Fundamentals of Economics

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Because of scarcity,

we must sacrifice something of value to obtain more of any good or service we desire

Which of the following can increase the opportunity cost of attending college for students?

An increase in wages paid to workers without college degrees

The table below shows how the marginal benefit of pizza dinners varies with the number consumed per month for Ralph. Dinners per Month Marginal Benefit 1 $8.00 2 $6.00 3 $4.00 4 $2.00 Suppose the price per pizza dinner is $8.99 and accurately reflects the marginal cost of the dinners to Ralph. Assuming that Ralph is rational,

he will not consume any pizza dinners this month.

Which of the following is an example of capital?

an oil tanker used by a petroleum company, an oven used by a pizza parlor, a delivery truck, a shovel used by a farmer

*** All of the above

Which of the following is assumed when constructing a production possibilities curve?

The quantity of economic resources available during the year is fixed.

Suppose an economy produces only pizza and jeans. If some resources are specialized in the production of either pizzas or jeans,

the opportunity cost of additional units of pizza will increase as more pizza is produced.

Suppose a new government provision is enacted in the U.S. that increases government spending of health benefits, providing tax-financed, long-term nursing home care to the growing population of people over the age of 65. If the U.S. is experiencing productive efficiency, the new benefits

can be provided without any sacrifice of other goods and services
will involve sacrifice of other goods and services
will require a reallocation of resources from the production of other goods and services to the production of health services for the elderly
** Both b and c

Suppose a nation produces only two goods--bread and computers. Currently, resources are being used to produce 10,000 computers and 5 million loaves of bread each year. If productive efficiency prevails in this nation this year,

it is possible to increase the production of bread to 6 million loaves per year, only by reducing the number of computers produced.

An increase in the size of the economy's labor force is illustrated by a graph

that shows two arrows moving to the right

In recent years, production possibilities curve of China has been shifting out at a faster rate than any other nation in the world. Which of the following can best explain China's rapid economic growth?

A high rate of investment.

An individual's ability to increase the consumption of two goods ___________ when the price of one or both goods ___________.

decreases, increases

Suppose you spend all your income on compact discs and hamburger dinners. The price of a compact disc is $10, and the price of a hamburger dinner is $5. It follows that the opportunity cost of a compact disc is

two hamburger dinners.

Paola receives an allowance of $300 per month from her father, which she uses to buy gasoline for her car and to buy cassette tapes. Suppose the price of gasoline doubles while the price of cassette tapes and her allowance remain the same. This implies that

the opportunity cost of cassette tapes for Paola will decrease.

The U.S. Treasury is expected to decrease its demand for loanable funds. Other things being equal, this implies that

interest rates will fall.

Suppose the market equilibrium price of lumber increases while, at the same time, the market equilibrium quantity sold declines. Which of the following is the most likely explanation for the change in the market equilibrium price and quantity?

A decrease in the supply of lumber.

Before the November 13, 1993, Florida State vs. Notre Dame football game, the price of a ticket to the game was below the equilibrium price. A price below the market equilibrium price results in

a shortage of tickets.

If price in the market for dinosaur bones is below its equilibrium level,

price will increase and quantity demanded will decrease.

A recession hits the U.S., and there's a decrease in the demand for labor. Assuming nothing else changes in labor markets and the labor market achieves a new equilibrium in response to the decrease in demand,

there will be a surplus of workers.

A rent control law is passed in the city of Portland. If the equilibrium rent for a one-bedroom apartment is $550 per month,

there will be a shortage of one-bedroom apartments if the rent ceiling is below $550 per month.

As a result of a government guarantee of $2.50 per gallon for milk--no matter how much milk is produced--more farmers enter this market until the new supply curve equals S2. As a result of this development,
(a) the milk surplus will increase to 7.6 billion gallons.
(b) taxpayers will pay an extra $6.25 billion to dairy farmers.
(c) the real equilibrium price of milk will be $.63.
(d) All of the above.
(e) (a) and (c) only.

REFERENCE ID: 1504.727 (1)

All of the above.

The graph shows the demand for and supply of labor hours by teenagers in the U.S. If the minimum wage is increased from $4.25 to $6.00 per hour, the result will be

an increase in labor hours supplied by teenagers, along with a decrease in labor hours demanded by employers of teenagers.

