FINAL EXAM Micro

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the characteristic from which all economic problems arise is

scarcity

scarcity results from the fact that

people's wants exceed the resources available to satisfy them.

To economists, scarcity means that

unlimited wants cannot be satisfied by the limited resources.

If a decision is made and it is the best choice for society, the decision is said to be

made in social interest

Jamie has enough money to buy either a Mountain Dew, or a Pepsi, or a bag of chips. He chooses to buy the Mountain Dew. The opportunity cost of the Mountain Dew is

the Pepsi or the bag of chips, whichever
the best alternative given up.

The benefit of an activity is

the gain or pleasure that it brings.

The marginal benefit of an activity is

i. the benefit from a one-unit increase in the activity.

iii. measured by what the person is willing to give up to get one additional unit of the activity.

The cost of a one-unit increase in an activity

is called the marginal cost.

If the marginal benefit of the next slice of pizza exceeds the marginal cost, you will

eat the slice of pizza.

When people make rational choices, they

weigh the costs and benefits of their options and act to satisfy their wants.

A positive statement

can be tested against the facts.

The production possibilities frontier is a graph showing the

maximum combinations of goods and services that can be produced.

The production possibilities frontier is a boundary that separates

attainable combinations of goods and services that can be produced from unattainable combinations.

Points inside the PPF are all

attainable and have some unemployed resources.

Points on the PPF are all

production efficient.

During a time with high unemployment, a country can increase the production of one good or service

without decreasing the production of
something else.

Moving along the production possibilities frontier itself illustrates

the existence of tradeoffs.

The opportunity cost of one more slice of pizza in terms of sodas is the

number of sodas we have to give up to get one extra slice of pizza.

Moving between two points on a PPF, a country gains 6 automobiles and forgoes 3 trucks. The opportunity cost of 1 automobile is

(what you give up/what you gain)
1/2 of a truck

Opportunity Cost Equation

What you give up/what you gain

Moving between two points on a PPF, a country gains 8 desktop computers and for- goes 4 laptop computers. The opportunity cost of 1 desktop computer is

(what you give up/what you gain)
1/2 of a laptop

A country produces only cans of soup and ink pens. If the country produces on its bowed outward PPF and increases the production of cans of soup, the opportunity cost of additional

cans of soup is increasing.

Moving along a country's PPF, a reason opportunity costs increase is that

some resources are better suited for producing one good rather than the other.

Increasing opportunity costs exist

in the real world.

To increase its economic growth, a nation should

encourage education because that increases the quality of labor.

Other things equal, if Mexico devotes more resources to train its population than Spain

Mexico will grow faster than Spain.

If a nation devotes a larger share of its current production to consumption goods, then

its economic growth will slow down.

Which of the following about economic growth is correct?

i. As an economy grows, the opportunity
costs of economic growth decrease.

iii. The opportunity cost of economic growth is current consumption forgone.

When a country's production possibilities frontier shifts outward over time, the country is experiencing

economic growth.

The opportunity cost of economic growth is ____ and the benefit of economic growth is ____.

decreased current consumption; increased future consumption

"Comparative advantage" is defined as a situation in which one person can produce

a good for a lower opportunity cost than another person.

in one hour John can produce 20 loaves of bread or 8 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?

Phyllis has an absolute advantage in both goods.

In one hour John can produce 20 loaves of bread or 16 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?

John has a comparative advantage in producing cakes.

In one hour John can produce 20 loaves of bread or 16 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. John and Phyllis will reap the largest gains from specialization and trade if John produces ____ and Phyllis produces ____.

only bread; only cakes

The "law of demand" indicates that if the University of Maine increases the tuition, all other things remaining the same,

he quantity of classes demanded will decrease at the University of Maine.

Other things remaining the same, the quantity of a good or service demanded will increase if the price of the good or service

falls

Teenagers demand more soda than other age groups. If the number of teenagers increases, everything else remaining the same,

market demand for soda increases.

One reason the demand for laptop computers might increase is a

a change in preferences as laptops have become more portable, with faster processors and larger hard drives.

