Microeconomics Study Guide 1

Economists assume that people are rational in the sense that

a. the generally make the correct choices
b. they use all available information as they take actions intended to achieve their goals

Which of the following best describes scarcity?
a. Prices of goods are very high.
b. Unlimited wants exceed the limited resources available.

Scarcity is central to the study of economics because it implies that
a. every choice involves an opportunity cost
b. wants are unlimited

Suppose, in an effort to prevent the population from declining, Italy begins offering new mothers extended periods of paid family leave from work and, consequently, the birthrate per woman increases.
If so, then this could best be characterized as an example of people responding to
a. compassion
b. economic incentives

When economists develop models designed to explain the choices people make, they generally assume that
a. people make the best decisions.
b. people are rational

______ is the study of the choices people make to attain their goals, given their scarce resources.

One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls
a. rationality
b. scarcity

Economics assumes people and firms:
a. are rational, respond to incentives, and make all-or-nothing decisions.
b. are rational, respond to incentive, and make decisions by comparing marginal benefits with marginal costs.

The three economic questions that every society must answer are:
a. What are the prices of goods, how are they determined, and who will pay for them?
b. What goods will be produced, who will they be produced, and who will receive the goods?

Centrally planned economies allocate resources based on decisions by _____, while market economies answer these questions through decisions made by _____.

Productive efficiency means that:
a. a good or service is produced at the lowest possible cost
b. a good or service produced as quickly as possible

Allocative efficiency means that:
a. every good or service is disturbed fairly
b. every good or service is produced up to the point where marginal benefit is equal to marginal cost.

When the price of Microsoft stock increased more than 27 percent in the first part of 2013, Bill Gates, who owns 436 million shares of Microsoft stock, once again became the world's richest man.
Does Bill Gates, the richest person in the world, face scarcity?

Trade-offs force society to answer questions such as what goods and services will be produced, how will the goods and services be produced, and who will receive the goods and services produced.
Which of the following countries has an economy where the government makes these decisions?
a. Japan
b. North Korea

Equity is
a. an exactly equal distribution of income
b. the fair distribution of economic benefits

Opportunity cost is
a. the highest valued alternative that must be give up to engage in an activity.
b. when consumers and firms use all available information as they act to achieve their goals

Today, which of the following countries has a centrally planned economy?
a. Canada
b. North Korea

Who are economic resources allocated in a market economy?
a. by the government
b. by the decisions of households and firms interacting in markets.

Economists use models
a. to prove that theories are true
b. to answer questions and analyze issues

Economic data is used
a. to prove that a model is true
b. to test models

A primary difference between macroeconomics and microeconomics is
a. Microeconomics is concerned with present decisions while macroeconomics is concerned with future decisions.
b. Microeconomics examines individual markets while macroeconomics examines the economy as a whole

Macroeconomics is
a. the study of firms as a group with special emphasis on how these firms interact with one another
b. the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

The diagram to the right is an example of
a. a time-series graph
b. an economic map

Use the following production possibilities frontier for a country to answer the following questions.
Which point(s) are unattainable?
a. Point A because it is outside the production possibilities frontier
b. Point E because it is inside the production possibilities frontier.

Which point(s) are efficient? Briefly explain why.
a. Points E, B, C, and D because they are attainable.
b. Points B, C, and D because this is where maximum output is produced with available resources.

Which point(s) are inefficient? Briefly explain why.
a. Point A because it is unattainable.
b. Point E because production there is not using all available resources.

At which point is the country's future growth rate likely to the highest? Briefly explain why.
a. Point E because it is where resources are saved for investments.
b. Point B because it is where the most resources are used to produce capital goods.

The production possibilities frontiers depicted in the diagram to the right illustrate
a. both the labor force and capital stock decreasing
b. both the labor force and capital stock increasing

In the diagram to the right, point C indicates an
a. inefficient result
b. efficient result

A production possibilities frontier (PPF) is
a. a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
b. a curve showing the generally attainable combinations of two products that may be produced with all planned or potential, yet undeveloped technology.

