line with price at the minimum of Average Total Costs
question
The price of milk increased. The total revenue of firms selling milk remained the same. This suggests that demand for milk is:
A. Elastic
B. Inelastic
C. Unit elastic
D. Perfectly inelastic
E. Perfectly elastic
A. Elastic
B. Inelastic
C. Unit elastic
D. Perfectly inelastic
E. Perfectly elastic
answer
C. Unit elastic
question
A perfectly competitive firm is making a positive profit if:
A. P>MR
B. P=MR
C. P>min ATC
D. MR=MC
E. Both B and D
A. P>MR
B. P=MR
C. P>min ATC
D. MR=MC
E. Both B and D
answer
C. P>min ATC
question
Jennet runs a sporting goods store. Her total revenue is $3500 per month; her explicit costs are $1000 per month. If she wouldn't be running a store she would be working as an accountant and receiving a monthly salary of $2000. What is Jennet's economic profit from running the business?
A. $500
B. $2500
C. $3500
D. -$2500
A. $500
B. $2500
C. $3500
D. -$2500
answer
A. $500
question
The price of candles increased. What will happen to demand for candles over time?
A. Elasticity of demand will stay the same
B. Elasticity of demand will decrease
C. Elasticity of demand will increase
D.Elasticity of demand will become zero
A. Elasticity of demand will stay the same
B. Elasticity of demand will decrease
C. Elasticity of demand will increase
D.Elasticity of demand will become zero
answer
C. Elasticity of demand will increase
question
What is a short run?
A. A period of one month or less
B. A period of one year or less
C. A period during which a firm has some fixed inputs
D. A period during which a firm has some variable inputs
A. A period of one month or less
B. A period of one year or less
C. A period during which a firm has some fixed inputs
D. A period during which a firm has some variable inputs
answer
C. A period during which a firm has some fixed inputs
question
Which of the following is always true for a monopoly?
A. P>MR
B. P=MR
C. P>min ATC
D. MR=MC
A. P>MR
B. P=MR
C. P>min ATC
D. MR=MC
answer
A. P>MR
question
Evan sells hand made guitars and he is a monopolist in his town. There are currently two consumers who want to buy a guitar from him. The first consumer is wiling to pay $700 for one of Evan's guitars. The second consumer is willing to pay $600 for one of Evan's guitars. It costs even $400 to make a guitar. Evan engages in a perfect price discrimination. What is a consumer surplus on this market?
A. 0
b $200
c. $300
d. $500
e. There is not enough information to answer this question
A. 0
b $200
c. $300
d. $500
e. There is not enough information to answer this question
answer
A. 0
question
Margaret is producing woolen coats. It costs her $200 to produce one coat, $380 to produce two coats and $530 to produce three coats. What are average costs of producing 2 coats?
A. $150
B. $180
C. $190
D.not enough information answer this question
A. $150
B. $180
C. $190
D.not enough information answer this question
answer
C. $190
question
Price elasticity of demand for post cards is -3. Demand for postcards is:
A. Elastic
B. Inelastic
C. Unit-elastic
D. Perfectly inelastic
A. Elastic
B. Inelastic
C. Unit-elastic
D. Perfectly inelastic
answer
A. Elastic
question
Which of the following is an example of imperfect price discrimination:
A. Charging different customers of an art gallery exactly their willingness to pay for a pint of a photograph
B. Charging different prices for a different breed of puppies
C. Providing coupons for milk
D. None of the above
A. Charging different customers of an art gallery exactly their willingness to pay for a pint of a photograph
B. Charging different prices for a different breed of puppies
C. Providing coupons for milk
D. None of the above
answer
C. Providing coupons for milk
question
Ivan is producing sweaters. His variable costs of making one sweater are $40. His variable costs of making two sweaters is $70. What are his marginal cost of making the second sweater?
A. $30
B. $55
C.There is not enough information to answer this question
A. $30
B. $55
C.There is not enough information to answer this question
answer
A. $30
question
Leonardo is currently making 10 ceramic cups. His Average Variable Costs are $10, his Fixed Costs are $60. What are his Total Costs of producing 10 cups?
A. $7
B.$61
C. $160
D. $700
A. $7
B.$61
C. $160
D. $700
answer
C. $160
question
Good Y has very few substitutes while good X has a lot of substitutes. Other things equal demand for good X is likely to be:
A. Inelastic
B. Elastic
C. Unit-elastic
D. Perfectly inelastic
E. Perfectly elastic
A. Inelastic
B. Elastic
C. Unit-elastic
D. Perfectly inelastic
E. Perfectly elastic
answer
B. Elastic
question
If price is below Average Variable Cost the profit is:
A. Negative
B. Positive
C.We can't tell
A. Negative
B. Positive
C.We can't tell
answer
A. Negative
question
Compared to single price monopoly perfectly price discriminating monopoly ________________ deadweight loss and ______________________ producer surplus
A. decreases; decreases
B. decreases; increases
C. increases; decreases
D.increases; increases
A. decreases; decreases
B. decreases; increases
C. increases; decreases
D.increases; increases
answer
B. decreases; increases
question
A firm is experiencing decreasing returns to scale if:
A. Long Run Average Total Cost increase as output increases
B. Long Run Average Total Cost decrease as output increases
C. Marginal cost increase as output increases
D. Short Run Average fixed cost decrease as output increases
A. Long Run Average Total Cost increase as output increases
B. Long Run Average Total Cost decrease as output increases
C. Marginal cost increase as output increases
D. Short Run Average fixed cost decrease as output increases
answer
A. Long Run Average Total Cost increase as output increases
question
Consider a monopoly producing at a profit maximizing quantity of output. The price is currently below the minimum of Average Fixed Cost. In the short run the firm should :
A. Continue producing at a loss
B. Close
C. Decrease the quantity of output
D. Increase the quantity of output
E. There is not enough information to answer
A. Continue producing at a loss
B. Close
C. Decrease the quantity of output
D. Increase the quantity of output
E. There is not enough information to answer
answer
E. There is not enough information to answer
question
Which of the following elasticites can be negative?
