Econ 2105 Midterm 1

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TRUE or FALSE: Efficiency means everyone in the economy should receive an equal share of the goods and services produced.

False - this is the definition of equality.

TRUE or FALSE: A rational decision maker takes an action if and only if the marginal cost exceeds the marginal benefit.

False - a rational decision maker would only take action if the marginal cost was lower than the marginal benefit.

TRUE or FALSE: The invisible hand ensures that economic prosperity is distributed equally.

False - The invisible hand works through the price system: The interaction of buyers and sellers determines prices. Each price reflects the good's value to buyers and the cost of producing the good. Prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being.

TRUE or FALSE: Productivity is defined as the quantity of goods and services produced from each unit of labor input.

True - Productivity is defined as the amount of goods and services produced per unit of labor

One tradeoff society faces is between efficiency and equality. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy.

Efficiency is the property of society getting the most it can from its scarce resources. Equality is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller. Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to help those members of society who are most in need. The individual income tax asks the financially successful to contribute more than others to support the government.

Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.

To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don't adjust immediately. Lower spending, combined with prices that are too high, reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment.

The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
a. goods are scarce.
b. people face tradeoffs.
c. income must be earned.
d. households face many decisions.

B. People face tradeoffs

When the government redistributes income from the wealthy to the poor,
a. efficiency is improved, but equality is not.
b. both wealthy people and poor people benefit directly.
c. people work less and produce fewer goods and services.
d. the government collects less revenue in total.

C. People work less and produce fewer goods and services

Making rational decisions "at the margin" means that people
a. make those decisions that do not impose a marginal cost.
b. evaluate how easily a decision can be reversed if problems arise.
c. compare the marginal costs and marginal benefits of each decision.
d. always calculate the marginal dollar costs for each decision.

C. compare the marginal costs and marginal benefits of each decision.

Tom is restoring a car and has already spent $3500 on the restoration. He expects to be able to sell
the car for $5000. Tom discovers that he needs to do an additional $2000 of work to make the table
worth $5000 to potential buyers. He could also sell the car now, without completing the additional
work, for $2800. What should he do?
a. He should sell the car now for $2800.
b. He should keep the car since it wouldn't be rational to spend $5500 restoring a car and then sell
it for only $5000.
c. He should complete the additional work and sell the car for $5000.
d. It does not matter which action he takes since the outcome will be the same either way.

C. He should complete the additional work and sell the car for $500

If Japan chooses to engage in trade, it
a. will only benefit if it trades with countries that produce goods Japan cannot produce.
b. cannot benefit if it trades with less developed countries.
c. should first attempt to produce the good itself.
d. can benefit by trading with any other country.

D. can benefit by trading with any other country

Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can
make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the
opportunity cost of 1 chair is
a. 1/5 table for Mike and 1/3 table for Sandy.
b. 1/5 table for Mike and 3 tables for Sandy.
c. 5 tables for Mike and 1/3 table for Sandy.
d. 5 tables for Mike and 3 tables for Sandy.

A. 1/5 tables for Mike and 1/3 tables for Sandy.

Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in
three hours or he can trim a tree in two hours.
a. Travis has an absolute advantage over Ricardo in trimming trees.
b. Travis has a comparative advantage over Ricardo in mowing lawns.
c. Ricardo has a comparative advantage over Travis in trimming trees.
d. All of the above are correct.

A. Travis has an absolute advantage over Ricardo in trimming trees.

Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the production of linen. If these two countries decide to trade,
a. Belarus should export linen to Russia.
b. Russia should export linen to Belarus.
c. trading linen would provide no net advantage to either country.
d. Without additional information about opportunity costs, this question cannot be answered.

A. Belarus should export linen to Russia.
*if a country/person has comparative advantage, they should always trade.

Which of the following is not a characteristic of a perfectly competitive market?
a. Sellers set the price of the product.
b. There are many sellers.
c. Buyers must accept the price the market determines.
d. All of the above are characteristics of a perfectly competitive market.

A. Sellers set the price of the product.

A market demand curve shows
a. the relationship between price and the number of buyers in a market.
b. how quantity demanded changes when the number of buyers changes.
c. the sum of all prices that individual buyers are willing and able to pay for each possible quantity
of the good.
d. how much of a good all buyers are willing and able to buy at each possible price.

D. how much of a good all buyers are willing and able to buy at each possible price.

When quantity demanded decreases at every possible price, we know that the demand curve has
a. shifted to the left.
b. shifted to the right.
c. not shifted; rather, we have moved along the demand curve to a new point on the same curve.
d. not shifted; rather, the demand curve has become flatter.

A. shifted to the left.

Which of the following is not a determinant of the demand for a particular good?
a. the prices of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good

D. the prices of the inputs used to produce the good

Suppose that when income rises, the demand curve for computers shifts to the right. In this case, we
know computers are
a. inferior goods.
b. normal goods.
c. perfectly competitive goods.
d. durable goods.

B. normal goods

Which of the following might cause the demand curve for an inferior good to shift to the left?
a. a decrease in income
b. an increase in the price of a substitute
c. an increase in the price of a complement
d. None of the above is correct.

C. an increase in the price of a complement
*(ex: peanut butter and jelly - If the price of peanut butter goes up, the demand for jelly will go down)

Which of the following events could shift the demand curve for gasoline to the left?
a. The income of gasoline buyers rises, and gasoline is a normal good.
b. The income of gasoline buyers falls, and gasoline is an inferior good.
c. Public service announcements run on television encourage people to walk or ride bicycles
instead of driving cars.
d. The price of gasoline rises.

