Microeconomics Exam Review #1

the study of the ways individuals, firms and society make decisions to allocate limited resources to competing wants. Assumes that people:
-are rational
-are self-interested
-respond to incentives

the study of decision making by individuals, businesses, and industries

the study of broader issues in the economy such as inflation, unemployment and national output

unlimited wants clash with limited resources. Everyone faces it. Economics focuses on the allocation of scarce resources

Assumption used in economics that all other relevant factors or variables are held constant. Models are crafted from new ideas, then tested against real world data. For example, will more government spending lead to economic growth

How well resources are used and allocated. Do people get the goods and services they want at the lowest possible resource cost?

the fairness of various issues and policies. Should executive salaries and bonuses be capped for publicly traded corporations

can be answered by available information or facts

addresses society's beliefs about what should or should not take place

the next best alternative; what you give up to do something or purchase something

what are the three basic questions?

the process of converting factors of production to outputs

what are the 4 factors in production?

goods and services are produced at their lowest possible resource (opportunity) cost

the mix of goods and services is just what society desires

a model that shows the combinations of two goods a society can produce a full employment.
-allows us to answer:
-HOW MUCH can be produced
-WHAT WILL IT COST to change the production
mix

the cost of a good in terms of another that must be give up

one country can produce more of a good than another country

one's country opportunity cost is lower than another country's

institutions that bring buyers and sellers together

market economies use prices to allocate resources, goods, and services
-send signals in free market economies:
-Buyers:
-What to buy?
-How much?
-Sellers:
-What to sell?
-How much?
-What method?

the maximum amount of a product that buyers are willing to purchase over some period at various prices (Ceteris Paribus)

-Non price factors affect demand; they are held constant for drawing a demand curve. They include:
-tastes and preferences
-income
-prices of related goods-substitutes and
complements
-number of buyers
-expectations about future prices

demand increases as incomes rise

demand decreases as incomes rise

are typically consumed together if the price of a complement decreases, the demand for the original good increases [and vice versa]

the maximum amount of a product that sellers are willing and able to provide over some period at various prices (ceteris paribus)

Nonprice factors that affect it include:
-production technology
-costs of resources
-prices of related commodities
-expectations
-number of sellers
-taxes and subsidies

the difference between market price and what consumers are willing to pay

the difference between market price and the price at which firms are willing to supply it

the loss of consumer surplus and producer surplus caused by the inefficiency of a market that is not operating at equilibrium

what are the sources of market failure?

what are 2 sources of public goods?

a government set maximum price that must be charged for a good or service
-can lead to shortages

a government set minimum price that must be charged for a good or service
-lead to surpluses

once a public good is provided, no one can be excluded from consuming it

one person's consumption does not diminish others' benefit

Economics is BEST defined as the study of how:
a) to classify resources used to produce final goods and services.
b) people make rational decisions.
c) technology can be used to change scarce d)resources into free resources.
e) resources are apportioned to satisfy human wants.

Because of scarcity:
a) we face tradeoffs in nearly every choice we make.
b) choices are unlimited.
c) wants are limited.
d) resources are limitles

Paying a salesperson more for increased sales is an example of:
a) an incentive.
b) an opportunity cost.
c) equity.
d) efficiency.

Macroeconomics is concerned with issues such as:
a) which job to take.
b) unemployment.
c) which orange juice to buy.
d) what price to charge for goods.

Supply and demand analysis is used:
a) only in macroeconomics.
b) only in microeconomics.
c) in both microeconomics and macroeconomics.
d) in neither microeconomics nor macroeconomics.

The economics of uranium mining would be studied in: a) microeconomics.
b) deductive logic.
c) inductive logic.
d) macroeconomics

A theory composed of a number of assumptions and facts boiled down to their basic relevant elements is called a:
a) practice.
b) conclusion.
c) metaphor.
d) model.

When goods are produced at the lowest possible cost, an economy is said to have achieved:
a) inferior quality goods.
b) allocative efficiency.
c) cheap production.
d) production efficiency.

In the study of economics, the goals of efficiency and equity are often:
a) compatible.
b) objectively definable.
c) given equal emphasis.
d) in conflict with one another.

Scarcity:
a)is faced by all individuals and societies.
b) is synonymous with poverty.
c) is eliminated with greater technology.
d) can be eliminated with adequate resources

The opportunity costs of attending college do NOT include:
a) the forgone wages that could have been earned working.
b) the costs of textbooks or eBooks.
c) the expenditures for food.
d) required student activity fees.