A. Price elasticity of demand
B. Income elasticity
C. Elasticity of supply
D. A and B
E. All of the above
A. Price elasticity of demand
B. Income elasticity
C. Elasticity of supply
D. A and B
E. All of the above
answer
D. A and B
question
A monopoly is producing profit-maximizing quantity of output at a 100 pills per day. The firm charges $5 per pill. The marginal revenue of the monopoly is:
A. $5
B. more than $5
C. less than $5
D.500
A. $5
B. more than $5
C. less than $5
D.500
answer
C. less than $5
question
Suppose demand for marijuana is perfectly inelastic in Holland. Suppose it becomes more expensive to produce marijuana in Holland due to change in regulation. What will happen on marijuana market as a results:
A. Equilibrium price will decrease, equilibrium quantity will stay the same
B. Equilibrium price will decrease, equilibrium quantity will increase
C. Equilibrium price will increase, equilibrium quantity will decrease
D. Equilibrium price will increase, equilibrium quantity will stay the same
E. Equilibrium price will increase, equilibrium quantity change is ambiguous
A. Equilibrium price will decrease, equilibrium quantity will stay the same
B. Equilibrium price will decrease, equilibrium quantity will increase
C. Equilibrium price will increase, equilibrium quantity will decrease
D. Equilibrium price will increase, equilibrium quantity will stay the same
E. Equilibrium price will increase, equilibrium quantity change is ambiguous
answer
D. Equilibrium price will increase, equilibrium quantity will stay the same
question
A single price monopoly is likely to charge _____________ price and sell_______________ quantity than a compatible perfectly competitive firm
A. lower; lower
B. higher; lower
C. lower; higher
D. higher; higher
A. lower; lower
B. higher; lower
C. lower; higher
D. higher; higher
answer
B. higher; lower
question
A firm decreased output a little. As a result Average Total Cost will:
A. Increase
B. Decrease
C. Can both increase or decrease
A. Increase
B. Decrease
C. Can both increase or decrease
answer
C. Can both increase or decrease
question
Consider a perfectly competitive firm producing at a profit maximizing quantity of output. The price is currently below the minimum of ATC. In the long run the firm should:
A. Continue producing at a loss
B. Close
C. Decrease the quantity of output
D. Increase the quantity of output
E. There is not enough information to answer
A. Continue producing at a loss
B. Close
C. Decrease the quantity of output
D. Increase the quantity of output
E. There is not enough information to answer
answer
B. Close
question
Which of the following is NOT an example of a barrier to entry for monopoly
A. Increasing returns to scale
B. Patents
C. Diminishing returns to an input
D. Ownership of a rare resource
A. Increasing returns to scale
B. Patents
C. Diminishing returns to an input
D. Ownership of a rare resource
answer
C. Diminishing returns to an input
question
There are diminishing returns to an input when:
a. an increase in the quantity of the input used, holding other factors constant, leads to a decline in its total product
b. an increase in the quantity of the input used, holding other factors constant, leads to a decline in its marginal product
c. the amount of the input cannot be varied during the production period
d. an increase in the quantity of the input used, holding other factors constant, leads to negative marginal product
a. an increase in the quantity of the input used, holding other factors constant, leads to a decline in its total product
b. an increase in the quantity of the input used, holding other factors constant, leads to a decline in its marginal product
c. the amount of the input cannot be varied during the production period
d. an increase in the quantity of the input used, holding other factors constant, leads to negative marginal product
answer
a. an increase in the quantity of the input used, holding other factors constant, leads to a decline in its total product
question
"Ukrainian Delights" is a monopolist for Ukrainian pies in our city. Currently the marginal cost of selling one more pie are below the marginal revenue of selling one more pie. To maximize profit "Ukrainian Delights" should:
A. Increase production
B. Decrease production
C. Do nothing since profit is already maximized
D. Not enough information to answer this question
A. Increase production
B. Decrease production
C. Do nothing since profit is already maximized
D. Not enough information to answer this question
answer
A. Increase production
question
Which of the following is likely to make a supply of a good more elastic:
A. A good has a lot of substitutes
B. A good is a luxury good
C. Little time passed after the price of a good changed
D. It is easy to expand production of a good
A. A good has a lot of substitutes
B. A good is a luxury good
C. Little time passed after the price of a good changed
D. It is easy to expand production of a good
answer
D. It is easy to expand production of a good
question
Which of the statements is TRUE for an imperfectly price discriminating monopolist?
A. The level of output is the same as in case of perfect competition
B. Consumer surplus is zero because it all goes to the monopolist
C. Deadweight loss is smaller than in case of single price monopoly
D. All of the above
A. The level of output is the same as in case of perfect competition
B. Consumer surplus is zero because it all goes to the monopolist
C. Deadweight loss is smaller than in case of single price monopoly
D. All of the above
answer
C. Deadweight loss is smaller than in case of single price monopoly
question
Price of apricots fell from $2 to $1 per pound. While quantity supplied of a apricots in Georgia decreased from 1000 pounds to 200 pounds. What is price elasticity of supply for apricots?
A. 1.6
B. 0.625
C. -1.6
D.-0.625
A. 1.6
B. 0.625
C. -1.6
D.-0.625
answer
A. 1.6
question
Which of the following holds when a monopoly is producing at a profit maximizing quantity of output?
