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Econ 2010: Microeconomics

Economics is a social science that studies how individuals, institutions, and society may:

Best use scarce resources to achieve the maximum satisfaction of economic wants

The key economic concept that serves as the basis for the study of economics is:

Scarcity

The idea in economics that "there is no free lunch" means that:

There are opportunity costs involved when scarce resources are used up for free lunches

Opportunity cost is best defined as:

The value of the best forgone alternative

Tammie makes $150 a day as a bank clerk. She takes off two days off work without pay to fly to another city to attend the concert of her favorite music group. The cost of transportation for the trip is $250. The cost of the concert ticket is $50. The opportunity cost of Tammie's attending the concert is:

$600

When a state government chooses to build more roads, the required resources are no longer available for spending on public education. This dilemma illustrates the concept of:

Opportunity cost

Henry wants to buy a book. The economic perspective suggests that Henry will buy the book if:

The marginal benefit of the book is greater than its marginal cost

The concept of "rational behavior" suggests that:

Different people make different choices because their circumstances and information differ

Economists have difficulty applying the scientific method because:

Controlled laboratory experiments are impossible or often infeasible

Which is an illustration of a macroeconomic question?

Are increasing wage demands by workers contributing to price inflation?

Microeconomics focuses on:

The individual units that make up the economy

Which of the following is a normative economic statement?

A trade deficit of 20 billion dollars will harm the economy

Clara states that "there is a high correlation between the level of people's education and the level of their income." Ellie replies that the correlation occurs because "more education is the best way to earn more income in this country."

Clara's statement is positive and Ellie's statement is normative

Assume that a consumer purchases only two products. Suppose that the consumer's money income doubles, and the prices of the two products also double. These changes in income and prices will result in

No change in the budget line

Which of the following is considered as an economic resource?

The land that are designated as national parks by the government

Which of the following is one of the four simplifying assumptions made in constructing the production possibilities model?

The economy is fully employed and is using least-cost methods of production

All of the following would affect the position of a country's production possibilities curve, except:

The level of unemployment

A point inside the production possibilities curve is:

Attainable, but the economy is inefficient

A point on the production possibilities curve is:

Attainable and resources are fully employed

The production possibility curve:

Is the boundary between attainable and unattainable outputs

The law of increasing opportunity costs says that:

Along a production possibilities curve, increases in the production of one good require larger and larger sacrifices of the other good

Which statement is an economic rationale for the law of increasing opportunity costs?

Many economic resources are better at producing one product than another

In a production possibilities table, the most-valued or optimal point for society is determined by:

The equality of marginal benefits and marginal costs

When a society is under-allocating resources to the production of a good or service, then the:

Marginal benefit is greater than the marginal cost

To improve the rate of growth of labor productivity a number of economists have suggested that there needs to be:

An increase in investment relative to consumption

If the opportunity cost of producing extra units of one good (expressed in terms of the amount of another good that is sacrificed) remains constant, then the shape of the production possibilities curve is:

A straight downsloping line

The production possibilities curve bows outward from the origin because:

Opportunity costs increase as the production of a good increases

The role of the entrepreneur in society is to:

Bring the factors of production together and take the risks of producing

Which of the following is a factor of production?

Capital

Which is considered a factor of production?

An auto plant

Clara states that "there is a high correlation between the level of people's education and the level of their income." Ellie replies that the correlation occurs because "more education is the best way to earn more income in this country."Which of the following is considered as an economic resource?

Clara's statement is positive and Ellie's statement is normative

The study of how a firm sets its prices in different regions of the nation would fall under:

Microeconomics

Microeconomics focuses on:

The individual units that make up the economy

Which question is an example of a microeconomic question?

Will the merger of two airlines likely lead to higher airline ticket prices?