The price elasticity of demand for Bart Simpson watches is -3. A 5% increase in the price of the watches will cause the quantity demanded to

decrease by 15%.

The more substitutes there are for an item,

the more elastic the demand will be.

If the price elasticity of demand for car tags is zero for all prices, the demand curve is

vertical.

The income elasticity of demand for furniture is 4. It follows that, other things being equal, a 7% increase in consumer income will

increase the quantity of furniture purchased by 28%.

The cross-elasticity of demand between JVC VCRs and the price of Sony VCRs is likely to be

a positive number.

A per-unit tax will be paid entirely by consumers if (a) demand is perfectly inelastic.
(b) demand is elastic.
(c) supply is perfectly elastic.
(d) Either (a) or (c).

Either (a) or (c).

If the supply of steel is perfectly elastic, an increase in the demand for steel will

increase the quantity of steel supplied, but have no effect on the price.

The portion of corporate profits that's passed on to stockholders is called

dividends.

Implicit costs are equal to

opportunity costs of owner-supplied resources.

John is president of a small corporation. At the end of the year, his accountant calculates the following costs attributable to the business.
Payroll for wages and salaries: $100,000
Interest paid to banks: $40,000
Depreciation on equipment: $80,000
Supplies, utilities: $50,000

The equity of the corporation, a measure of the value of its assets less debt, is estimated to be $200,000. John forgoes a return of 10% per year by keeping the equity in the corporation.

If the corporation takes in revenue of $500,000 this year, its economic profit is

$210,000.

Unlimited liability is a characteristic of

sole proprietorships and partnerships.

In the long run,

all inputs are variable.

Gilligan runs a local coconut processing plant. Gilligan notices that the marginal product of labor for his plant is currently negative. This means

total output will increase if Gilligan reduces the amount of labor used.

Number of Workers Employed Marginal Product of Labor (Per Week) (Pairs of Shoes Per Week) 0 - 1 30 2 40 3 20 4 -10 5 -20 The table above shows the marginal product of labor for a shoe manufacturer. At what point does the law of diminishing marginal returns set in?

After the second worker is hired.

A firm is producing 100 units of output at a total cost of $400. The firm's average variable cost is $3 per unit. What is the firm's fixed cost?

$100

If marginal cost is less than average cost, at current levels of production,

average cost is decreasing with output.

Suppose you operate a factory producing lawn mowers. Your current level of output is 500 lawn mowers per week. Your weekly variable cost is $40,000. If your total cost is $50,000 per month,

average variable cost of production is $80.

At a current level of production of 10,000 per day in its Garner plant, the marginal cost of producing a Jess Jones Sausage is 50 cents. If the average cost of production is 40 cents, at that level of production,

the average cost of production will increase if output is increased above 10,000 sausages per day.

The only variable input used in producing bicycles in a small factory is labor. Currently, 4 workers are employed. Each works 40 hours per week and is paid $10 per hour. If fixed cost is $2,000 per week and total output is 10 bicycles per week,

All of the above.

Economies of scale occur if a firm's

long-run average cost decreases as the firm increases its output by expanding its plant and equipment.

Which of the following is a measure of average variable cost?

All of the above.

If all productive resources are fully and efficiently employed in a nation and technology is fixed this year, then

it is possible to increase the production of medical services, but only by decreasing the production of other goods and services this year.

The table below shows how the marginal benefit of sweatshirts varies with the number purchased per year for David. Number of Sweatshirts per Year Marginal Benefit 1 $40 2 30 3 20 4 10 Suppose the price of a sweatshirt is $19.99, and this price accurately reflects the marginal cost to John. If John is rational, how many sweatshirts will he buy per year?

3

The data below shows how the marginal benefit and marginal cost of going to the movies varies with the number attended by Dan. Number of Screenings Marginal Benefit Marginal Cost Attended per Month 1 $20 $8 2 14 8 3 8 8 4 4 8 5 2 8 Assuming that Dan is rational, how many movies will he attend per month?

3

Which of the following is most likely to shift a nation's production possibilities curve outward?

An improvement in technology in manufacturing.

Suppose an earthquake in Los Angeles destroys a considerable amount of the city's capital stock, including portions of highways, business and commercial structures, and industrial equipment. As a result of the loss of capital,

Los Angeles' production possibilities curve will shift inward.

