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ECO Exam 1
Terms in this set (59)
Economics is best defined as the study of:
how people make choices under the conditions of scarcity and the results of these choices. (Refer to the definition of economics)
The logical implications of the scarcity principle is that:
choices must be made. (The scarcity principle implies that a person cannot have or do everything, but must choose from among alternatives)
The cost-benefit principle indicates that an action should be taken:
if the extra benefit is greater than or equal to the extra costs. (Refer to the definition of the cost-benefit principle given in the text: the extra benefits and extra costs determine whether an action should be taken)
The opportunity cost of an activity is the value of:
the next-best alternative forgone. (Opportunity cost is not the total value of all possible activities, but only the value of the alternative you give up.)
Matt has decided to purchase his textbooks for the semester. His options are to purchase the books via the Internet with next day delivery to his home at a cost of $175, or drive to campus tomorrow to buy the books at the university bookstore at a cost of $170. Last week he drove to campus to buy a concert ticket because they offered 25% off regular price of $16.
According to the cost-benefit principle:
it would be rational for Matt to drive to campus to purchase the books because the $5 savings is more than he saved by driving there to buy the concert ticket. (because Matt was willing to drive to school to save $4 last week, we can assume that the cost of driving to school is no more than $4, so he should be willing to drive to school to save $5.)
If a nation has the lowest opportunity cost of producing a good, that nation has a(n):
comparative advantage (comparative advantage means having a lower opportunity cost)
Which of the following statements is always true?
Comparative advantage does not require absolute advantage (Comparative advantage and absolute advantage differ: you can have both at the same time, but you can also have either one but not the other.)
Application of the Principle of Comparative Advantage leads to:
Greater specialization of labor and other factors of production. (The Principle of Comparative Advantage states that people should specialize in those activities for which their opportunity cost is lower, so it leads to specialization)
In general, individuals and nations should specialize in producing those goods for which they have a(n):
comparative advantage (The Principle of Comparative Advantage states that people should specialize in those activities for which their opportunity cost is lower, which is the same as saying the activity for which they have a comparative advantage)
The production possibilities curve shows:
the maximum production of one good for every possible production level of the other good. (The production possiblilties curve describes the maximum amount of one good that can be produced for every possible amount produced of another good.)
Points that lie below the production possiblilities curve are inefficient because:
More of one or both goods could be produced using currently available resources without giving up production of another good. (Inefficient points lie below the production possibilities curve so it is possible, give currently available resources, to produce more of one good without giving up production of the other good.)
According to the principle of increasing opportunity cost, expanding production requires using resources in which order?
Starting with the resource with the lowest opportunity cost and proceeding to the higher opportunity cost resources. (Recall the low-hanging-fruit analogy: take advatage of the most favorable opportunities first)
Economic growth can result from a(n):
increase in the amount of productive resources. (more productive resources will shift the PPC outward)
In the long-run, if the production of all goods increases for a society (there is economic growth), it will cause the production possibility curve to:
shift outward. (With growth, more of both goods can be produced.)
The entire group of buyers and sellers of a particular good or service makes up the equilibrium.
a market. (The definition of a market given in the text is that the market for any good consists of all buyers and sellers of that good)
As coffee becomes more expensive, Joe starts drinking tea, and therefore quantity for coffee decreases. This is called:
the substitution effect. (When one good becomes more expensive, buyers switch to substitutes)
When the price of an item increases, buyers tend to purchase less of that item
because of both the substitution and the income effects. (Both the substitution effect and the income effect operate to reduce the quantity demanded when price increases.)
The buyer's reservation price of a particular good or serivce is the:
maximum amount the buyer would be willing to pay for it. (The definition of a buyer's reservation price is the largest dollar amount the buyer would be willing to pay for a good.)
The supply curve illustrates that firms:
increase the quantity supplied of a good when its price rises. (At higher prices, more sellers find that the price they can sell an item for is greater than their opportunity cost to produce that item)
An increase in the quantity demanded of tea occurs whenever:
the price of tea falls. (A change in price leads to a change in quantity demanded.)
If the demand for a good decreases as income decreases, it is a(n):
Normal good (A normal good is one for which the demand curve shifts leftward when the incomes of buyers decreases.)
Whether or not a good can be classified as a complement depends on whether:
an increase in demand for one good follows a decrease in the price of the other. (Whether a good is a complement is determined by the reaction of market demand for one good to a change in the price of the other.)
Suppose that the price of doughnuts decreases and that doughnut-holes are a by-product of producing doughnuts. One would expect:
the quanitity supplied of doughnuts to decrease. (A decrease in price decreases the quantity supplied.)