A. P=MC
B. MR=MC
C. All of the above
A. P=MC
B. MR=MC
C. All of the above
answer
B. MR=MC
question
Marginal cost is currently above the Average Total Cost (ATC). A firm decides to increase output. The following will happen with ATC as a result:
A. ATC will increase
B. ATC will decrease
C. We can't tell
A. ATC will increase
B. ATC will decrease
C. We can't tell
answer
A. ATC will increase
question
Marias's Honey is currently producing zero honey. Total Costs of Marias's Honey are $900. What are her Fixed Costs?
a. $0
b. $900
c. There is not enough information to answer this question
a. $0
b. $900
c. There is not enough information to answer this question
answer
b. $900
question
A monopolist provides special discounts to students. This suggests that students have:
A. Less elastic demand than other consumers
B. Exactly the same demand as other consumers
C. More elastic demand than other consumers
D.Perfectly inelastic demand
A. Less elastic demand than other consumers
B. Exactly the same demand as other consumers
C. More elastic demand than other consumers
D.Perfectly inelastic demand
answer
C. More elastic demand than other consumers
question
The individual demand curve for a monopolistic competition firm in the short run is:
A. Downward sloping
B. Horizontal
C. Upward sloping
A. Downward sloping
B. Horizontal
C. Upward sloping
answer
A. Downward sloping
question
Elasticity measures
answer
responsiveness (sensitivity) in one variable to changes in another variable
question
More responsive means more
answer
elastic
question
The quantity demanded is more responsive to the same changes in price for --- than inelastic demand.
answer
elastic
question
example of inelastic demand
answer
insulin
question
example of elastic demand
answer
snickers bar
question
A demand is inelastic when
answer
an increase in price decreases the quantity demand by a little
question
A demand is elastic when
answer
an increase in price decreases the quantity demanded by a lot
question
The flatter the curve the more
answer
elastic the demand
question
Elasticity changes when moving along the
answer
linear demand curve
question
The demand for insulin is perfectly inelastic. Suppose the costs of producing insulin increased rapidly. The following is likely to happen on the insulin market:
A. Equilibrium price will increase and equilibrium quantity will decrease;
B. Equilibrium price will stay the same and equilibrium quantity will decrease;
C. Equilibrium quantity will stay the same and equilibrium price will increase;
D. Equilibrium price will increase and equilibrium quantity can increase, decrease, or stay the same.
A. Equilibrium price will increase and equilibrium quantity will decrease;
B. Equilibrium price will stay the same and equilibrium quantity will decrease;
C. Equilibrium quantity will stay the same and equilibrium price will increase;
D. Equilibrium price will increase and equilibrium quantity can increase, decrease, or stay the same.
answer
C. Equilibrium quantity will stay the same and equilibrium price will increase;
=> Perfectly inelastic means vertical demand curve (the quantity demanded stays the same no matter what happens with the price)
=> Perfectly inelastic means vertical demand curve (the quantity demanded stays the same no matter what happens with the price)
question
price elasticity of demand
answer
percentage change in quantity demanded divided by the percentage change in price
question
The price of iPhones increased 5% and the quantity demanded of iPhones decreased 10%. What is the price elasticity of demand for iPhones?
A. -0.5
B. -2
C. 1.
A. -0.5
B. -2
C. 1.
answer
B. -2
=> The price elasticity of demand is: (-10)/5=-2 (or 2 in absolute terms)
=> The price elasticity of demand is: (-10)/5=-2 (or 2 in absolute terms)
question
The price elasticity of demand is always
answer
negative
-because price and quantity demanded always move in the opposite direction for demand
-because price and quantity demanded always move in the opposite direction for demand
question
economists often talk about price elasticity of demand
answer
in absolute values (drop the minus).
question
If the absolute value of price elasticity of
demand is greater than 1, demand is
demand is greater than 1, demand is
answer
elastic
question
f the absolute value of price elasticity of
demand is smaller than 1, demand is
demand is smaller than 1, demand is
answer
inelastic
question
If the absolute value of price elasticity of demand exactly equals one, demand is
answer
unit- elastic
question
What factors determine price elasticity of demand
answer
- Availability of substitutes
- Time after the price change;• - Share of income spent on the good;
- Whether the good is a necessity or a luxury good
- Time after the price change;• - Share of income spent on the good;
- Whether the good is a necessity or a luxury good
question
The more substitutes the more --- the demand.
answer
elastic
question
If the good is a small share of the budget the consumers might not even notice a change in price, so the demand doesn't change by a lot
answer
demand is inelastic
question
If a consumer conceders the good a luxury
good, the demand for a good is
good, the demand for a good is
answer
more elastic
question
If the good is a necessity (example: a medication), the demand
answer
is inelastic
question
The demand for which of the
following goods is likely to be very
inelastic?
A. a new sofa
B. a condo on the beach
C. medication for a sick pet
D. a gourmet box of chocolates
following goods is likely to be very
inelastic?
A. a new sofa
B. a condo on the beach
C. medication for a sick pet
D. a gourmet box of chocolates
answer
C. medication for a sick pet
question
A newspaper consumes a smaller share of income than a TV set with cable. You would expect the demand for:
A. A newspaper to be more price elastic;
B. Both newspaper and TV with cable to be equally price elastic;
C. A TV set with cable to be more price elastic;
D. We can't tell.
A. A newspaper to be more price elastic;
B. Both newspaper and TV with cable to be equally price elastic;
C. A TV set with cable to be more price elastic;
D. We can't tell.
answer
C. A TV set with cable to be more price elastic;
=> The bigger the share of the budget the more elastic
=> The bigger the share of the budget the more elastic
question
The demand for which of the following goods is likely to be more elastic:
A. Coffee
B. Cocaine
C. Prada shoes
D. Gasoline.
A. Coffee
B. Cocaine
C. Prada shoes
D. Gasoline.
answer
C. Prada shoes
- Shoes are not a necessity, they are expensive, have a lot of other substitutes
- Shoes are not a necessity, they are expensive, have a lot of other substitutes
question
Calculating elasticity with initial value method
answer
B. Decrease by 50%
Change in Price= P=(5-4)/4=25
Change in Quantity= ElasticityChange in price=225%=50%;
Price and quantity move in the opposite direction! Price increased hence quantity demanded will decrease.