The number of buyers of sport utility vehicles, SUVs, decreases sharply. So the

demand curve for SUVs shifts leftward.

When moving along a demand curve, which of the following changes?

the prices of the good

If the price of a DVD falls,

ii. the demand curve for DVDs will not shift.

iii. there is a movement along the demand curve for DVDs.

Pizza and tacos are substitutes and the price of a pizza increases. Which of the following correctly indicates what happens?

The quantity of pizza demanded decreases and the demand for tacos increases.

The quantity supplied of a good, service, or resource is ____ during a specified period and at a specified price.

he amount that people are willing and able to sell

One reason supply curves have an upward slope is because

a higher price brings a greater profit, so firms want to sell more of that good.

Which of the following indicates that the law of supply applies to makers of soda?

An increase in the price of a soda leads to an increase in the quantity of soda supplied.

4. The market supply curve is the ____ of the ____.

horizontal sum; individual supply curves

If the costs to produce pizza increase, which will occur?

The supply of pizza will decrease.

A rise in the price of a substitute in production for a good leads to

a decrease in the supply of that good.

An increase in the productivity of producing jeans results in

the supply of jeans increasing.

A rightward shift of the supply curve of pizza could be the result of

an increase in the productivity of the
firms producing pizza.

The price of leather used to produce shoes rises, so the supply of shoes ____ and the supply curve of shoes ____.

decreases; shifts leftward

The equilibrium price of a good occurs if the

quantity of the good demanded equals the quantity of the good supplied.

Which of the following is correct?
i. A surplus puts downward pressure on the price of a good.

ii. A shortage puts upward pressure on the
price of a good

iii. There is no surplus or shortage at equilib-
rium.

i, ii, iii

The number of people looking to buy ceiling fans increases, so there is an increase in the

demand for ceiling fans and a rise in the price of a ceiling fan.

Which of the following is the best explanation for why the price of gasoline increases during the summer months?

There is increased driving by families going on vacation.

Suppose that the price of lettuce used to produce tacos increases. This change means that the equilibrium price of a taco ____ and the equilibrium quantity ____.

rises; decreases

The technology associated with manufacturing computers has advanced enormously. This change has led to the price of a computer ____ and the quantity ____.

falling; increasing

Candy makers accurately anticipate the increase in demand for candy for Halloween so that the supply of candy and the demand for candy increase the same amount. As a result, the price of candy ____ and the quantity of candy ____.

does not change; increases

During 2010 the supply of gasoline de- creased while at the same time the demand for gasoline increased. If the magnitude of the increase in demand was greater than the magnitude of the decrease in supply, then the equilibrium price of gasoline ____ and the equilibrium quantity ___

increased; increased

The price elasticity of demand is a measure of the extent to which the quantity demand- ed of a good changes when ____ changes and all other influences on buyers' plans remain the same.

the price of the good

Suppose the price of a movie falls from $9 to $7. Using the midpoint method, what is the percentage change in price?

-25%

Suppose the price of a tie rises from $45 to $55. Using the midpoint method, what is the percentage change in price?

20%

Demand is elastic if

consumers respond strongly to changes in the product's price.

During the winter of 2011-2012, the price of fuel oil increased enormously but the quantity demanded decreased only a little. This response indicates that the demand for fuel oil was

inelastic.

If substitutes for a good are readily available, the demand for that good is

elastic

If the price of a product increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity of demand is

1

The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from 100 to 60. What is the price elasticity of demand?

1.25

When a firm raises the price of its product, what happens to total revenue?

If demand is elastic, total revenue decreases.

The price elasticity of supply is a measure of the extent to which the quantity supplied of a good changes when only the

price of the good changes.

When the percentage change in the quantity supplied exceeds the percentage change in price, then supply is

elastic

The supply of beachfront property on St. Simon's Island is

inelastic

For a product with a rapidly increasing opportunity cost of producing additional units,

supply is price inelastic.

The greater the amount of time that passes after a price change, the

more elastic supply becomes.

The price elasticity of supply equals the percentage change in the

quantity supplied divided by the percentage change in price.

