Microeconomics Midterm #1

True or False - Scarcity arises from the economic decisions of producers and if the economic organization of society were changed, it could be eliminated.

True or False - Economic costs exclude historical explicit expenditures, unless they can be recovered.

True or False - The primary function of advertising is to lower information cost.

True or False - If the price of a good decreases, the demand for the good increases.

True or False - If the price of a good increases, the demand for a complement will shift right.

True or False - The assumption of "Ceteris Paribus" means "all things have an equal effect."

True or False - Crude oil can be used to produce gasoline or heating oil. An increase in demand for gasoline would therefore raise the price of heating oil.

True or False - The existence of used car lots is an example of how middlemen raise transaction cost.

True or False - A rise in the value of corn will decrease the supply of wheat.

If a good is scarce,

a. more of it must be produced.
b. some form of competition will exist between people desiring the good.
c. it can be a free good by lowering its money price to zero.
d. there cannot be too much of it produced.
e. none of the above.

The opportunity cost concept in economics implies that:

a. the cost of any action will always depend upon the available alternatives.
b. the cost of obtaining any good is the highest value of the alternatives sacrificed in order to obtain it.
c. costs can change simply because people's preferences change.
d. all of the above are true.

Which of the following is NOT a direct implication of scarcity?

a. choice
b. cost
c. compensation
d. competition
e. none of the above

An increase in the market price will result from:

a. an increase in demand.
b. an increase in supply.
c. a decrease in supply.
d. a and b.
e. a and c.

Which of the following would cause a shift to the right of the supply curve for gasoline?
I. A large increase in the price of public transportation.
II. A large decrease in the price of automobiles.
III. A large reduction in the costs of producing gasoline.

a. I only
b. II only
c. III only
d II and III only

The particular price that results in quantity supplied being equal to quantity demanded is the best price because it

a. maximizes costs of the seller.
b. maximizes tax revenue for the government.
c. maximizes the combined welfare of buyers and sellers.
d. minimizes the expenditure of buyers.

When the price of wood (which is an input in the production of furniture) falls, the consumer surplus associated with the consumption of furniture

a. increases.
b. decreases.
c. does not change.
d. could be any of the above.

When a shortage exists for a good:

a. the good will be allocated on some basis other than price.
b. the allocation will not equate the marginal values of the users.
c. a reallocation could increase societies value from the good.
d. all of the above
e. one of the above (a, b, c) is false.

Use the following statements to answer this question:
I. If the extent of a market is broader, it is less likely that firms in the market can influence the market price.
II. In determining whether the two different products belong to the same market, it is necessary to know whether the two products can be used as substitutes for each other.

a. I and II are both false.
b. I is false, and II is true.
c. I is true, and II is false.
d. I and II are both true.

Consumer surplus is

a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
b. the amount a buyer is willing to pay for a good minus the cost of producing the good.
c. the amount by which the quantity supplied of a good exceeds the quantity demanded of the good.
d. a buyer's willingness to pay for a good plus the price of the good.

How might department stores best protect themselves against the risk of recession?

a. Buy insurance policies that pay off when a recession occurs.
b. Stand ready to go out of business if a recession occurs.
c. Sell goods that are complements to one another.
d. Sell both substitute and complement goods.
e. Sell inferior goods paired with substitute normal goods.

the study of how society manages its scarce resources

the quantity of goods and services produced from each unit of labor input

an increase in the overall level of prices in the economy

fluctuations in economic activity, such as employment and production

something that induces a person to act

a small increment adjustment to a plan of action

the impact of one person's actions on the well-being of a bystander

the limited nature of society's resources

the property of society getting the most it can from its scarce resources

the property of distributing economic prosperity uniformly among the members of society

whatever must be given up to obtain some item

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

people who systematically and purposefully do the best they can to achieve their objectives

a situation in which a market left on its own fails to allocate resources efficiently

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

the ability of an individual to own and exercise control over scarce resources

claims that attempt to prescribe how the world should be

claims that attempt to describe the world as it is

a visual model of the economy that shows how dollars flow through markets among households and firms

the study of how households and firms make decisions and how they interact in markets