Change in Price= P=(5-4)/4=25
Change in Quantity= ElasticityChange in price=225%=50%;
Price and quantity move in the opposite direction! Price increased hence quantity demanded will decrease.
question
The price elasticity of demand for apples is -2. If the price of apples increased from $4 per pound to $5 per pound, the quantity of apples demanded will:
A. Increase by 40%
B. Decrease by 50%
C. Increase by 8%
D. Decrease by 10%;
A. Increase by 40%
B. Decrease by 50%
C. Increase by 8%
D. Decrease by 10%;
answer
= Price * Quantity of a good sold
question
Total revenue equation
answer
= Total Revenue - Total Costs
question
Profit Equation
answer
C. When the price increases the total revenue will decrease, since demand is elastic
question
The price elasticity of demand for a subscription for HBO channel is 1.5. One of the managers at HBO suggests increasing the price of subscription. Which of the following statements is correct:
A. When the price increases the total revenue will increase, since demand is inelastic
B. When the price increases the total revenue will increase, since demand is elastic
C. When the price increases the total revenue will decrease, since demand is elastic
D. When the price increases the total revenue will decrease, since demand is inelastic.
A. When the price increases the total revenue will increase, since demand is inelastic
B. When the price increases the total revenue will increase, since demand is elastic
C. When the price increases the total revenue will decrease, since demand is elastic
D. When the price increases the total revenue will decrease, since demand is inelastic.
answer
increases when price increases
question
If demand is inelastic, the total revenue
answer
decreases when price increases;
question
If demand is elastic, the total revenue
answer
stays the same when the price increases
question
If demand is unit-elastic, the total revenue
answer
B. Less elastic
=> If HBO has a unique and a very good show, it is harder to find the substitute for HBO
=> If HBO has a unique and a very good show, it is harder to find the substitute for HBO
question
HBO creates a new unique TV show which is only available on their channel. This is likely to make the demand for HBO channel:
A. More elastic
B. Less elastic
C. Unit-elastic
D. Perfectly elastic.
A. More elastic
B. Less elastic
C. Unit-elastic
D. Perfectly elastic.
answer
D. It will decrease the total revenue since, demand is inelastic
question
The price elasticity of demand for coffee is 0.5. How will a decrease in price of coffee affect the total revenue of coffee producers:
A. It will increases the total revenue, since demand is inelastic
B. It will increase the total revenue since, demand is elastic;
C. It will decrease the total revenue since, demand is elastic;
D. It will decrease the total revenue since, demand is inelastic
A. It will increases the total revenue, since demand is inelastic
B. It will increase the total revenue since, demand is elastic;
C. It will decrease the total revenue since, demand is elastic;
D. It will decrease the total revenue since, demand is inelastic
answer
B. -0.80
=> 40%/-50%=-0.8.
=> 40%/-50%=-0.8.
question
Cross-price elasticity of demand for good X when a price of a good Y changes
answer
positive
question
Suppose that Michael's Bowling Alley offers 50% off bowling on Mondays, and as a result, drink sales increase by 40%. What is the cross elasticity of demand between bowling and drinks?
A. 0.80 B. -0.80 C. 1.25 D. -1.25
A. 0.80 B. -0.80 C. 1.25 D. -1.25
answer
negative
question
Cross price elasticity of demand is --- if two goods are substitutes
answer
is a percentage change in quantity demanded, divided by a percentage change in income.
question
Cross price elasticity of demand is --- if two goods are complement
answer
positive
When incomes increase, individuals consume more of normal goods, for examples restaurant meals.
When incomes increase, individuals consume more of normal goods, for examples restaurant meals.
question
Income elasticity
answer
negative
When incomes increase, individuals consume less of inferior goods, for example ramen noodles
When incomes increase, individuals consume less of inferior goods, for example ramen noodles
question
Income elasticity of demand is --- if the
good is a normal good
good is a normal good
answer
C. Substitutes
- Cross price elasticity is about price of related goods. For substitutes cross price elasticity is positive.
- Cross price elasticity is about price of related goods. For substitutes cross price elasticity is positive.
question
Income elasticity of demand is -- if the
good is an inferior good
good is an inferior good
answer
C. It will increase by 50%
5*10%=50%.
5*10%=50%.
question
The cross price elasticity of demand for pizza and chicken wings is positive. This suggests that pizza and chicken wings are:
A. Normal goods
B. Inferior Goods
C. Substitutes
D. Complements
A. Normal goods
B. Inferior Goods
C. Substitutes
D. Complements
answer
how responsive is the quantity supplied to the change in price
question
Aly's income increased by 10%. His income elasticity of demand for foreign travel is 5. What will happen to Aly's demand for foreign travel?