The measure used to determine whether two goods are complements or substitutes is called the

cross elasticity of demand.

If beef and pork are substitutes, the cross elasticity of demand between the two goods is

positive

When the price of a pizza is $10, the quantity of soda demanded is 300 drinks. When the price of pizza is $15, the quantity of soda demanded is 100 drinks. The cross elasticity of demand equals

-2.50.

If two goods have a cross elasticity of demand of −2, then when the price of the one increases, the demand curve of the other good

shifts leftward

The income elasticity of demand is the percentage change in the ____ divided by the percentage change in ____.

quantity demanded; income

When income increases by 6 percent, the demand for potatoes decreases by 2 percent. The income elasticity of demand for potatoes equals

-0.33

If a product is a normal good, then its income elasticity of demand is

positive

The income elasticity of demand for used cars is less than zero. So, used cars are

an inferior good.

If a landlord will rent an apartment only to married couples over 30 years old, the landlord is allocating resources using a ____ allocation method.

personal characteristics

Allocative efficiency occurs when

the most highly valued goods and services
are produced.

Marginal benefit equals the

benefit that a person receives from con-
suming another unit of a good.

In general, the marginal cost curve

has a positive slope.

Allocative efficiency is achieved when the marginal benefit of a good

equals the marginal cost.

Value is

the difference between the price paid for a good and the marginal cost of producing
that unit of the good.

A marginal benefit curve

is the same as a demand curve.

In general, as the consumption of a good or service increases, the marginal benefit from consuming that good or service

decreases.

The difference between the marginal benefit from a new pair of shoes and the price of the new pair of shoes is

the consumer surplus from that pair of
shoes.

If the price of a pizza is $10 per pizza, the consumer surplus from the first pizza consumed ____ the consumer surplus from the second pizza consumed.

is greater than

Cost is

is what the seller must give up to produce
the good.

If a firm is willing to supply the 1,000th unit of a good at a price of $23 or more, we know that $23 is the

minimum price the seller must receive to
produce this unit.

A supply curve shows the ____ of producing one more unit of a good or service.

marginal cost

The producer surplus on a unit of a good is

equal to the price of the good minus the
marginal cost of producing it.

Suppose you're willing to tutor a student for $10 an hour. The student pays you $15 an hour. What is your producer surplus?

$5 an hour

In a figure that shows a supply curve and a demand curve, producer surplus is the area

above the supply curve and below the
market price.

When a market is efficient the

sum of consumer surplus and producer
surplus is maximized.

Which of the following occurs when a market is efficient?

scarce resources are used to produce the
goods and services that people value most
highly

The concept of "the invisible hand" suggests that markets

produce the efficient quantity

When underproduction occurs,

there is a deadweight loss that is borne by
the entire society.

When production moves from the efficient quantity to a point of overproduction,

there is a deadweight loss.

Which of the following can result in market failure?

ii. an external cost or an external benefit
iii. a tax

A price ceiling is a government regulation that makes it illegal to charge a price

above some specified level.

When a price ceiling is set below the equilibrium price, the quantity supplied ____ the quantity demanded and ____ exists.

is less than; a shortage

In a housing market with a rent ceiling set below the equilibrium rent,

some people seeking an apartment to rent
will not be able to find one.

A rent ceiling on housing creates a problem of allocating the housing units because

a shortage of apartments occurs.

Rent ceilings

increase search activity AND benefit renters living in rent-controlled apartments.

Suppose that the government imposes a price ceiling on gasoline that is below the equilibrium price. The black market for gasoline is ____ market in which the price ____ the ceiling price.

an illegal; exceeds

A rent ceiling creates a deadweight loss if....

it is set below the equilibrium rent.

A price floor is...

the lowest price at which it is legal to
trade a particular good, service, or factor of production.

To be effective in raising people’'s wages, a minimum wage must be set

above the equilibrium wage rate.

A minimum wage set above the equilibrium wage rate

increases the quantity of labor services supplied.