A teenager receives an allowance of $50 per month, which she spends entirely on lunches at McDonald's and going to the movies. A lunch at McDonald's costs $2. and a ticket to the movies costs $6. It follows that

the opportunity cost of going to the movies is three lunches at McDonald's.

If hamburger is an inferior good, as individuals' incomes rise,

the demand for hamburger will decrease.

Pencils and pens are substitutes. As the price of pens decreases, it's likely that

the demand for pencils will decrease.

Tobacco is an input in the production of cigarettes. Therefore, as the price of tobacco increases,

the supply of cigarettes will decrease.

The supply of personal computers is likely to increase this year. Other things being equal, which of the following is the likely consequence of the increase in supply?

A decrease in the market equilibrium price and an increase in the equilibrium quantity of computers demanded.

Price ceilings will cause shortages if prices are set

below the equilibrium price.

In the wake of Hurricane Hugo, price ceilings were imposed on the market for lumber to prevent "price gouging" (charging an unfairly high price during an emergency). If the price ceilings were established below the equilibrium price of lumber,

the quantity of lumber demanded increased.

If the price elasticity of demand for the movie "Dirty Harry" is -0.44 at the local video store, the demand for this Clint Eastwood movie is

inelastic.

The demand for Hickory Crawdad (a minor league baseball team) seat cushions is inelastic. A 5.82% increase in the price of these seat cushions will

increase the total revenue of sellers.

A perfectly elastic demand curve is

horizontal.

For inferior goods, the income elasticity of demand is

negative.

If a 10% increase in the price of beef results in a 26% increase in the quantity of pork demanded, the cross-elasticity of demand is

positive, and the goods are substitutes.

Shares of ownership in a corporation are called

stocks.

Limited liability is a characteristic of

corporations.

Economic profit is equal to

total revenue less the sum of accounting costs and implicit costs.

Gilligan runs a local coconut processing plant. Gilligan notices that the marginal product of labor for his plant is currently negative. This means

total output will increase if Gilligan reduces the amount of labor used.

Variable costs are

costs that vary with output.

If a firm enjoys economies of scale as it expands in the long run, then, given input prices,

average cost will decrease as the firm expands.

You run a small business producing picture frames. This month, your total cost of production is $10,000, your variable cost of production is $5,000, and your output is 5,000 frames. It follows that

average fixed cost is $1.

The marginal cost of producing lumber for a competitive firm is currently $3 per board foot at its level of daily operations. If the price of lumber is $3.27 per board foot and the firms wishes to maximize profits, it must

increase daily output.

In the long run, economic profits in a perfectly competitive industry will

encourage new firms to enter the industry.

In long-run competitive equilibrium, price equals both

marginal cost and minimum possible average cost.

The existence of losses induces firms to __________ an industry, which shifts the market supply curve to the __________ and __________ market price.

exit, left, increases

Suppose the home construction industry is perfectly competitive. When the industry expands or contracts in the long run, the minimum possible average cost of home building remains fixed at $50 per square foot. Suppose the industry is currently in equilibrium. If the demand for housing increases,

the price of home construction will go up in the short run, but return to an equilibrium price of $50 per square foot in the long run.

The 1990-91 recession caused a decrease in the demand for organically grown food. If the industry was perfectly competitive before the recession,

firms left the industry and the supply of organically grown food decreased.

A significant long-run difference between monopoly and competition is that
(a) there's free entry and exit in a competitive industry, whereas barriers to entry exist in a monopolized market.
(b) the demand curve for the monopolist is the industry demand curve, whereas the demand curve faced by the competitive firm is perfectly elastic.
(c) the monopolist controls market supply, whereas the competitive firm's influence on market supply is imperceptible.
(d) All of the above.

All of the above.

A monopoly firm selling textbooks is currently maximizing profits by charging a price of $100 per book. It follows that the marginal cost of textbooks

is less than $100.

Suppose the DeBeers company exercises monopoly power in the distribution of diamonds. This year, the company earns economic profits and maximizes profit. This implies that the price of diamonds per carat will

exceed both the marginal cost and average cost of diamonds.

If the government attempts to break up a natural monopoly to enforce competition in an industry,

the average cost of producing the good will increase.

If a local movie theater is a monopolist, price discrimination means that

the theater can charge different prices for its product in different markets.