A. It will increase by 2%;
B. It will decrease by 2%;
C. It will increase by 50%;
D. It will decrease by 50%;
E. We can't tell.
A. It will increase by 2%;
B. It will decrease by 2%;
C. It will increase by 50%;
D. It will decrease by 50%;
E. We can't tell.
answer
positive
question
Elasticity of supply measures
answer
elastic
question
Elasticity of supply is always -- because price and quantity supplied always move in the same direction.
answer
inelastic
question
Supply is --- when the increase in price,
increases the quantity supplied by a lot;
increases the quantity supplied by a lot;
answer
percentage change in quantity supplied, divided by a percentage change in price.
question
Supply is --- when the increase in price increases the quantity supplied by a little
answer
inelastic
question
calculating elasticity of supply
answer
elastic
question
ES < 1, supply is
answer
unit-elastic
question
ES >1, supply is
answer
inelastic the supply is
question
ES =1, supply is
answer
elastic
question
the harder it is to expand production the more
answer
C. Coffee;
- It is easy to expand production of coffee fast, hence the supply of paper clips is elastic. It is not easy to expand production of other goods
- It is easy to expand production of coffee fast, hence the supply of paper clips is elastic. It is not easy to expand production of other goods
question
If production can increase with constant costs (or small increase in costs), than supply is
answer
a. Elasticity of supply increases.
- As time goes by supply becomes more elastic: the more time goes by the easier it is to expand production
- As time goes by supply becomes more elastic: the more time goes by the easier it is to expand production
question
Which of the following goods is likely to have the highest elasticity of supply
A. Land on a small island;
B. Furniture designed by Frank Loyd Wright;
C. Coffee;
D. Rare plant which only grows on one island in the Pacific Ocean.
A. Land on a small island;
B. Furniture designed by Frank Loyd Wright;
C. Coffee;
D. Rare plant which only grows on one island in the Pacific Ocean.
answer
B. Price elasticity of supply is always positive;
=> Price and quantity supplied change in the same direction
=> Price and quantity supplied change in the same direction
question
For most automobile manufacturers, what happens to the elasticity of supply over time?
a. Elasticity of supply increases.
b. Elasticity of supply will not change.
c. Elasticity of supply decreases.
d. Elasticity of supply will fall to zero.
a. Elasticity of supply increases.
b. Elasticity of supply will not change.
c. Elasticity of supply decreases.
d. Elasticity of supply will fall to zero.
answer
use various resources (inputs) to produce goods and services;
question
Choose a correct statement:
A. Price elasticity of demand is always positive B. Price elasticity of supply is always positive
A. Price elasticity of demand is always positive B. Price elasticity of supply is always positive
answer
is an input whose quantity is
fixed and cannot be varied
fixed and cannot be varied
question
Firms
answer
is an input whose quantity the firm can vary
question
A fixed input
answer
is the time period in which all
inputs can be varied
inputs can be varied
question
A variable input
answer
is the time period in which at least one input is fixed
question
long run
answer
A. Short run
question
short run
answer
A. Buildings
- It takes a while to make a new building. Building cant be changed at least in the short run.
- It takes a while to make a new building. Building cant be changed at least in the short run.
question
Suppose a bakery has a fixed input in production of candy. This means that the bakery is operating in:
A. Short run B. Long run C. We can't tell.
A. Short run B. Long run C. We can't tell.
answer
upward
question
Consider a university. Which of the following inputs is the most fixed in production of high quality college graduates?
A. Buildings
B. Administrative employees
C. Books available in the library
A. Buildings
B. Administrative employees
C. Books available in the library
answer
an additional change in output that is created by using one more unit of that input
question
total product curve slopes
answer
is a change in output generated by one additional unit of labor
question
marginal product of an input is
answer
Change in quantity of output/change in quantity of labor;
question
Marginal product of labor
answer
B. 15
(25-10)/(2-1)
(25-10)/(2-1)
question
Marginal product of labor =
answer
C. Marginal product is decreasing with higher production, yet it is still positive
question
Joe runs a burger restaurant. If Joe hires the first worker, the restaurant can produce 10 burgers in an hour. If Joe hires the second worker, the restaurant can produce 25 burgers in an hour. If Joe hires the third worker, the restaurants can produce 45 burgers in an hour. What is the marginal product of labor of the second worker?
A. 10; B. 15; C. 25; D. 20;
A. 10; B. 15; C. 25; D. 20;
answer
c) at a slower pace due to diminishing returns.
=> There are diminishing returns to any input, including engineers. The law of diminishing returns is a universal law
=> There are diminishing returns to any input, including engineers. The law of diminishing returns is a universal law
question
When a firm experiences diminishing returns:
A. Its total output is falling;
B. Marginal product is negative;
C. Marginal product is decreasing with higher production, yet it is still positive
A. Its total output is falling;
B. Marginal product is negative;
C. Marginal product is decreasing with higher production, yet it is still positive
answer
D. Marginal product of labor starts to decrease
- Diminishing (decreasing returns) to an additional worker hired
- It is possible to have a negative marginal product but it is an extreme case, and is not about the law of diminishing returns.
- Diminishing (decreasing returns) to an additional worker hired
- It is possible to have a negative marginal product but it is an extreme case, and is not about the law of diminishing returns.
question
As more high-speed trains are built, each additional engineer hired to manage the construction is likely to increase production:
a) at a rising pace due to diminishing returns.
b) at a rising pace due to constant returns.
c) at a slower pace due to diminishing returns. d) a slower pace due to negative returns.
a) at a rising pace due to diminishing returns.
b) at a rising pace due to constant returns.
c) at a slower pace due to diminishing returns. d) a slower pace due to negative returns.
answer
cost that depends on the quantity of output produced. It is the cost of the variable input
question
The law of diminishing returns
suggests that, holding other factors
constant, if a firm hires more workers
eventually:
A. Marginal product of labor becomes negative;
B. Marginal product of labor becomes positive;
C. Marginal product of labor starts to increase; D. Marginal product of labor starts to decrease;
suggests that, holding other factors
constant, if a firm hires more workers
eventually:
A. Marginal product of labor becomes negative;
B. Marginal product of labor becomes positive;
C. Marginal product of labor starts to increase; D. Marginal product of labor starts to decrease;
answer
cost that does not depend on the quantity of output produced. It is the cost of the fixed input.