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

the ability to produce a good at a lower opportunity cost than another producer

goods produced domestically and sold abroad

goods produced abroad and sold domestically

the ability to produce a good using fewer inputs than another producer

a graph of the relationship between the price of a good and the quantity demanded

a group of buyers and sellers of a particular good or service

the amount of a good that buyers are willing and able to purchase

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

the amount of a good that sellers are willing and able to sell

a situation in which quantity supplied is greater than quantity demanded

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

the claim that, other things being equal, the quantity demanded for a good falls when the price of the good rises

a graph of the relationship between the price of a good and the quantity supplied

a situation in which quantity demanded is greater than quantity supplied

the price that balances quantity supplied and quantity demanded

a good for which, other things being equal, an increase in income leads to a decrease in demand

two goods for which an increase in the price of one leads to a decrease in the demand for the other

the quantity supplied and the quantity demanded at the equilibrium price

two goods for which an increase in the price of one leads to an increase in the demand for the other

a table that shows the relationship between the price of a good and the quantity supplied

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

a good for which, other things being equal, an increase in income leads to an increase in demand

a table that shows the relationship between the price of a good and the quantity demanded

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

a measure of how much the quantity demanded of one good responds to a change in the prices of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Economics is best defined as the study of

a. how society manages its scarce resources.
b. how to run a business most profitably.
c. how to predict inflation, unemployment, and stock prices.
d. how the government can stop the harm from unchecked self-interest.

Your opportunity cost of going to a movie is

a. the price of the ticket.
b. the price of the ticket plus the cost of any soda and popcorn you buy at the theater.
c. the total cash expenditure needed to go to the movie plus the value of your time.
d. zero, as long as you enjoy the movie and consider it a worthwhile use of time and money.

A marginal change is one that

a. is not important for public policy.
b. incrementally alters an existing plan.
c. makes an outcome inefficient.
d. does not influence incentives.

Adam Smith's "invisible hand" refers to

a. the subtle and often hidden methods that businesses use to profit at consumer's expense.
b. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
c. the ability of government regulation to benefit consumers, even if the consumers are unaware of the regulations.
d. the way in which producers or consumers in unregulated markets impose costs on innocent bystanders.

Governments may intervene in a market economy in order to

a. protect property rights.
b. correct a market failure due to externalities.
c. achieve a more equal distribution of income.
d. all of the above.

If a nation has high and persistent inflation, the most likely explanation is

a. the central bank creating excessive amounts of money.
b. unions bargaining for excessively high wages.
c. the government imposing excessive levels of taxation.
d. firms using their monopoly power to enforce excessive price hikes.

1: People face trade-offs
2: The cost of something is what you give up to get it
3: Rational people think at the margin
4: People respond to incentives

5: Trade can make everyone better off
6: Markets are usually a good way to organize economic activity
7: Governments can sometimes improve market outcomes

8: A country's standard of living depends on its ability to produce goods and services
9: Prices rise when the government prints too much money
10: Society faces a short-run trade-off between inflation and unemployment

The fundamental lessons about individual decision making are that people face __________ among alternative goals, that the cost of any action is measured in terms of _____________________, that rational people make decisions by comparing ______________ and _________________, and that people change their behavior in response to the __________ they face.

The fundamental lessons about interactions among people are that trade and interdependence can be ___________________, that markets are usually a good way of coordinating _________________ among people, and that the __________ can potentially improve market outcomes by remedying a market failure or by promoting greater economic quality.

The fundamental lessons about the economy as a whole are that ____________ is the ultimate source of living standards, that growth in the quantity of money is the ultimate source of _________, and that society faces a short-run trade-off between _________ and ____________.

An economic model is

a. a mechanical machine that replicates the functioning of the economy.
b. a fully detailed, realistic description of the economy.
c. a simplified representation of some aspect of the economy.
d. a computer program that predicts the future of the economy.

