question
Economic choice is the result of
answer
scarcity
question
What do economists mean when they say a good is scarce?
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the amount of the good that people would like exceeds the supply freely available from nature
question
What is a key economic idea?
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Incentives matter; human choice is influenced in predictable ways by changes in personal costs and benefits
question
The expression, "there is no such thing as free lunch" implies that
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opportunity costs are incurred when resources are used to produce goods and services
question
Which is not a basic economic question that all economies must answer?
answer
which government agency will set the prices of the goods and services?
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What types of economies require that we answer the questions of what, how, and for whom to produce goods and services?
answer
market economies, centrally planned economies, and mixed economies
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Which term best relates to a fair distribution of economic benefits?
answer
equity
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Positive economics differs from normative economics in that
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positive economic statements are testable, and normative statements are not
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What is a positive economic statement?
answer
an increase in the minimum wage will reduce employment
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The basic difference between macro and micro is that
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macro is concerned with the forest (aggregate markets) while micro is concerned with the individual trees (subcomponents)
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What best reflects the concept of opportunity cost?
answer
"time is money"
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If an economy is operating at a point inside the production possibilities curve,
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its resources are not being used efficiently
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If the production possibilities frontier is linear, then
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opportunity costs are constant as more of one good is produced
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With voluntary exchange,
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both the buyer and seller will be made better off
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Absolute advantage is the ability of an individual, a firm, or a country to
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produce more of a good or service than competitors using the same amount of resources
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If a firm or a nation desires to maximize its output, each productive assignment should be carried out by those persons who
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have a comparative advantage in the productive activity
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What is the role of the entrepreneur?
answer
to bring together the factors of production (labor, capital, and natural resources), to take risks, and to operate a buisness that produces a good or service
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According to Adam Smith, what is is the instrument the invisible hand uses to direct economic activity?
answer
price
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What will most likely occur under a system of clearly defined and enforced private property rights?
answer
resource owners will gain by discovering and employing their resources in ways that are highly valued by other
question
"A reduction in gasoline prices caused the demand for gasoline to increase. The lower gas prices also led to an increase in demand for large cars, causing their prices to rise." These statements
answer
contain one error; the lower gasoline prices would cause an increase in the quantity demanded of gasoline, not an increase in demand
question
What would most likely increase the demand for peanut butter?
a) decrease in the price of jelly, a good that is often used with peanut butter
b) the discovery that excessive consumption of peanut butter is harmful to one's health
c) crop failures that raise the price of peanuts
d) the invention of a new product that consumers think is a good substitute for peanut butter
a) decrease in the price of jelly, a good that is often used with peanut butter
b) the discovery that excessive consumption of peanut butter is harmful to one's health
c) crop failures that raise the price of peanuts
d) the invention of a new product that consumers think is a good substitute for peanut butter
answer
a) decrease in the price of jelly, a good that is often used with peanut butter
question
If cable TV service and satellite TV service are substitutes...
a) a decrease in the price of cable will decrease the demand for satellite TV
b) an increase in the price of cable will decrease the demand for satellite TV
c) an increase in the price of cable will generally have no effect on the demand for satellite TV
d) a decrease in the price of cable will decrease the demand for satellite TV
a) a decrease in the price of cable will decrease the demand for satellite TV
b) an increase in the price of cable will decrease the demand for satellite TV
c) an increase in the price of cable will generally have no effect on the demand for satellite TV
d) a decrease in the price of cable will decrease the demand for satellite TV
answer
a) a decrease in the price of cable will decrease the demand for satellite TV
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According to the law supply, as price of a good decreases
answer
sellers will produce less of the goods
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Assume that corn and soybeans are alternatives that could be grown by most farmers. An increase in the price of corn will
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decrease the supply of soybeans
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What would most likely decrease the price of beef?
answer
lower prices of grains used to produce cattle feed
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If the market price is above the equilibrium price, there will be a tendency for price to decrease, causing
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the quantity demanded to increase and quantity supplied to decrease until they are equal
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A decrease in the supply of a good will
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lead to an increase in the price of the good
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Over the past 20 years both the quantity of health care provided and health care prices have been rising rapidly. Economic theory would suggest that they observed data could best be explained as
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an increase in demand while supply remained relatively constant
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The invisible hand principle indicated that competitive markets can help promote the efficient use of resources
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even when each market participant cares only about their own self-interest rather than about the overall efficiency of resource use
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What is not a fundamental that underlies consumer behavior?
answer
consumers always make choices with perfect information
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"I like ice cream, but after eating homemade ice cream last night, I want to have something else for dessert today." This statement most clearly reflects
answer
the law of diminishing marginal utility
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When total utility is maximized, what is true concerning marginal utility?
answer
marginal utility equals 0
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The market demand for a good
answer
the horizontal sum of all individual demand curves for the good.