question
variable cost
answer
= Variable Costs + Fixed Costs
question
fixed cost
answer
long run
question
Total costs formula
answer
show how much the average or typical unit of output costs to produce
question
All costs are variable in the ---- because overtime the use of any input can be changed
answer
is total cost divided by the quantity of output produced
question
Average costs
answer
at first they decrease with output and then they increase with output.
question
Average total costs equation
answer
ATC = TC = FC + VC = AFC + AVC
question
ATC curve has a U-shape
answer
AFC = FC/Q
question
Average fixed and variable costs
answer
AVC = VC/Q
question
Average fixed cost formula
answer
1. Spreading effect (Works through AFC);
2.Diminishing returns effect (Works through AVC)
2.Diminishing returns effect (Works through AVC)
question
Average variable cost formula
answer
because of law of diminishing returns
question
When output increases there are two effects on average costs:
answer
D. Can increase or decrease;
=> ATC are U-shaped. They first decrease and than increase with output
=> ATC are U-shaped. They first decrease and than increase with output
question
The larger the output, the greater the amount of variable input required to produce additional units
answer
D. $350
=>FC=VC+FC=AVCQ+AVFQ=3010+510=350
=>FC=VC+FC=AVCQ+AVFQ=3010+510=350
question
A firm decided to increase output. What will happen to average total costs?
A. Increase
B. Decrease
C. Stay the same
D. Can increase or decrease
A. Increase
B. Decrease
C. Stay the same
D. Can increase or decrease
answer
D. variable cost times output
question
If a firm produces 10 units of output and incurs $30 in average variable cost and $5 in average fixed cost, total cost is:
A. $35
B. $50
C. $300
D. $350
A. $35
B. $50
C. $300
D. $350
answer
additional cost of each additional unit of output.
question
Average variable cost equals all the following except
A. variable cost divided by output
B. (total cost - fixed cost) divided by output
C. average total cost minus average fixed cost
D. variable cost times output
A. variable cost divided by output
B. (total cost - fixed cost) divided by output
C. average total cost minus average fixed cost
D. variable cost times output
answer
change in total cost / change in quantity
question
Marginal costs describes
answer
at first marginal costs decrease with output.
As output increases marginal costs start to increase and continue increasing.
As output increases marginal costs start to increase and continue increasing.
question
Marginal cost equation
answer
C. $2
=> MC3= (TC3-TC2)/(3-2) =TC3-TC2=FC3+VC3-FC2-VC2.
Since FC are always the same FC3 and FC2 cancel out.
MC3= VC3-VC2=12-10=2.
=> MC3= (TC3-TC2)/(3-2) =TC3-TC2=FC3+VC3-FC2-VC2.
Since FC are always the same FC3 and FC2 cancel out.
MC3= VC3-VC2=12-10=2.
question
Marginal cost curve has a J shape
answer
A. Increase
=> Whenever question is about MC and AC always draw the graph and look at it for an answer.
=> Whenever question is about MC and AC always draw the graph and look at it for an answer.
question
Variable cost of producing 2 T-shirts are $10, Variable costs of producing 3 T-shirts are $12. What are the marginal costs of producing the 3rd T- shirt?
A. $4;
B. $5;
C. $2;
D. We can't find MC based on information given.
A. $4;
B. $5;
C. $2;
D. We can't find MC based on information given.
answer
C. Marginal costs;
question
At the current level of output marginal cost is higher then the average cost. What is going to happen to average costs if a firm increases it's output?
A. Increase
B. Decrease
C. Stay the same
A. Increase
B. Decrease
C. Stay the same
answer
D. None of the above
=> Whether the period is long run or short run does not depend on time. It depend on whether the firm can adjust everything or not
=> Whether the period is long run or short run does not depend on time. It depend on whether the firm can adjust everything or not
question
Which of the following cost curves is J-shaped?
A. Average costs;
B. Average variable costs;
C. Marginal costs;
D. Average fixed costs;
A. Average costs;
B. Average variable costs;
C. Marginal costs;
D. Average fixed costs;
answer
the minimum possible average costs for each output level in the long run
question
Which of the following statements is correct?
A. Long run is a period which is longer than 1 year;
B. Long run is a period longer than 5 years;
C. Long run is a period longer than 10 years;
D. None of the above
A. Long run is a period which is longer than 1 year;
B. Long run is a period longer than 5 years;
C. Long run is a period longer than 10 years;
D. None of the above
answer
A. True
question
Long run average total cost (LRATC) shows
answer
B. no noticeable effect; standardized
question
The short run average total costs can
never be lower then the long run average
total costs.
A. True
B. False
never be lower then the long run average
total costs.
A. True
B. False
answer
B. Horizontal
question
For the Colorado beef industry to be classified as perfectly competitive, ranchers in Colorado must have ________ on prices and beef must be a ________ product
A. a huge effect; differentiated
B. no noticeable effect; standardized
C. no noticeable effect; differentiated
D. a huge effect; standardized.
A. a huge effect; differentiated
B. no noticeable effect; standardized
C. no noticeable effect; differentiated
D. a huge effect; standardized.
answer
maximize profits.
question
The individual demand curve for a perfectly competitive firm is:
A. Downward sloping
B. Horizontal
C. Upward sloping
A. Downward sloping
B. Horizontal
C. Upward sloping
answer
= Quantity*Price
question
The goal of most firms is to
answer
change in total revenue / change in quantity
question
Total Revenue formula
answer
price
question
marginal revenue formula
answer
B. $10
- For a perfectly competitive firm the MR equals price.
- TR=10*30=300 but in this question we are asked about MR, the revenue that selling the last bush brought in
- For a perfectly competitive firm the MR equals price.
