ECON120 - Exam 1 - Study Guide Flashcards
<p>A person should consume more of something when its marginal</p>
<p>benefit exceeds its marginal cost</p>
<p>Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to expand parking for students. This example illustrates</p>
<p>opportunity costs</p>
<p>Economic theories</p>
<p>are generalizations based on a careful observation of facts`</p>
<p>Suppose an economist says that "other things equal, the lower the price of bananas, the greater the amount of bananas purchased." This statement indicates that</p>
<p>all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed to be constant</p>
<p>Microeconomics</p>
<p>is concerned with individual economic units and specific markets</p>
<p>Ben says that "an increase in the tax on beer will raise its price." Holly argues that "taxes should be increased on beer because college students drink too much." We can conclude that</p>
<p>Holly's statement is normative, but Ben's is positive</p>
<p>The economizing problem is</p>
<p>the need to make choices because economic wants exceed economic means</p>
<p>The shift of the budget line from cd to ab in the figure is consistent with</p>
<p>a decrease in money income</p>
<p>Refer to the budget line shown in the diagram. If the consumer's money income is $20, the</p>
<p>price of C is $4 and the price of D is $2</p>
Money is not an economic resource because
money, as such, does not produce anything
The production possibilities curve illustrates the basic principle that
if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced
When an economy is operating under conditions of full employment, the production of more of commodity A will mean the production of less of commodity B because
resources are limited
<p>Refer to the diagram. Other things equal, this economy will achieve the most rapid rate of growth if</p>
<p>it chooses point A</p>
<p>Refer to the diagram. If society is currently producing 9 units of bicycles and 4 units of computers and it now decides to increase computer output to 6, the cost</p>
<p>will be 4 units of bicycles</p>
The fact that the slope of the production possibilities curve becomes steeper as we move down along the curve indicates that
the principle of increasing opportunity costs is relevant.
The optimal point on a production possibilities curve is achieved where
B.
each good is produced at a level where marginal benefits equal marginal costs.
The marginal benefit curve is
downsloping because successive units of a specific product yield less and less extra benefit
The marginal cost curve is
upsloping because of increasing marginal opportunity costs
A direct cost of going to college is
tuition, while an indirect cost (opportunity cost) is forgone income while in college
<p>Refer to the diagram. The equation that shows the relationship between Y and X is</p>
<p>Y = 50 + 1/4X</p>
An economic system
is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
Economic systems differ according to which two main characteristics
Who owns the factors of production and the methods used to coordinate economic activity
A fundamental difference between the command system and laissez-faire capitalism is that, in command systems
the division of output is decided by central planning rather than by individuals operating freely through markets
The regulatory mechanism of the market system is
competition
Specialization in production is economically beneficial primarily because it
permits the production of a larger output with fixed amounts of resources
The use of money contributes to economic efficiency because
it promotes specialization by overcoming the problems with barter
An increase in consumer desire for strawberries is most likely to
increase the number of strawberry pickers needed by farmers
The economic function of profits and losses is to
signal that resources should be reallocated
If a competitive industry is neither expanding nor contracting, we would expect
economic profits to be zero
The most efficient combination of resources in producing a given output is the combination that
minimize the cost per unit of output
The market system’s answer to the fundamental question “How will the system accommodate change?” is essentially
Through the guiding function of prices and the incentive function of profits
The market system’s answer to the fundamental question “What will be produced?” is essentially
Goods and services that are profitable
The market system’s answer to the fundamental question “How will the goods and services be produced?” is essentially
“In ways that minimize the cost per unit of output
Consumer sovereignty” means that
buyers determine what will be produced based on their “dollar votes” for the goods and services offered by sellers
The invisible hand refers to the
B.
notion that, under competition, decisions motivated by self-interest promote the social interest.
The incentive problem under communist central planning refers to the idea that
workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products
The simple circular flow model shows that
households are on the selling side of the resource market and on the buying side of the product market.