The purpose of the ceteris paribus assumption used in economic analysis is to:

Focus on the effect of a single factor on a certain variable

The process of developing hypotheses, testing them against facts, and using the results to construct theories is called:

The scientific method

When an economist says that there is "too much of a good thing," the economist is suggesting that:

The marginal benefit of the thing is less than the marginal cost

The observation that people compare the marginal benefits with the marginal costs in making such decisions as how to spend time, which products to buy, whether or not to work, and which goods to produce and sell, is most closely associated with:

The economic perspective

One major assumption of the economic perspective is:

That individuals' behavior reflect rational self-interest

A recurring theme in economics is that people:

Have unlimited economic wants, but limited resources

The satisfaction or pleasure one gets from consuming a good or service is:

Utility

The utility of a specific product:

Varies from person to person using the product

Total utility is best defined by which of the following?

The total satisfaction received from consuming a particular amount of a product

Which of the following statements is correct?

Total utility is the cumulation or summation of marginal utility

Which situation is consistent with the law of diminishing marginal utility?

The more pizza Henry eats, the less he enjoys an additional slice

Which statement is correct?

When marginal utility is positive, an increase in the quantity consumed will increase total utility

The reason why people are charged for an additional can of soda they get from a soda machine, but are not charged for an additional paper taken from a newspaper dispensing machine, is that the marginal utility of an additional:

Soda diminishes slowly, but the marginal utility of an additional paper is close to zero

The downward slope of the demand curve for a product shows the implications of:

Diminishing marginal utility

Which of the following is an assumption of the marginal-utility theory of consumer behavior?

Each good and service has a price

Which of the following is not an assumption of the marginal-utility theory of consumer behavior?

The consumer's tastes and preferences change within the period studied

A consumer with a fixed income will maximize utility when each good is purchased in amounts such that the:

Marginal utility per dollar spent is the same for all goods

In deciding what to buy, the consumer will choose the good with the:

Highest marginal utility-to-price ratio

Assume that a consumer purchases a combination of products Y and Z and that the MUy/Py= 25 and MUz/Pz= 20. To maximize utility, without spending more money, the consumer should:

Purchase more of Y and less of Z

The goal of a rational consumer is to maximize:

Total utility from all goods consumed

The reason the substitution effect works to encourage a consumer to buy less of a product when its price increases is:

The product is now relatively more expensive than it was before

The fact that an ounce of gold is priced higher than an ounce of chocolate suggests that:

The marginal utility of the last unit of gold consumed is greater than the marginal utility of the last unit of chocolate consumed

An increase in the productivity of labor over time will:

Increase the value of time

Health insurance often pays 80 percent of health care cost. This situation will encourage the rational consumer to:

Use more medical services than they would if they had to paid the full price

From the viewpoint of potential criminals, the probability of being fined or imprisoned:

Raises the marginal cost or "price" of criminal behavior

One implication of the phenomenon described by economist Richard Easterlin as the "hedonic treadmill" is that:

People can only become happier if they are consuming more and more

Marginal utility is the accumulation of the total utility from successive units of a good or service consumed.

False

The law of diminishing marginal utility suggests that the total utility a consumer derives from a product will increase slower and slower as consumption of the product increases.

True

The income and substitution effects will both induce the consumer to buy more of a normal good when its price decreases.

True

Someone paying $800 to fly from one city to another instead of paying only $100 for a bus trip between the two cities is making an irrational choice and is thus not maximizing his utility.

False

Behavioral economics is still in the early stages of development and thus is not yet capable of being used as a basis for policy-making

False

When diminishing marginal utility starts happening as a person consumes more and more of a given good:

Total utility will increase at a diminishing rate

Children who dislike Brussels sprouts exemplify the notion that the marginal utility of Brussels sprouts is:

Negative

According to utility theory, when total utility reaches a maximum, then marginal utility is

Equal to zero

When the price of a product falls for a normal good, the:

Income and substitution effects will encourage consumers to purchase more of the product

When the price of a product rises for an inferior good, the

Substitution effect will encourage consumers to purchase less of the product but the income effect will encourage them to purchase more

