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Economics is the study of
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how to allocate resources to satisfy wants and needs.
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Thomas Malthus’s prediction of mass starvation failed to come true because of increases in
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productivity
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As a discipline, economics is best described by which of the following?
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the study of how to use scarce resources to satisfy unlimited wants and needs
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Which of the following is a macroeconomic question?
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What is the rate of unemployment?
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Microeconomics is the study of
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individual decision-making units.
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Economics professors are well aware of the importance of incentives. Which of the following situations shows the use of a positive incentive?
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Students can choose to get a higher grade by doing extra credit work
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Economics is concerned with the trade-offs that emerge because of scarcity. The term “trade-offs” refers to
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the alternatives given up when making choices.
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Opportunity cost is the ________ alternative forfeited when a choice is made.
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highest-valued
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How are changes in opportunity cost related to decision-making behavior?
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The lower the opportunity cost of doing activity X, the more likely activity X will be done.
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Nicole asked her neighbor to rake the leaves on his lawn because they were blowing into her yard. It takes an hour to rake the yard, regardless of who performs the task. He responded that it wouldn’t be rational for him to do so, but he would be willing to hire someone else to rake. Why would this be the case?
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Her neighbor is a lawyer who values his time at $200 an hour and knows that he can hire a high school kid to rake leaves for $20 an hour.
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The opportunity cost for Jeremiah of going to a water park is
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the highest valued alternative activity Jeremiah could have done instead.
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Economists believe that optimal decisions are made up to the point where
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marginal benefits are equal to marginal costs.
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Instead of deciding to finish high school, Cecily could have decided to work full-time. How would an economist explain her decision to receive her high school degree?
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The benefit of going to high school was greater than the benefit of working full-time.
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Who benefits from voluntary trade?
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buyers and sellers
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Comparative advantage emerges because of the presence of
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differing opportunity costs.
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Saudi Arabia has a comparative advantage in producing oil because it
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has specialized in the production of oil given its natural resources.
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Which of the following is an example of an unintended consequence?
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A tax rebate on electric cars results in increased household electricity consumption
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The ________ system encourages innovation by creating a powerful financial reward for creativity
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patent
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Laura leaves her job as an accountant, where she earns $80,000 per year, to start her own business. After the first year, her business earns a profit of $60,000. How would an economist describe the profitability of Laura’s career change?
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Laura had a loss of $20,000.
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________ is the process of breaking down decisions into smaller parts.
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Marginal analysis
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Rodrigo operates a dry-cleaning service and charges customers $5 per article of clothing. Based on his knowledge of operations, the 1,000th piece of clothing costs him $4.95 to dry-clean. If he takes additional business, however, the 1,001st piece will cost $5 for the service. Does he take the additional business?
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Yes. At a $5 cost, he breaks even and is indifferent. He necessarily turns away business when the cost of the additional unit exceeds the income.
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A positive statement
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is a claim that can be tested.
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Which of the following is a positive statement?
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Increases in the minimum wage cause unemployment.
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Which of the following is a normative statement?
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One should wear a helmet when cycling.
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The process of examining a change in one variable in a model while assuming that all the other variables remain constant is called
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ceteris paribus.
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Why do economists use models?
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Models allow us to study a simplified version of a complex world.
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Variables that are controlled for in a model are called
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endogenous factors.
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When testing a paper airplane on a campus quad, which of the following would be an exogenous factor?
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the level of wind encountered
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A graph that shows the maximum attainable combinations of two goods when society efficiently uses its productive resources is called
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a production possibilities frontier (PPF).
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Ceteris paribus, if a society is producing at a point on the production possibilities frontier (PPF), it can only increase the production of one good by
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decreasing the production of the second good.
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Think of the production possibilities frontier (PPF) model. When society is producing the largest possible output from its resources, it is operating
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efficiently.
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The set of efficient points is best described as
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points on the PPF only.
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Given current resources and technology, the unattainable range is best described as
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only area O: points outside the PPF.
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How is opportunity cost illustrated?
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a move from point B to point C
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The inefficient point(s) is/are
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point A.
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Suppose someone finds a production possibilities frontier (PPF) that is shaped like a straight line. What can one determine about the production of the two goods?
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Production of the two goods is subject to constant opportunity cost anywhere along the PPF.
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The opportunity cost of increasing the production of apple pies from 12 to 14 pies is ________ pies.
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4 blueberry
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The opportunity cost of increasing production of blueberry pies from 7 to 11 pies is ________ pies.
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2 apple
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Economic growth can be depicted on a production possibilities frontier (PPF) as an
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outward shift of the PPF.
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Which of the following represents a point that is unattainable with current resources and technology?