- TR=10*30=300 but in this question we are asked about MR, the revenue that selling the last bush brought in
question
For a perfectly competitive firm Marginal Revenue equals
answer
- by increasing output
- the revenue from additional unit of output is higher that the costs;
- the revenue from additional unit of output is higher that the costs;
question
If a perfectly competitive gardening shop sells 30th evergreen bush at a price of $10 per bush, its marginal revenue is:
A. more than $10
B. $10
C. less than $10.
D. $300.
A. more than $10
B. $10
C. less than $10.
D. $300.
answer
decreasing output
question
if MR> MC, firm can increase profit by
answer
A. $3
- At the optimal output MR=MC=3. If we didn't know that the firm is currently producing at the optimal level we would not know what MC is in his example.
- At the optimal output MR=MC=3. If we didn't know that the firm is currently producing at the optimal level we would not know what MC is in his example.
question
if MR < MC, firm can increase profit by
answer
C. Increase production.
- Increase production as long as MR>MC
- Increase production as long as MR>MC
question
A perfectly competitive bakery is
currently producing 100 cupcakes. This
is the optimal level of output for the
bakery. The marginal revenue from
selling a cupcake is $3. What is the
marginal cost of producing the last
cupcake?
A. $3
B. Less than $3
C. More than $3
D. Not enough information to answer the question
currently producing 100 cupcakes. This
is the optimal level of output for the
bakery. The marginal revenue from
selling a cupcake is $3. What is the
marginal cost of producing the last
cupcake?
A. $3
B. Less than $3
C. More than $3
D. Not enough information to answer the question
answer
D. marginal revenue is smaller than marginal cost
MR<MC => decrease production to increase profits
MR<MC => decrease production to increase profits
question
If Patrick is producing hand made skis. He is operating at a quantity in which the marginal revenue from the last pair of skis produced is $1200, marginal cost is $1000, and average total cost is $9000. What should Patrick do to
maximize profits?
A. Keep production the same.
B. Decrease production.
C. Increase production.
D. Shut down the business because it is losing money.
maximize profits?
A. Keep production the same.
B. Decrease production.
C. Increase production.
D. Shut down the business because it is losing money.
answer
B. MR=P
For a perfectly competitive firm MR=P always because firms are price takers, this is true in every point not only profit maximizing output. The MR=MC is only true at profit maximizing output.
For a perfectly competitive firm MR=P always because firms are price takers, this is true in every point not only profit maximizing output. The MR=MC is only true at profit maximizing output.
question
Suppose a perfectly competitive firm can increase its profits by decreasing its output by a little. Than the following statement is correct:
A. marginal revenue exceeds the price
B. marginal revenue is below price
C. marginal revenue is larger than marginal cost;
D. marginal revenue is smaller than marginal cost;
A. marginal revenue exceeds the price
B. marginal revenue is below price
C. marginal revenue is larger than marginal cost;
D. marginal revenue is smaller than marginal cost;
answer
Total Revenue - Total costs
question
Which of the following is always true for a perfectly competitive firm:
A. MR=MC
B. MR=P
C. All of the above.
A. MR=MC
B. MR=P
C. All of the above.
answer
on whether P is greater then ATC.
question
Profit formula
answer
the firm is profitable
question
Whether profit is positive or negative depends
answer
the firm breaks even
question
If the firm produces a quantity at which
P>ATC
P>ATC
answer
the firm incurs a loss
question
If the firm produces a quantity at which
P=ATC
P=ATC
answer
D. greater than min ATC.
question
If the firm produces a quantity at which
P<ATC
P<ATC
answer
P < min average variable costs
- There is no level of output at which the firm's total revenue can cover its variable costs;
- The firm can avoid the loss in variable costs by shutting down;
- The firm will still have to incur a loss of fixed cots (it can't avoid it by shutting down);
- There is no level of output at which the firm's total revenue can cover its variable costs;
- The firm can avoid the loss in variable costs by shutting down;
- The firm will still have to incur a loss of fixed cots (it can't avoid it by shutting down);
question
Firms will make profit if the price is:
A. less than MC.
B. greater than min AVC.
C. equal to marginal revenue.
D. greater than min ATC.
A. less than MC.
B. greater than min AVC.
C. equal to marginal revenue.
D. greater than min ATC.
answer
P > AVC
- Even though a firm is incurring a loss, it is still minimizing losses by staying in business
- Even though a firm is incurring a loss, it is still minimizing losses by staying in business
question
The firm should shut down immediately if
answer
the firm is indifferent between producing and shutting down
question
The firm should continue to operate in the short run even if P<min ATC as long
answer
C. It would have to shut down manufacturing in order to minimize losses.
question
P= min AVC in Short Run
answer
the output (quantity supplied)
question
"Happy cup" is a company producing tea on a perfectly competitive market. What would happen if the price of tea would fall below the min of Happy Cup's average variable costs.
A. It would continue to operate and increase production.
B. It would continue to operate only in the short run.
C. It would have to shut down manufacturing in order to minimize losses.
D. It would have to raise prices
A. It would continue to operate and increase production.
B. It would continue to operate only in the short run.
C. It would have to shut down manufacturing in order to minimize losses.
D. It would have to raise prices
answer
an individual firm in the short run
question
supply curve shows the relationship between the price of a good and
answer
C. Remain in business even though she is making losses;
=> Closing the business would result in losses of -2500 (fixed cost can not be avoided in the SR), while remaining in business results in -500 losses. Losses are minimized when staying in business.
=> Closing the business would result in losses of -2500 (fixed cost can not be avoided in the SR), while remaining in business results in -500 losses. Losses are minimized when staying in business.
question
MC cost curve above the min AVC represents a supply cure of
answer
D. price is less than average variable cost
question
Sarah earned $4000 from her
personal training studio last month.