In a monopolistically competitive market,

firms sell a differentiated product.

Under oligopoly,

there are only a few sellers in the industry.

Which of the following conditions is NOT necessary for a cartel to succeed?

The ability to practice price discrimination.

Other things being equal, which of the following will increase current GDP in the United States?

An increase in exports of Boeing 767 airliners to Mexico.

Suppose real GDP in the United States rises by 3% in 2003. If follows that
(a) the economy will be in an expansion phase of the business cycle that year.
(b) aggregate real income will also rise by 3% that year.
(c) nominal GDP will fall that year.
(d) total production of final products will rise by 3% in 2003, but aggregate real income won't increase at all.
(e) Both (a) and (b).

Both (a) and (b).

__________ results from shifts in the demand for goods and services, or changes in technology in the economy.

Structural unemployment

Suppose the natural rate of unemployment is believed to be 5.8%. If actual unemployment at the time is 6.2%, it follows that

cyclical unemployment is 0.4% of the labor force.

Which of the following will increase potential real GDP?

An increase in the productivity of labor.

If the CPI in year 1 equals 100 and the CPI in year 2 equals 104.6, it can be concluded that

the rate of inflation from year 1 to year 2 is 4.6%.

Suppose there's an unanticipated increase in the rate of inflation. Which of the following is likely to be true?

Workers whose nominal wages are set at the beginning of the year are likely to suffer a decrease in real wages.

An economic contraction can be caused by an increase in

real interest rates.

If macroeconomic equilibrium prevails at real GDP of $650 billion, but full-employment real GDP is $750 billion,

the recessionary GDP gap is $100 billion.

If equilibrium real GDP exceeds potential GDP,

an inflationary GDP gap exists.

Suppose aggregate demand shifts to the right, causing an inflationary GDP gap. As a result, wages will increase and

cause aggregate supply to shift back to the left.

According to the classical model of macroeconomic equilibrium,

a decrease in aggregate demand that causes excessive unemployment will eventually result in a decrease in nominal wages.

The long-run aggregate supply curve, according to the classical model,

is vertical at potential real GDP.

In a perfectly competitive market,

a seller can't influence the price of its product.

The competitive firm's demand curve is

perfectly elastic; thus, an increase in price would cause the firm's total revenue to decrease to zero.

To maximize profits, a firm should produce output up to the point at which

marginal revenue equals marginal cost.

The marginal cost of producing lumber for a competitive firm is currently $3 per board foot at its level of daily operations. If the price of lumber is $3.27 per board foot and the firms wishes to maximize profits, it must

increase daily output.

Which of the following is NOT a characteristic of long-run competitive equilibrium?

Firms within the industry are growing at a rate exceeding the inflation rate.

Firms in the oat industry are currently receiving a price of $2 per bushel for their product. The minimum possible average cost of producing oats in the long run is $1 per bushel. It follows that

new firms will enter the oat industry.

The existence of economic profits induces __________from/into an industry, which in turn __________market supply and __________market price.

entry, increases, decreases

The monopolist's profit-maximizing level of output is determined by the equality of

marginal revenue and marginal cost.

A monopoly firm selling textbooks is currently maximizing profits by charging a price of $100 per book. It follows that the marginal cost of textbooks

is less than $100.

Which is the best description of price discrimination?

Charging different prices to different buyers for goods with identical costs of production.

Characteristics of monopolistic competition include all of the following EXCEPT

barriers to entry.

A cartel is

a group of firms acting in collusion to control output and maximize group profits.

GDP includes

final, but not intermediate, products.

Why has nominal GDP typically increased more rapidly than real GDP?

Because of inflation

The equation for GDP using the expenditure approach i

GDP = C + I + G + Net Exports.

Suppose real GDP in the United States rises by 3% in 2003. If follows that
(a) the economy will be in an expansion phase of the business cycle that year.
(b) aggregate real income will also rise by 3% that year.
(c) total production of final products will rise by 3% in 2003, but aggregate real income won't increase at all.
(d) nominal GDP will fall that year.
(e) Both (a) and (b).

Both (a) and (b).

If the unemployment rate was 6.4% for November of last year, it means

6.4% of the total labor force was unemployed.

Unemployment caused by economic decline or recession is called

cyclical unemployment

Which of the following will increase potential real GDP?