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If a network externality is present for a product, then
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consumers may be more likely to buy the product because it is more useful
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How does the fact that consumers apparently value fairness affect the decisions that businesses make?
answer
firms will not raise prices in response to an increase in demand
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Which of the following factors best explains why consumers would prefer to go to a restaurant that was popular than another restaurant that had similar décor and serves similar food but had fewer customers?
answer
some people receive utility from goods they believe are popular
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Economically rational means that consumers and firms
answer
take actions that are appropriate to reach goals given available information
question
According to the endowment effect, people are unwilling to sell a good they already own in which case?
answer
even if they are offered a price greater than the price they would pay if they did not already own the good
question
What reason do economists use to explain why people are overweight?
answer
people undervalue the utility to be received in the future, peoples preferences are not consistent over time, and people overvalue the utility from current choices
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What is true about marginal benefit?
answer
consumers marginal benefit is equal to the height of the demand curve, consumers will continue to purchase a good up until the point where marginal benefit equals price, and marginal benefit declines as consumption increases because of the law of diminishing marginal utility.
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John advertises his used car for $3,000 in the newspaper. He would be willing to sell his used car for as low as $2,000. He is offered $2,600 for if from a buyer and accepts it. In this trade, John receives
answer
producer surplus of $600
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Economic efficiency is
answer
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum
question
Rent control has been used extensively in NYC. Economic theory suggests that rent controls
answer
result in poor service and quality deterioration of many rental units
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What is the most likely result of an increase in the minimum wage?
answer
a decrease in the employment of unskilled workers
question
The term tax incidence refers to
answer
the actual division of the burden of a tax
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The laffer curve illustrates the concept that
answer
when marginal tax rates are quite high, a decrease in the tax rate may cause tax revenues to increase
question
What term corresponds to a market in which buying and selling takes place at prices that violate government price regualtions?
answer
black market
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Economic efficiency requires that
answer
all economic activity generating more benefits than costs be undertaken.
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when production of a good generates external costs, the
answer
supply curve for the good will understate the true social cost of producing the good
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What correctly describes the external benefit resulting from an individual's purchase of a winter flu shot?
answer
The flu shot reduces the likelihood others will catch the flu
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Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How will the price and output of paper in a competitive market compare with their values under conditions of ideal economic efficiency?
answer
the price will be too low and the output will be too large
question
When a positive externality is present in producing a good or service, _____ of the good or service will be produced at private market equilibrium
answer
too little
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What is the focus of a command and control approach to reducing pollution?
answer
imposing quantitative limits on the amount of pollution firms are allowed to generate
question
What is the best example of a public good?
answer
national defense
question
Markets may have difficulty providing the proper quantity of a public good because
answer
individuals will tend to become free-riders and private firms will have difficulty generating enough revenue to produce an efficient quantity of the good
question
What is the tragedy of the commons?
answer
the tragedy of the commons refers to the tendency for a common resource to be overused
question
Competitive markets generally give consumers and producers correct incentives when
answer
property rights are well-defined and enforced
question
If you know the value for price elasticity of demand, then what can you compute?
answer
the effect of a price change on the quantity demanded, the responsiveness of the quantity supplied of a good changes in the price, and the price elasticity of supply
question
If a 50 percent increase in the price of hula hoops led to a 10 percent reduction in the quantity of hula hoops demanded, the price elasticity of demand is
answer
0.2 and the demand for hula hoops is inelastic
question
When the price elasticity of demand is greater than one, it means that demand is
answer
elastic and the % change in quantity is greater than the % change in price
question
Suppose that the quantity of chain saws sold increased from 200 to 400 when the price fell from $225 to $175. Over this price range, the absolute value of the price elasticity of demand for chain saws is
answer
2.67
question
Which of the following statements is true?
a) the fewer substitutes available for a product, the greater the price elasticity of demand
b) the more time that passes, the more inelastic the demand for a product becomes
c) the demand curve for a luxury is less elastic than the demand curve for a necessity
d) the more narrowly defined a product is, the larger the price elasticity of demand
a) the fewer substitutes available for a product, the greater the price elasticity of demand
b) the more time that passes, the more inelastic the demand for a product becomes
c) the demand curve for a luxury is less elastic than the demand curve for a necessity
d) the more narrowly defined a product is, the larger the price elasticity of demand
answer
d) the more narrowly defined a product is, the larger the price elasticity of demand
question
If a sandwich shop near campus increases its prices by 5 percent, and revenues from its sales increase, the price elasticity of demand for the services offered by the sandwich shop must be
answer
inelastic
question
What is true regarding the price elasticity of demand?
answer
demand is generally more elastic in the long run than in the short run, along a single demand curve, demand elasticity decreases as you move down the curve (to lower prices), and a demand curve that is flatter is relatively more elastic than a demand curve that has a steeper slope
question
An increase in the price of a substitute for Good X will lead to _ in the quantity demanded of Good X, so the cross-price elasticity of demand will be _.