An increase in the price of product X causes a decrease in the quantity demanded for product X. One basic explanation for this is:

The law of diminishing marginal utility

The price of diamonds is substantially greater than the price of water because:

The marginal utility of the last unit of a diamond is significantly greater than the marginal utility of the last unit of a gallon of water consumed by a typical person

The marginal utility of leisure time appears to:

Increase as the quantity of available leisure time decreases

The financing of health care through insurance has:

Resulted in consumers directly paying less than the full price of health care

The law of diminishing marginal utility implies that in order to induce a buyer to buy more of a product, the seller must lower its price.

True

The value of the next best alternative for a resource is called its opportunity cost

True

An industry is expected to expand if firms in the industry are earning positive:

Economic profits

Suppose a firm sells its product at a price lower than the opportunity cost of the inputs used to produce it. Which of the following statements is definitely true?

The firm may earn positive accounting profits, but will face economic losses

Normal profits are:

Considered an implicit cost by economists

Which of the following statements is false?

The short run refers to a period of less than one year

In the short run:

Output is raised or reduced by changing the levels of variable inputs

Which is most likely to be a long-run adjustment for a firm that manufactures cars on an assembly line basis?

A change in production to a redesigned and retooled facili

Marginal product of labor refers to the:

Increase in output resulting from employing one more labor

According to the law of diminishing marginal returns:

The additional output generated by additional units of an input will diminish

Which of the following statements is true?

Diminishing marginal returns means that in order to increase output at a constant rate, the firm must add larger and larger quantities of the variable inputs

The law of diminishing returns in a manufacturing plant of a fixed capacity implies that, eventually, employing one:

More worker will decrease the average amount of output per worker

Which statement best illustrates the law of diminishing returns?

The marginal product of the last unit of a resource used is less than the marginal product of the preceding unit of resource

The total product curve graphically shows the:

Maximum level of output that can be produced by a quantity of a variable resource holding constant the quantity of other resources

The marginal product of labor curve graphically shows the change in total product resulting from a:

One-unit increase in the quantity of a particular resource used, holding constant other resources

When a bakery manager reports that at her bakery, productivity of her 15 workers last month was 1,800 loaves per worker, she is referring to the:

Average product of labor

The range of diminishing marginal productivity begins when:

Marginal product reaches its maximum

At the Amarillo Piano Company, the average product of labor stays constant at 5, regardless of how much labor is employed. This implies that:

The marginal product of labor is constant

At the point where diminishing marginal returns of an input sets in, the:

Marginal product starts to decrease

With fixed costs of $400, a firm has average total costs of $3 and average variable costs of $2.50. Its output quantity must be:

800 units

If the long-run average total cost curve for a firm is horizontal in the relevant range of production, then it indicates that there:

Are constant returns to scale

When diminishing marginal returns starts occurring, the addition of successive units of a variable resource to a fixed resource will cause the firm's production to diminish.

False

The law of diminishing marginal returns is another name for the law of diminishing marginal utility.

False

Marginal product is highest where marginal cost is lowest

True

When a firm increases its output, its average fixed costs will stay constant.

False

If a firm increases all its inputs by 10 percent and its output increases by 15 percent, the firm is experiencing diseconomies of scale.

False

In which market model would there be a unique product for which there are no close substitutes?

Pure monopoly

There would be some control over price within rather narrow limits in which market model?

Monopolistic competition

Under which market model are the conditions of entry into the market easiest?

Pure competition

Under which market model are the conditions of entry the most difficult?

Pure monopoly

Local electric or gas utility companies mostly operate in which market model?

Pure monopoly

The production of agricultural products such as wheat or corn would best be described by which market model?

Pure competition

The steel and automobile industries would be examples of which market model?

Oligopoly

Which is not a basic market model?

Free enterprise

Which characteristic would best be associated with pure competition?