An increase in the labor force.

If your nominal wage is going up more slowly than the price level,

your real wage is declining.

Suppose there's an unanticipated increase in the rate of inflation. Which of the following is likely to be true?

Workers whose nominal wages are set at the beginning of the year are likely to suffer a decrease in real wages.

Suppose the current cost of the market basket of goods included in the consumer price index (CPI) is $2,000. The cost of the same basket of goods in the base year was $1,500. The current CPI is

133.

An economic contraction can be caused by an increase in

real interest rates.

A recessionary GDP gap occurs when

full-employment real GDP exceeds equilibrium real GDP.

A decrease in input prices shifts the aggregate ___________ curve ___________, causing real GDP to ___________ and the price level to ___________.

supply, rightward, increase, decrease

Stagflation is a term used to describe the combination of

high inflation and high unemployment.

Which of the following situations is likely to shift the aggregate supply curve inward?

Labor unions receive higher wages for their members.

The long-run aggregate supply curve, according to the classical model,

is vertical at potential real GDP.

Suppose the U.S. economy is in macroeconomic equilibrium at a level of real GDP that's below potential real GDP. According to the classical model of macroeconomic equilibrium, which of the following is true?

Nominal wages will decline, thereby increasing aggregate supply to move the economy to full employment.

John Maynard Keynes argued that

downward nominal wage rigidity prevents the classical adjustment mechanism from working to eliminate unemployment.

The classicists argued that an increase in aggregate demand would ____________ in the short run, but in the long run real GDP would ____________.

increase real GDP, return to its potential level

* What are the four major functions of money?

1. medium of exchange
2. a standard of value
3. a standard of deferred payment
4. a store of value

liquid

money can be converted into goods and services without any inconvenience or cost

fiat money

money that accepted as a medium of exchange because of gov decree rather than because of its intrinsic value as a commodity

Gresham's Law

good money is driven out of circulation by bad money. Good money has higher value as a commodity than bad money

Checkable deposits

money deposited in bank accounts that can be used to write checks accepted to pay debts or that can easily be converted to currency.

commercial banks

firms that acquire funds by accepting checkable deposits and savings deposits from households and business firms and use these funds to make loans.

Thrift institutions

depository institutions that acquire funds by attracting savings deposits and have, in the past, specialized in mortgage loans and consumer credit. Thrift institutions are sometimes referred to as savings associations or savings banks, and many of them were formerly called "savings and loan associations" and "mutual savings banks."

Credit unions

Credit unions are depository institutions whose depositors, called members, belong to a particular organization such as a business firm or government. Credit unions make loans only to their members for the purpose of financing homes or personal goods and services (such as cars).

The nation's total checkable deposits are

the sums in demand deposits, NOW accounts, ATS accounts, and other checkable deposits

Bonds

are securities issued by corporations and governments representing the promise to make periodic payments of interest and to repay borrowed funds at a certain time.

Money is a stock, rather than a flow

can only be measured as the amount held by the public on a certain day

M1

a measure of the money stock that includes only currency and account balances commonly used in payment for purchases of goods and services

M1 is the sum of the

currency, traveller's checks, and checkable deposits held by the public

Near monies

are assets that are easily converted into money, because they can be liquidated at low cost and little risk of loss.

M2

is the sum of M1 and certain near monies.

certificates of deposit

deposits made in banks for a specified time with a penalty charged for early withdrawal.

time deposits

interest bearing accounts at a commercial bank or a thrift institution for which the bank can legally request a 30 day notice before paying out the funds.

Example of time deposits

savings deposits
certificates of deposit

the opportunity cost of holding a dollar over the year is

the interest income thats forgone.

transaction demand for money

the sum of money people want to hold per day as a convenience in paying their everyday bills.

The benefit of holding money

avoidance of the transaction costs of converting other assets into currency and checkable deposits

The greater the level of nominal GDP

the grater the transaction demand for money.

Reasons for holding money

liquidity ( can draw upon quickly to pay debts)
uncertainty about the future level of prices and interest rates in the economy

demand for money

the relationship between the sums of money that people willingly hold and the level of interest rates in the economy, given all other influences on the desirability of holding money instead of other assets.

money demand curve

relationship between the level of interest rates in the economy and the stock of money demanded at a given point in time.

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