When the government chooses to use resources to build tourist centers, the selected resources are no longer available to build highways. This BEST illustrates the concept of:
a) scarcity.
b) opportunity cost.
c) macroeconomics.
d) efficiency.

Which statement is TRUE about specialization and exchange between two individuals?
a) They generally benefit the poorer individual at the expense of the richer individual.
b) They generally benefit the richer individual at the expense of the poorer individual.
c) They generally benefit the poorer individual as well as the richer individual.
d) They generally benefit neither the poorer individual nor the richer individual.

Which statement is a key idea in economic thinking?
a) All of these are key ideas in economic thinking.
b) The value of a good can be objectively measured and is the same for everyone.
c) Scarcity exists for the poor but not for the rich.
d) Incentives matter.

Rational behavior requires thinking at the margin. Which example represents this type of thinking?
a) deciding whether the overtime pay is worth working on your day off
b) All of these examples represent thinking at the margin.
c) deciding whether a second burger is worth the extra $2
d) deciding whether to pay a fine for polluting the local harbor or installing antipollution machinery

People use _____ to determine how many hours to work, and businesses use _____ to determine how much of their product they are willing to supply to the market.
a) production efficiency; marginal analysis
b) marginal analysis; marginal analysis
c) marginal analysis; allocative efficiency
d) allocative efficiency; production efficiency

Which of these is NOT an example of market failure?
a) Air is polluted by a manufacturing firm.
b) Competition leads firms to provide products at the lowest possible price.
c) Water is polluted by a paper company located by a river.
d) Consumers must buy water from one local water utility.

Which situation(s) may require government intervention?
I. A local business has made a profit in each of the last ten years.
II. Students are having difficulty deciding whether to go the beach or to go hiking for their class trip.
III. A manufacturing firm on a river is dumping production run off into the water.
a) I and II
b) II only
c) II and III
d) III only

the factors that motivate individuals and firms to make decisions in their best interest

holding all other relevant factors constant, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises

goods consumers will substitute for one another. When one good rises, the demand for the other good increases, and vice versa

market forces are in balance when the quantities demanded by consumers just equal the quantities supplied by producers

the price at which the quantity demanded is just equal to quantity supplied

the output that results when quantity demanded is just equal to quantity supplied

occur when the price is above market equilibrium and quantity supplied exceeds quantity demanded

occurs when the price is below market equilibrium and quantity demanded exceeds quantity supplied

Which is NOT considered a basic economic question?
Who will receive the goods and services?
How will the system accommodate change?
What goods and services will be produced?
How will these goods and services be produced?

In a _____ economy, individuals and firms own most resources, and in a _____ economy, the government controls most resources.
socialist; planned
planned; market
market; planned
planned; socialist

If an economy is operating at a point that is inside of its production possibilities frontier, then it can be assumed that its resources are:
efficiently allocated.
underutilized.
fully utilized.
over-utilized.

A production possibilities frontier that is a straight line is the result of:
increasing opportunity costs.
underemployment of resources.
constant opportunity costs.
scarcity.

A lawyer can argue a case in court for one hour and make $300. She could alternatively use that hour of time to type a legal brief in her office. What is the opportunity cost of her typing the legal brief?
nothing, since she would always hire an administrative assistant to type for her
$300, since that is the amount she could have made by arguing a case in court
nothing, since she would never type a legal brief
There is not enough information in this problem to be able to answer the question.

If the government of Spain decides to spend less on the military and more on health care, the forgone spending on military items represents the:
production efficiency of the extra health care.
opportunity cost of the extra health care.
cost factor of the extra health care.
allocative cost of the extra health care.

Investment in human capital refers to:

increasing the machinery and equipment that firms use.
increasing the financial capital in the economy.
increasing the number of people working at companies.
education, on-the-job training, and professional training activities.

The theory of comparative advantage says that countries:
should import those goods they can produce at a lower opportunity cost than another country.
should restrict trade by cutting off all imports.
should export those goods they can produce at a lower opportunity cost than another country.
can never benefit from specialization in trade.

the limits on international trade include all of these EXCEPT:
decreasing opportunity costs and increasing returns.
transportation and communication costs.
Trade may hurt some industries and individuals within each country.
increasing opportunity costs and diminishing returns.