Price takers

In a purely competitive industry, each firm:

Can easily enter or exit the industry

Which is a feature of a purely competitive market?

Products are standardized or homogeneous

Which is true under conditions of pure competition?

No single firm can influence the market price by changing its output

Price is constant or "given" to the individual firm selling in a purely competitive market because:

Each seller supplies a negligible fraction of total demand and supply

Which is not a required characteristic of a purely competitive industry?

Industry demand is highly elastic

A purely competitive firm does not try to sell more of its product by lowering its price below the market price because:

It can sell all it wants to at the market price

The demand curve faced by a purely competitive firm

Is the same as its marginal revenue curve

In pure competition, the demand for the product of a single firm is perfectly:

Elastic because many other firms produce the same product

If a firm is a price taker, then the demand curve for the firm's product is:

Perfectly elastic

In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is:

Equal to the price

In a graph for a firm in pure competition with the quantity of output measured on the horizontal axis, the total revenue curve is:

Upward-sloping

The total revenue of a purely competitive firm from 8 units of output is $48. Based on this information, total revenue for 9 units of output must be:

$54

Which is necessarily true for a purely competitive firm in short-run equilibrium?

Marginal revenue less marginal cost equals zero

A purely competitive firm is in short-run equilibrium and its MC exceeds its ATC. It can be concluded that:

The firm is realizing an economic profit

In pure competition, the industry demand curve is infinitely price elastic.

False

The break-even point means that the firm is realizing economic profits.

True

Which is an example of a market failure?

Polio shots and chest x-rays provide widespread benefits to the community as a whole as well as to the individuals who get them

Which of the following situations is not an example of market failure?

Ben cannot afford to buy a high-end Mercedes Benz luxury car

Charlie is willing to pay $10 for a T-shirt that is priced at $9. If Charlie buys the T-shirt, then his consumer surplus is

$1

Consumer surplus arises in a market because:

The equilibrium market price is below what some consumers are willing to pay for the product

If the price of a product increases:

The consumer surplus will decrease

Deadweight losses occur when the quantity of an output produced is:

less than or greater than the competitive equilibrium quantity

When there is overproduction of a good:

The marginal cost of the good exceeds its marginal benefit

What are the two characteristics that differentiate private goods from public goods?

Rivalry and excludability

Private firms can hardly produce a public good profitably because of:

The free-rider problem

A public good:

Can't be provided to one person without making it available to others as well

External benefits in consumption refer to benefits accruing to

Those other than the ones who consumed the product

If a good that generates negative externalities were priced to take into account these negative externalities, then its:

Price would increase and its output would decrease

If the production of a product or service involves external benefits, then the government can improve efficiency in the market by:

Providing a subsidy to correct for an underallocation of resources

When external benefits occur in the production of a particular product, the private market tends to provide:

Too little of the product

Where there are spillover (or external) costs from the production of a good, the government can make the quantity of the good approach the socially optimal level by doing the following except:

Subsiding the sellers of the product

Which antipollution policy would be least likely to make use of cost-benefit analysis?

Enacting legislation that bans pollution

An emission fee levied against polluters will tend to:

Internalize the external cost of pollution

Oftentimes, the socially optimal quantity for a product that imposes external costs on the society is not zero, but something greater than zero. This is because completely eliminating the externality involves:

A much greater marginal cost than marginal benefit

Sometimes, public goods whose benefits are less than their costs still get produced because:

The benefits accrue to politically powerful government officials and their constituents

Market failures refer to those situations where the sellers are not producing as much as the buyers are wanting to buy.

False

Demand-side market failures refer to those situations when there is a shortage in the market because buyers want to buy more than what is available in the market.

False

When the marginal benefits exceed the marginal costs of producing a product, then allocative efficiency is not achieved in the market.

True

Deadweight losses occur when there is overproduction of a product.

True

The free-rider problem refers to the local government's problem of finding funds to subsidize public transportation.

False

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