The production possibilities frontiers depicted in the diagram to the right illustrate
a. technological advances in the tank industry
b. technological advances in the automobile industry

The primary difference between absolute and comparative advantage is
a. absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
b. absolute advantage refers to the ability to produce a good or service at a lower opportunity cost and comparative advantage refers to the ability to produce more of a good or service using the same amount of resources.

The basis for trade is _____ advantage

Your consumption point before trade is illustrated by point ___.

Your consumption point after
trade is illustrated by point ___.

Your neighbors consumption point before trade is illustrated by point ___.

Your neighbors consumption point after trade is illustrated by point ___.

What are the two main categories of participants in markets?
a. Firms and households
b. Firms and banks

Which participants are of greatest importance in determining what goods and services are produced?
a. The government
b. Households

Writing in the New York Times, Michael Lewis argued that
"... a market economy is premised on a system of incentives designed to encourage an ignoble human trait: self-interest."
What incentives does a market system provide to encourage self-interest?
a. Financial reward
b. Selfishness

The Scottish philosopher Adam Smith argued in 1776 that
a. prices would do a better job of coordinating the activities of buyers and seller than guilds could.
b. prices would do a better job of coordinating the activities of buyers and sellers than markets could.

Property rights are
a. the rights individuals or firms have to the exclusive use of their property, excluding the right to buy or sell it.
b. the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.

According to Adam Smith, which of the following is necessary for the proper functioning of the market system?
a. For markets to work, people must be free to pursue their self-interest.
b. For markets to work, people and the government need to coordinate their decisions.

According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity?
a. costs.
b. prices

What is the outcome of enforcing contracts and property rights in a market system?
a. decreased economic activity
b. increased economic activity

If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
a. an independent court system
b. All of the above.

The distinction between substitutes and complements is
a. substitute goods are used for the same purposes while complementary goods are used together.
b. substitute goods are used together while complementary goods are used for the same purposes.

What is the law of demand?
The law of demand is the
a. rule that, holding everything else constant, when the price of a good falls, the quantity demanded will increase, and when the price of a good falls, the quantity demanded will decrease.
b. rule that, holding everything else constant, when the price of a good rises, the quantity demanded will increase, and when the price of a good falls, the quantity demanded will decrease.

Economists refer to the necessity of holding all variable other than price constant in constructing a demand curve as the
a. law of demand
b. ceteris paribus condition

A good for which demand increases as income rises is _____, and a good for which demand increases as income falls is ____.
a. a substitute; a complement
b. a normal good; an inferior good

Goods and services that can be used for the same purpose are ____, and goods and services that are used together are ____.
a. substitutes; complements
b. normal goods; inferior goods.

On the diagram to the right, a movement for A to B represents a
a. change in quantity supplied
b. change in supply

According to the law of supply,
a. there is a positive relationship between price and quantity supplied
b. as the price of a product increases, firms will supply more of it to the market
c. A and B only

The diagram in panel a is an example of
a. a supply curve
b. a supply schedule

Which of the following illustrates the law of supply?
a. An increase in the number of firms in an industry causes a shift of the supply curve.
b. An increase in price causes an increase in the quantity supplied, and a decrease in price causes a decrease in the quantity supplied.

What do economists mean by market equilibrium?
a. A condition where a good is no longer scarce.
b. A market outcome where quantity supplied is equal to quantity demanded

If a market is in equilibrium, is it necessarily true that all potential buyers and sellers are satisfied with the market price?

Market price is determined by
a. both supply and demand
b. neither supply nor demand

In the diagram to the right, when the price is $29 per player, the amount of the ____ is ____ million players per month

If a surplus exists in a market, we know that the actual price is
a. above the equilibrium price, and the quantity demands a greater than the quantity supplied.
b. above the equilibrium price, and quantity supplied is greater than the quantity demanded

If a shortage exists in a market, we know that the actual price is
a. below the equilibrium price, and the quantity supplied is greater than the quantity demanded.
b. below the equilibrium price, and the quantity demanded is greater than the quantity supplied.

An unexpected frost in the orange groves of California would cause
a. a decrease in the supply of orange juice, increasing the equilibrium price.
b. a decrease in the demand for orange juice, decreasing the equilibrium price.