The circular-flow diagram illustrates that, in markets for the factors of production,

a. households are sellers, and firms are buyers.
b. households are buyers, and firms are sellers.
c. households and firms are both buyers.
d. households and firms are both sellers.

A point inside the production possibilities frontier is

a. efficient, but not feasible.
b. feasible, but not efficient.
c. both efficient and feasible.
d. neither efficient nor feasible.

An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences, it would

a. expand the production possibilities frontier.
b. contract the production possibilities frontier.
c. move the economy along the production possibilities frontier.
d. move the economy inside the production possibilities frontier.

All of the following topics fall within the study of microeconomics EXCEPT

a. the impact of cigarette taxes on the smoking behavior of teenagers.
b. the role of Microsoft's market power in the pricing of software.
c. the effectiveness of antipoverty programs in reducing homelessness.
d. the influence of the government budget deficit on economic growth.

Which of the following is a positive, rather than a normative, statement?

a. Law X will reduce national income.
b. Law X is a good piece of legislation.
c. Congress ought to pass law X.
d. The president should veto law X.

Economists try to address their subject with a scientist's ___________. Like all scientists, they make appropriate assumptions and build __________ models to understand the world around them. Two simple economic models are the _____________ diagram and the ________________________ frontier.

The field of economics is divided into two subfields: ______________ and macroeconomics. Microeconomists study decision making by households and firms and the interaction among households and firms in the ___________. Macroeconomists study the forces and trends that affect the economy as a _____.

A ________ statement is an assertion about how the world is. A _________ statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as _______________ than as __________.

Economists who advise policymakers sometimes offer conflicting advice either because of differences in ____________________ or because of differences in ______. At other times, economists are united in the advice they offer, but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the _________________.

In an hour, David can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1 lawn. Who has the absolute advantage in car washing, and who has the absolute advantage in lawn moving?

a. David in washing, Ron in mowing.
b. Ron in washing, David in mowing.
c. David in washing, neither in mowing.
d. Ron in washing, neither in mowing.

Once again, in an hour, David can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1 lawn. who has the comparative advantage in car washing, and who has the comparative advantage in lawn mowing?

a. David in washing, Ron in mowing.
b. Ron in washing, David in mowing.
c. David in washing, neither in mowing.
d. Ron in washing, neither in mowing.

When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage,

a. they both obtain consumption outside their production possibilities frontier.
b. they both obtain consumption inside their production possibilities frontier.
c. one individual consumes inside her production possibilities frontier, while the other consumes outside hers.
d. each individual consumes a point on her own production possibilities frontier.

Which goods will a nation typically import?

a. those goods in which the nation has an absolute advantage
b. those goods in which the nation has a comparative advantage
c. those goods in which other nations have an absolute advantage
d. those goods in which other nations have a comparative advantage

Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor and producing a shirt takes 4 hours of labor. What will these nations trade?

a. China will export aircraft, and the United States will export shirts.
b. China will export shirts, and the United States will export aircraft.
c. Both nations will export shirts.
d. There are no gains from trade in this situation.

Mark can cook dinner in 30 minutes and wash the laundry in 20 minutes. His roommate takes half as long to do each task. How should the roommates allocate the work?

a. Mark should do more of the cooking based on his comparative advantage.
b. Mark should do more of the washing based on his comparative advantage.
c. Mark should do more of the washing based on his absolute advantage.
d. There are no gains from trade in this situation.

Each person consumes goods and services produced by many other people both in the United States and around the world. _______________ and _____ are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.

There are two ways to compare the ability of two people to produce a good. The person who can produce the good with the smaller quantity of inputs is said to have an __________________ in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a _____________________. The gains from trade are based on _____________________, not __________________.

Trade makes everyone better off because it allows people to __________ in those activities in which they have a comparative advantage.

The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate __________ among countries.