Her fixed cost are $2500 and her
variable cost are $2000. In the short
run Sarah should:
A. Close her business since she is making losses;
B. Remain in business since she is making positive profits;
C. Remain in business even though she is making losses
personal training studio last month.
Her fixed cost are $2500 and her
variable cost are $2000. In the short
run Sarah should:
A. Close her business since she is making losses;
B. Remain in business since she is making positive profits;
C. Remain in business even though she is making losses
answer
firm covers all variable and fixed costs and stays in business
question
Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses but continues to produce. At the profit-maximizing (loss- minimizing) output, all of the following statements are correct except:
A. marginal cost is equal to marginal revenue.
B. price is less than average total cost.
C. price is equal to marginal cost.
D. price is less than average variable cost
A. marginal cost is equal to marginal revenue.
B. price is less than average total cost.
C. price is equal to marginal cost.
D. price is less than average variable cost
answer
Firm produces at a loss in the short run because it covers variable costs and some but not all of fixed costs
question
P > minimum ATC
answer
Firm is indifferent between producing in the short run or not. Just covers variable costs
question
minimum ATC >P>minimum AVC
answer
Firm shuts down in the short run. Does not cover variable cost.
question
P = minimum AVC
answer
firm is better off by closing the business and leaving the industry if it is running at a loss
question
P < minimum AVC
answer
The firm will continue producing in this industry
question
P<min ATC in the long run
answer
D. There is not enough information to answer this question;
=> In the SR it still might make sense to continue production if P<ATC as long as P>AVC, so if it is SR than there is not enough information to answer this question. In the LR the firm has to shut down if P<ATC.
=> In the SR it still might make sense to continue production if P<ATC as long as P>AVC, so if it is SR than there is not enough information to answer this question. In the LR the firm has to shut down if P<ATC.
question
P > min ATC
answer
Profit is zero
question
Suppose a firm is currently producing at a profit maximizing quantity of output. The price is below min ATC. The following statement is true:
A . The firm should shut down;
B. The firm should continue producing at a loss;
C. The firm should produce more;
D. There is not enough information to answer this question
A . The firm should shut down;
B. The firm should continue producing at a loss;
C. The firm should produce more;
D. There is not enough information to answer this question
answer
Shut down
question
P=min ATC
answer
explicit costs
question
P<min AVC
answer
is a direct payment to others in the course of running a business (cost of materials, wages, lease payments)
question
Accounting profit is calculated using only
answer
= explicit costs + opportunity costs
question
explicit cost
answer
B. always smaller than accounting profit
=> Economic profit is always smaller than accounting because to get economic profit we subtract opportunity costs from accounting profit (opportunity costs are never zero).
=> Economic profit is always smaller than accounting because to get economic profit we subtract opportunity costs from accounting profit (opportunity costs are never zero).
question
Economic costs
answer
TR - explicit costs
question
Economic profit is______
A. always greater than accounting profit;
B. always smaller than accounting profit; C. always the same as accounting profit.
A. always greater than accounting profit;
B. always smaller than accounting profit; C. always the same as accounting profit.
answer
= TR - Explicit Costs-OpportunityCost.
question
Accounting Profit formula
answer
B. $4500
=> 5000-500=4500
=> 5000-500=4500
question
Economic Profit formula
answer
D. $1700
=> 5000-500-2800=1700
=> 5000-500-2800=1700
question
Ryan is a college student who works during the summer. This summer he is planning to work as a yoga instructor and will earn $5000. To be a yoga instructor he will need to get a license which costs $500. Alternatively he could work in a fast-food restaurant and earn $2800 during the summer. What is Ryan's accounting profit?
A. $5000
B. $4500
C. $1200
D. $700
A. $5000
B. $4500
C. $1200
D. $700
answer
profitable
question
Ryan is a college student who works during the summer. This summer he is planning to work as a yoga instructor and will earn $5000. To be a yoga instructor he will need to get a license which costs $500. Alternatively he could work in a fast-food restaurant and earn $2800 during the summer. What is Ryan's economic profit?
A. $5000; B. $4500; C. $1200; D. $1700
A. $5000; B. $4500; C. $1200; D. $1700
answer
breaking even
question
P > minimum ATC. Firm is
answer
unprofitable
question
P = minimum ATC. Firm is
answer
zero
question
P < minimum ATC. Firm is
answer
A. lower apple prices due to the entry of new firms.
question
In a long run the economic profit in a competitive industry will be
answer
A. Some firms will exit the industry
=> P<ATC means that firms are making losses, some firms will eventually exit the market, pushing prices up and profits to zero.
=> P<ATC means that firms are making losses, some firms will eventually exit the market, pushing prices up and profits to zero.
question
Johanna is an owner of an apple orchard which operates under perfect competition. The price of apples is high enough that Johanna is earning positive economic profits. Johanna should expect:
A. lower apple prices due to the entry of new firms.
B. higher apple prices due to the entry of new firms.
C. higher apple prices due to the exit of existing firms.
D. lower apple prices due to the exit of existing firms.
A. lower apple prices due to the entry of new firms.
B. higher apple prices due to the entry of new firms.
C. higher apple prices due to the exit of existing firms.
D. lower apple prices due to the exit of existing firms.
answer
more efficient in producing the goods
question
In a perfectly competitive market, price is currently $10 and average total cost for most firms is $15. What will happen in this industry in the
long run?
A. Some firms will exit the industry;
B. New firms will enter the industry;
C. There will be no change in the number of firms in the industry.
long run?
A. Some firms will exit the industry;
B. New firms will enter the industry;
C. There will be no change in the number of firms in the industry.
answer
...
question
Competition in the long run makes the firms
answer
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question
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answer
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