Suppose the current equilibrium wage rate for lifeguards in Houston is $7.85 an hour. A minimum wage law that creates a price floor of $8.50 an hour leads to

a surplus of lifeguards in Houston.

If the minimum wage is above the equilibri- um wage rate, then an increase in the minimum wage ______ employment and ______ unemployment.

decreases; increases

If a minimum wage is introduced that is above the equilibrium wage rate,

job search activity increases.

The minimum wage is set above the equilibrium wage rate. Does the minimum wage create inefficiency?

YES

When the minimum wage is raised, the ____ union labor ____.

demand for; increases

Price supports are generally used in what kind of market?

agricultural markets.

To have an effective price support program, the government must:

i. isolate the domestic market from the world market

ii. pay the farmers a subsidy

iii. introduce a price floor

i, ii, iii

A price support directly sets the

lowest price for which the good may be sold.

To keep the price at the level set by the price support, the government must

buy some of the good.

With a price support program, who receives a subsidy?

only producers

When a price support is set above the equilibrium price, producers ____ the quantity supplied and consumers ____ the quantity demanded.

increase; decrease

A price support ____ producers and ____ a deadweight loss.

benefits; creates

Which of the following best describes an externality?

an effect of a transaction felt by someone other than the consumer or producer

Pollution is an example of a ____ externality.

negative production

Which of the following is an example of an external cost?

i. second-hand smoke

ii. sulfur emitting from a smoke stack.

iii. garbage on the roadside

i, ii, iii

The cost of producing one more unit of a good or service that is borne by the producer of that good or service is...

is the marginal private cost.

The cost of producing an additional unit of a good or service that falls on people other than the producer is

the marginal external cost.

The marginal cost of production that is borne by the entire society is the marginal

social cost.

If the marginal private cost of producing one kilowatt of power in California is 8¢ and the marginal social cost of each kilowatt is 13¢, then the marginal external cost equals ____ a kilowatt.

When the production of a good has a marginal external cost, which of the following will occur in an unregulated market?

i. Overproduction relative to the efficient level will occur

ii. The market price will be less than the marginal social cost at the equilibrium quantity

iii. A deadweight loss will occur

i, ii, iii

The Coase theorem is the proposition that if property rights exist, a small number of people are involved, and transactions costs are low, then private transactions are

efficient

If a polluting producers are required to pay a pollution charge or a pollution tax, what is the effect on the supply and demand curves for the product?

The supply curve shifts leftward.

A marketable pollution permit does what?

allows firms to buy and sell the right to pollute from other firms.

If we compare air pollution today to air pollution in 1980, we see that...

pollution of most types has been
decreased.

The benefit the consumer of a good or service receives is the

private benefit.

An external benefit is a benefit from a good or service that someone other than the ____ receives.

consumer

When Ronald takes another economics class, other people in society benefit. The benefit to these other people is called the marginal ____ benefit of the class.

external

Marginal social benefit equals

marginal private benefit plus marginal external benefit

If an external benefit is present, then the ____________ curve lies above the ____________ curve.

marginal social benefit;marginal private benefit

In an unregulated market with an external benefit, the

quantity produced is less than the efficient quantity.

If all education in the United States were provided by private, tuition charging schools, then...

too little education would be consumed.

Which of the following is a method used by government to cope with the situation in which production of a good creates an external benefit?

a. removing property rights
b. paying subsidies
c. issuing marketable permits d. running a lottery
e. imposing a Coasian tax

b. paying subsidies

If tuition at a college is $30,000 and the external benefit of graduating from this college is $10,000, then

i. in the absence of any gov. intervention, the number of students graduating is less than the efficient number

ii. the gov. could increase the # of graduates by giving the college a $10,000 subsidy per student

iii. gov. could increase the number of graduates by giving the students $10,000 vouchers

i, ii, iii

Which of the following is an example of a voucher?

a. the postal service
b. police services
c. social security
d. food stamps
e. a tax on gasoline

d. food stamps

The fact that Heidi’'s enjoyment of a sunset on Saint Simon’'s Island does not preclude Mounette from enjoying the same sunset is an example of

a good that is nonrival.

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