C. Public service announcements run on television encouraging people to walk or ride bicycles instead of cars.
*Price doesn't shift curves, It moves along the curve.

Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per
dozen. We would expect a
a. shortage to exist and the market price of roses to increase.
b. shortage to exist and the market price of roses to decrease.
c. surplus to exist and the market price of roses to increase.
d. surplus to exist and the market price of roses to decrease.

D. surplus to eist and the market price of roses to decrease.
*When supply is greater than demand, there is a surplus.

Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a
reduction in input prices. What would we expect to occur in this market?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
b. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.

A. equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.

TRUE or FALSE: If wages for accountants rose, then accountants' leisure time would have a lower opportunity cost.

False, Leisure time would have a higher opportunity cost.

TRUE or FALSE: If a country has the comparative advantage in producing a product, then that country must also have
the absolute advantage in producing that product.

False. Even if a country has comparative advantage, it may not have absolute advantage.

TRUE or FALSE: A decrease in the price of a product and an increase in the number of buyers in the market affect the
demand curve in the same general way.

False. Price doesn't shift the demand curve; it goes up and down it.

TRUE or FALSE: An increase in supply will cause a decrease in price, which will cause an increase in demand.

False. Price does not shift the demand curve.
OR
True, an increase in price in supply will cause a decrease in price which will increase the quantity demanded.

What is the limited nature of society's resources called?

scarcity

What is the study of how society manages its scarce resources?

economics

__________ is when society gets the most from its scarce resources

Efficiency

_______ is when prosperity is distributed uniformly among society's members

Equality

The ___________ of any item is whatever must be given up to obtain it.

opportunity cost

What is something that induces a person to act, i.e. the prospect of a reward or punishment.

incentive

A ________ allocates resources through the decentralized decisions of many households and firms as they interact in markets.

market economy

_________ is when the market fails to allocate society's resources efficiently. This can be caused by externalities or market power.

market failure

________ are when the production or consumption of a good affects bystanders (e.g. pollution)

externalities

______ is when a single buyer or seller has substantial influence on market price (e.g. monopoly)

market power

What is the amount of goods and services produced per unit of labor?

productivity

What is an increase in the general level of prices called?

inflation

What are the fluctuations in economic activity, such as employment and production called?

business cycle

What are small incremental adjustments to a plan of action called?

marginal changes

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

the market economy

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

market power

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

property rights

What are people called if they systematically and purposefully do the best they can to achieve their objectives?

rational people

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

absolute advantage

what is the ability to produce a good at a lower opportunity cost than another producer called?

comparative advantage

goods produced abroad and sold domestically

imports

goods produced domestically and sold abroad

exports

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

competitive market

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

complements

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

demand curve

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

demand schedule

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

equilibrium

the price that balances quantity supplied and quantity demanded

equilibrium price

the quantity supplied and the quantity demanded at the equilibrium price

equilibrium quantity

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

inferior good

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

law of demand

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

law of supply

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

law of supply and demand

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

market

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

normal good

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

quantity demanded

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

quantity supplied

a situation in which quantity demanded is greater than quantity supplied

shortage

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

substitutes

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

supply curve

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

supply schedule

a situation in which quantity supplied is greater than quantity demanded

surplus

In a ______ _______ _______, all goods are exactly the same, and buyers and sellers are so numerous that no one can affect price.

perfectly competitive market

TRUE or FALSE: According to the law of demand, if prices fall, quantity rises.

True - if no other aspects change.
OR
False - this is only true if all other things remain equal.

What are things that determine a buyer's demand for a good, other than a good's price?

non-price determinants

TRUE or FALSE: The demand for a good increases if income increase.

True - if the good is a normal good.
OR
False - the good could be an inferior good.

Two goods are _______ if an increase in the price of one causes an increase in demand for the other. (ex: coke and pepsi)

substitutes

Two goods are _________ if an increase in the price of one causes a fall in demand for the other. (ex: peanut butter and jelly)

complements

Inferior goods are those for which demand increases as:
A) the price of a substitute falls
B) income increases
C) income decreases
D) the price of a substiute falls

C) income decreases

A decrease in the quantity demanded because of an increase in price is represented by a:
A) movement down and right along the demand curve
B) A movement up and to the left along the demand curve
C) rightward shift along the demand curve
D) leftward shift along the demand curve

B) a movement up and to the left along the demand curve

If the price of Product X falls and this change increases the demand for Product Y, then:
A) X and Y are complements
B) Y is an inferior good
C) X is an inferior good
D) X and Y are substitutes

A) X and Y are complements

The quantity of ipods that people plan to buy this month depends on all but:
A) price of cd players
B) price of music download
C) technology used to produce an ipod
D) price of an ipod

C) technology used to produce an ipod

TRUE or FALSE: During the mid-2000s, the average price of a used car fell by nearly $500 and the quantity sold nationwide decreased by several thousand each year. This set of results is a contradiction to the law of demand.

False, because other aspects could have changed.
OR
True, this is a contradiction because the law of demand states that if the price of a product falls, quantity demanded rises.

The supply curve is usually ________ sloped.

positively

The demand curve is usually ________ sloped.

negatively

In a supply curve for tax return preparation software, what would happen to the curve if retailers cut the price of the software?

The supply curve would shift down and to the left.

In a supply curve for tax return preparation software, what would happen to the curve if a technological advance allows the software to be produced at a lower cost?

The supply curve would shift right.

In a supply curve for tax return preparation software, what would happen to the curve if professional tax return preparers raise the price of the services they provide?

The supply curve would not shift.

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