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point F
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This society could reach point F when there is a(n)
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new technology that makes the storage and transport of both rice and pasta more efficient.
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For a market to be competitive
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each buyer and seller is small, relative to the whole market; no single decision maker has any influence over the market price.
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Which of the following scenarios would represent a monopoly?
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In a city, there is one Ethiopian restaurant.
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Imperfect markets
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occur when the buyer or seller has an influence on the price.
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When the price for computers is expected to fall in the future, what happens?
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The demand for computers decreases.
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Assume that the market for iPhones has only two consumers: Christy and Lori. According the table above, if the price of an iPhone is $285, the market will demand ________ iPhones.
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8
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Which of the following would cause a normal good’s demand curve to shift to the left?
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Income decreases.
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Which of the following would cause the demand curve to shift to the right?
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Income decreases for an inferior good.
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Two goods that are used together are called
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complements.
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Which of the following will cause the demand curve for burgers to shift to the right?
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A study is published by the National Association for Burger Research that says eating burgers can reduce the risk for bad acne.
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The demand curve shift shown in the figure was caused by a(n)
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decrease in the number of buyers in the market for the good.
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An increase in the number of buyers would cause the demand curve to
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shift from D1 to D2.
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The law of supply states that, all other things being equal,
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the quantity supplied falls when the price falls, and the quantity supplied rises when the price rises.
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A change in quantity supplied
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is represented by a movement along the supply curve.
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If the cost of flour increases from $3 to $5 a bag, we could predict the supply curve for bagels to
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shift to the left.
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In 1993, the government increased the tax on gasoline producers from 14.1 cents per gallon to 18.4 cents per gallon. Our model of supply and demand predicts that
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the supply for gasoline decreased.
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Which of the following situations would cause the demand curve to shift to the right?
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an increase in the price of a substitute
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When the price of ground beef increases and all else is held constant, we would expect the supply of hamburgers to ________, causing the price to ________.
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decrease; increase
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Which of the quantity (Q) and price (P) combinations in the accompanying figure represents the market at competitive equilibrium?
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(22, $8)
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According to the accompanying figure, if the price is $10, there is a ________ of ________ units.
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surplus; 15
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A shortage occurs whenever
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the quantity supplied is less than the quantity demanded.
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The economists at JET Consulting consider Campbell’s Soup to be an inferior good. During a recession, when the income in the economy is decreasing, economists at JET Consulting would expect the demand curve for Campbell’s Soup to ________, causing the equilibrium price to ________ and the equilibrium quantity to ________.
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shift to the right; increase; increase
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If all else is held constant, what would happen to the equilibrium price and quantity of iPhones if the price of an Android phone decreased?
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They would both decrease.
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Wine and cheese are complement goods because they are consumed together. What would we expect to happen to the equilibrium quantity of cheese if the price of wine increased and all else is held constant?
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It would decrease because of a demand shift.
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A technological advancement for Good A will shift the ________ curve of Good A to the ________, making the equilibrium price ________.
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supply; right; decrease
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The market for footballs is perfectly competitive. If all else is held constant and the price of leather decreases, we would expect that the equilibrium quantity of footballs would ________ and the equilibrium price would ________.
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rise; fall
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When firms in a market expect the price of their products to rise, the supply curve of their goods ________, causing the equilibrium price to ________.
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decreases; rise
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Which of the following scenarios best describes the change in the equilibrium shown in the accompanying graph?
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firms leaving the market
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When both supply and demand shift to the left, the equilibrium
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quantity always falls.
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When both supply and demand shift to the right, equilibrium
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quantity always rises.
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When both supply and demand decrease, the equilibrium price ________ and equilibrium quantity ________.
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is indeterminate; decreases
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According to a supply and demand model for apples, if the average household income decreases at the same time 10 apple orchards go out of business, one would expect the equilibrium
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quantity of apples in the market to decrease and the equilibrium price of apples to be indeterminate.
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We are given the following equations where P is price and Q is quantity: Equation 1: P = 300 - 10Q Equation 2: P = 5Q
a. Which equation represents the demand curve? Why?
b. What is the equilibrium price and equilibrium quantity?
c. At a price of $150, is there a shortage, surplus, or neither? If there is a shortage or surplus, what is the amount of that shortage or surplus?
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a. Equation 1 represents the demand curve. The slope of this equation is negative, representing a negative relationship between price and quantity. By the law of demand and holding all else constant, as price increases, the quantity demanded decreases, showing a negative relationship.
b. The equilibrium price and equilibrium quantity would be $100 and 20 units, respectively.
c. At the price of $150, we would experience a surplus of 15 units because, at a price of $150, we see quantity demanded at 15 and quantity supplied at 30.
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