answer
increase; positive
question
Jane received a 10 percent increase in her salary and purchased 20 percent more jewelry. For Jane, jewelry
answer
has an income elasticity of 2, is a normal good, and is a luxury good
question
The more elastic the supply of a product, the more likely it is that the burden of a tax will
answer
fall on buyers
question
Which of the following represents a long-run adjustment?
a) the hiring of 4 additional cashiers by a supermarket
b) a cutback on purchases of iron ore by a steel manufacturer
c) construction of a new assembly-line plant by a car manufacturer
d) the extra does of fertilizer used by a farmer on his wheat crop
a) the hiring of 4 additional cashiers by a supermarket
b) a cutback on purchases of iron ore by a steel manufacturer
c) construction of a new assembly-line plant by a car manufacturer
d) the extra does of fertilizer used by a farmer on his wheat crop
answer
c) construction of a new assembly-line plant by a car manufacturer
question
Which of the following is most likely to be an implicit cost of production?
a) property taxes on a building owned by the firm
b) transportation costs paid to a trucking supplier
c) rental payments for a building utilized by the company and rented from another party
d) interest income forgone on funds invested in the firm by the owners
a) property taxes on a building owned by the firm
b) transportation costs paid to a trucking supplier
c) rental payments for a building utilized by the company and rented from another party
d) interest income forgone on funds invested in the firm by the owners
answer
d) interest income forgone on funds invested in the firm by the owners
question
What refers to the total output produced divided by the quantity of workers?
answer
average product of labor
question
The law of diminishing marginal returns indicates why
answer
a firms marginal costs will eventually increase as the firm expands output in the short run
question
The firm's average total costs will be at a minimum at the output level where the
answer
marginal cost curve crosses the firms average total cost curve
question
When costs that vary with the level of output are divided by the output, you have calculated
answer
average variable cost
question
In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be
answer
$2,500
question
Mr. Hudson notes that if he produces 10 pairs of shoes per day, his average fixed cost is $14 and his marginal cost is $8; if he produces 20 pairs of shoes per day, his marginal cost is $15. What is his average fixed cost when output is 20 pairs of shoes per day?
answer
$7
question
The average variable cost curve and the average total cost curve become closer together as output increases because
answer
average fixed cost, which is the difference between them, declines with output
question
When a firm increases its plant size in the long run and its per unit costs fall, this is called
answer
economies of scale and is shown by the downward sloping portion of the LRATC curve
question
A market is perfectly competitive if
answer
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market
question
Why do single firms in perfectly competitive markets face horizontal demand curves?
answer
with many firms selling an identical product, single firms have no effect on market price
question
Perfectly competitive firms should produce the quantity where
answer
the difference between total revenue and total cost is as large as possible
question
If marginal revenue exceeds marginal cost at the current level of output, profit will increase when output is expanded because
answer
producing and selling an additional unit will add more to total revenue than it adds to total cost
question
If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm
answer
is incurring a loss
question
A perfectly competitive firm's supply curve is its
answer
marginal cost curve above its minimum average variable cost
question
When are firms likely to enter an industry? When are they likely to exit?
answer
economic profits attract firms to enter an industry and economic losses cause firms to exit an industry
question
In a monopolistically competitive industry, the firms will
answer
be able to choose their price, and the entry barriers into the market will be low
question
The marginal revenue curve lies below the demand curve for monopolistically competitive firm because
answer
in order for a monopolistically competitive firm to sell an extra unit, it must cut the price on all units. The lowered price offsets the additional revenue from the extra unit sold, so the marginal revenue is lower than the price.
question
If a monopolistically competitive firm can sell 4 units at a price of $6 or 5 units at a price of $5, the marginal revenue of the 5th unit is
answer
25-24=$1
question
For the monopolistically competitive firm
answer
price will exceed marginal cost at the profit maximizing level of output, price will equal average total cost in the long run, and economic profit will be driven to zero in the long run by the entry and exit of firms
question
In the long run, neither perfectly competitive nor monopolistically competitive firms will be able to earn economic profits because
answer
competition will force prices down the the level of per unit production costs
question
If firms in a monopolistically competitive market are currently earning economic losses, then in the long run,
answer
some existing firms will exit the market, and the remaining firms will experience an increase in demand for their products until 0 economic profit is again restored
question
What long run equilibrium conditions are present in perfectly competitive and monopolistically competitive markets?
answer
MR=MC, and P=ATC
question
If a market is in long-run equilibrium, which of the following conditions will be present in a perfectly competitive market but absent from a monopolistically competitive market?
answer
P=MC
question
Some economists have argued that monopolistically competitive firms are productively inefficient relative to perfectly competitive firms because
answer
unlike perfectly competitive firms, monopolistically competitive firms do not produce at the minimum of their average total cost curves.
question
Compared to the outcome when the firms are perfectly competitive, monopolistically competitive markets will result in
answer
a wider variety of products and higher prices
question
Unlike in perfectly competitive markets, in monopolistically competitive markets
answer
firms face downward sloping demand curves and the products competitors sell are differentiated
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