At the beginning of the fall semester, college towns experience large increases in their populations, causing a(n):
increase in the demand for apartments. (Apartments are complements to college attendance)
Which of the following would cause an increase in quantity supplied of wheat?
The price farmers receive for their wheat rises. (An increase in price causes a movement up and along the supply curve)
Suppose that the technology use to manufacture laptops was improved. The likely results would be:
An increase in supply of laptops. (An improvement in technology causes supply to shift to the right.)
Which of the following is NOT a determinant of demand for gasoline?
The quantity of gasoline supplied. (A change in quantity supplied does not change demand)
As the price of flour (an input into the cookie production process) increases, firms that produce cookies will:
decreases the supply of cookies (An increases in the price of an input causes supply to shift upward and to the left.)
Q1: Which of the following statements best describes the study of economics?
Economics studies how individuals and groups manage resources.
Q1: The two broad fields that make up the subject of economics are:
microeconomics and macroeconomics
Q1: Which of the following could be an example of a question that would be studied in microeconomics?
How will the legalization of marijuana affect the market for cigarettes?
Q1: Scarcity reflects our inability to satisfy wants due to:
Q1: Opportunity cost:
is the value of your next best alternative
Q1: Making a decision "on the margin" involves comparing:
additional benefits against additional costs
Q1: Many theaters sell empty seats at a deep discount just before showtime. What economic concept si displayed by this behavior?
Thinking at the margin
Q1: Your favorite team has commanding lead toward the end of the ballgame. You suggest to your friend that you leave early to beat traffic. Your friend does not like the idea because he pain $50 to see the game. The $50 already spend on the game is an example of a(n):
Q2: A production possibilities frontier is a line or curve that:
shows all possible combinations of outputs that can be produced using all available resources.
Q2: The slope of a production possibilities frontier measures:
1) the opportunity cost of producing one good in terms of the other.
2) the trade-off inherent in the production of one good versus the other.
3) how much of one good that must be given up in order to produce the other.
Q2: If we consider the reality that each worker has different skills, then the production possibilities frontier:
would display an increasing opportunity cost of a good as more of that good is produced.
Q2: Choosing to produce at any point within a production possibilities frontier:
is inefficient, meaning the society would not be using all its available resources in their best possible use.
Q2: If society were to experience an increase in its availiable resources:
its production possibilities frontier would shift out.
Q2: Hurricane Katrina destroyed much of New Orleans and other parts of the South. Which of the following statements is true?
The hurricane caused the production possibilities of the United States to shift in.
Q3: If a country possesses the absolute advantage in the production of one good:
it can produce more of that good given the same resources.
Q3: The improvement in outcomes that occurs when speciailized producers exchange goods and services is called:
the gains from trade.
Q3: The concept of comparative advantage, specialization, and trade from a compelling argument in favor of:
Q4: The four important characteristics that define a competative market are:
standarized good, full infomation, no transaction costs, participants are price takers.
Q4: In economic terminology, a buyer or seller who cannot affect the market price is called a:
Q4: The amount of a particular good that buyers in a market will purchase at a given price during a specified period is called:
Q4: The law of demand describes the:
inverse relationship between price and quantity demanded.
Q5: A movement along a demand curve from one price-quantity combination to another is called:
A change in quantity demanded. (A change in quantity demanded is a change along a demand curve; a change in demand is a shift in the entire curve.)
Q5: "As the price of personal computers to fall, demand increases." This headline is inaccurate because:
A falling price for personal computers increases quantity demanded, not demand. (a change in price leads to a change in quantity demanded because it is a change along a demand curve; a change in demand is a shift in the entire curve)
Q6: The law of supply can be stated as:
All else equal, quantity supplied rises as price rises.
Q6: The supply schedule assumes that:
factors other than price remain the same.
Q6: Some non-price determinants of supply are:
prices of related goods, technology, prices of inputs, expectations, and # of sellers.
Q6: The term equilibrium refers to the point where:
All of these statements are true.
Q6: The term "shortage" refers to:
a situation in which the quantity supplied is less than the quantity demanded.
Q6: A shortage will occur if:
the quantity being supplied at a given price is less than the quantity demanded at that price.
Q6: Consider a market that is in equilibrium. If it experiences an increase in demand, what will happen?
The demand curve will shift to the right, and the equilibrium price and quantity will rise.
Q6: Consider a market that is in equilibrium. If it experiences both an increase in demand and an increase in supply, what can be said of the new equilibrium?
The equilibrium quantity will definitely rise, while the equilibrium price cannot be predicted.
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