A change in which of the following will NOT shift the demand curve for hamburgers?

a. the price of hot dogs
b. the price of hamburgers
c. the price of hamburger buns
d. the income of hamburger consumers

An increase in ___, will cause a movement along a given demand curve, which is called a change in ___.

a. supply, demand
b. supply, quantity demanded
c. demand, supply
d. demand, quantity supplied

Movie tickets and DVDs are substitutes. If the price of DVDs increases, what happens in the market for movie tickets?

a. The supply curve shifts to the left.
b. The supply curve shifts to the right.
c. The demand curve shifts to the left.
d. The demand curve shifts to the right.

The discovery of a large new reserve of crude oil will shift the ___ curve for gasoline, leading to a ___ equilibrium price.

a. supply, higher
b. supply, lower
c. demand, higher
d. demand, lower

If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods?

a. Prices and quantities both rise.
b. Prices and quantities both fall.
c. Prices rise, quantities fall.
d. Prices fall, quantities rise.

Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold?

a. an increase in the price of peanut butter, a complement to jelly
b. an increase in the price of Marshmallow Fluff, a substitute for jelly
c. an increase in the price of grapes, an input into jelly
d. an increase in consumers' incomes, as long as jelly is a normal good

Economists use the model of _________________ to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the ____________.

The demand curve shows how the quantity of a good ________ depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded _____. Therefore, the demand curve slopes ________.

In addition to price, other determinants of how much consumers want to buy include ______, the prices of substitutes and ___________, ______, ____________, and the number of buyers. If one of these factors changes, the demand curve ______.

The supply curve shows the quantity of a good ________ depends on the price. According to the law of supply, as the price of a good rises, the quantity supplied _____. Therefore, the supply curve slopes _______.

In addition to price, other determinants of how much producers want to sell include _____ prices, __________, ____________, and the number of sellers. If one of these factors changes, the supply curve ______.

The intersection of the supply and demand curves determines the __________________. At the equilibrium price, the quantity demanded ______ the quantity supplied.

The behavior of buyers and sellers naturally drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a _______ of the good, which causes the market price to ____. When the market price is below the equilibrium price, there is a ________, which causes the market price to ____.

To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity. To do this, we follow three steps. First, we decided whether the event ______ the supply curve or the demand curve (or both). Second, we decided in which _________ the curve shifts. Third, we compare the new equilibrium with the _______ equilibrium.

In market economies, prices are the _______ that guide economic decisions and thereby allocate scarce resources. For every good in the economy, the price ensures that supply and demand are in _______. The equilibrium price then determines how much of the good buyers choose to _______ and how much sellers choose to _______.

The price elasticity of demand measures how much the quantity demand responds to _______ in the price. Demand tends to be more elastic if close ___________ are available, if the good is a luxury rather than a _________, if the market is ________ defined, or if buyers have substantial ____ to react to a price change.

The price elasticity of demand is calculated as the percentage change in _________________ divided by the percentage change in _____. If quantity demanded moves proportionately less than the price, the the elasticity is less than 1 and demand is said to be _________. If quantity demanded moves proportionately more than the price, the elasticity is greater than 1 and demand is said to be _______.

Total revenue, the total amount paid for a good, equals the _____ of the good times the ________ sold. For inelastic demand curves, total revenue moves in the ____ direction as the price. For elastic demand curves, total revenue moves in the ________ direction as the price.

The income elasticity of demand measures how much the quantity demanded respondes to changes in consumers' ______. The cross-price elasticity of demand measures how much the quantity demanded of one good responds to changes in the price of ____________.

The price elasticity of supply measures how much the quantity supplied responds to changes in the _____. This elasticity often depends on the time horizon under consideration. In most markets, supply is more elastic in the ____ run than in the _____ run.

The price elasticity of supply is calculated as the percentage change in _________________ divided by the percentage change in _____. If quantity supplied moves proportionately less than the price, then the elasticity is less than 1 and supply is said to be ________. If quantity supplied moves proportionately more than the price, then the elasticity is greater than 1 and supply is said to be _______.

The tools of supply and demand can be applied in many different kinds of _______. This chapter uses them to analyze the market for wheat, the market for oil, and the market for illegal drugs.