<p>Refer to the diagram. Flow 4 represents</p>
<p>consumer expenditures</p>
<p>Refer to the diagram. Arrows (1) and (2) represent</p>
<p>resources and goods respectively</p>
Which of the following best illustrates the circular flow model in action?
ALL OF THESE ANSWERS
Bobbie goes to work and builds cars, and uses the income she receives to buy food at the grocery store
Evan buys a new couch; the owner of the furniture store uses some of the money from the sale to pay her supplier, and uses the rest to take her family out to dinner
Boeing experiences a surge in orders for new airplanes, prompting the company to hire more workers
The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.
inverse; direct
An increase in the price of a product will reduce the amount of it purchased because
consumers will substitute other products for the one whose price has risen
When the price of a product rises, consumers with a given money income shift their purchases to other products whose prices are now relatively lower. This statement describes
the substitution effect
When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes
the income effect.
Steve went to his favorite hamburger restaurant with $3, expecting to buy a $2 hamburger and a $1 soda. When he arrived he discovered that hamburgers were on sale for $1 each, so Steve bought two hamburgers and a soda. Steve’s response to the decrease in the price of hamburgers is best explained by
the income effect
In 2007, the price of oil increased, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are
substitute goods and the higher price for oil increased the demand for natural gas
If the price of product L increases, the demand curve for close-substitute product J will
shift to the right
If X is a normal good, a rise in money income will shift the
demand curve for X to the right
If the demand for steak (a normal good) shifts to the left, the most likely reason is that
consumer incomes have fallen
<p>Refer to the diagram. A decrease in demand is depicted by a</p>
<p>shift from D2 to D1</p>
<p>Refer to the diagram. A decrease in quantity demanded is depicted by a</p>
<p>move from point y to point x</p>
In moving along a demand curve, which of the following is not held constant
The price of the product for which the demand curve is relevant
The law of supply indicates that, other things equal
A.
producers will offer more of a product at high prices than at low prices.
Increasing marginal cost of production explains
why the supply curve is upsloping
A leftward shift of a product supply curve might be caused by
some firms leaving an industry
Other things equal, if the price of a key resource used to produce product X falls, the
product supply curve of X will shift to the right
<p>Refer to the diagram. A surplus of 160 units would be encountered if the price was:</p>
<p>$1.60</p>
<p>Refer to the diagram. A price of $20 in this market will result in a</p>
<p>shortage of 100 units</p>
Productive efficiency refers to
the use of the least-cost method of production
Price floors and ceiling prices
interfere with the rationing function of prices
U.S. exports of goods and services (on a national income account basis) are about
13 percent of U.S. GDP
If country A can produce both goods X and Y more efficiently, that is, with smaller absolute amounts of resources, than can country B
mutually advantageous specialization and trade between A and B may still be possible
Differences in production efficiencies among nations in producing a particular good result from
ALL OF THESE
different endowments of fertile soil
different amounts of skilled labor
different levels of technological knowledge`
Countries engaged in international trade specialize in production based on
comparative advantage
If a nation has a comparative advantage in the production of X, this means the nation
must give up less of other goods than other nations in producing a unit of X
In the theory of comparative advantage, a good should be produced in that nation where
its cost is least in terms of alternative goods that might otherwise be produced
The terms of trade reflect the
ratio at which nations will exchange two goods
The fact that international specialization and trade based on comparative advantage can increase world output is demonstrated by the reality that
a nation’s trading possibilities line lies to the right of its production possibilities line
Refer to the diagram showing the domestic demand and supply curves for a specific standardized product in a particular nation. If the world price for this product is $1.60, this nation will experience a domestic
surplus of 160 units, which it will export
<p>Refer to the diagram showing the domestic demand and supply curves for a specific standardized product in a particular nation. If the world price for this product is $.50, this nation will experience a domestic:</p>
<p>shortage of 160 units, which it will meet with 160 units of imports</p>
<p>Refer to the diagrams. The solid lines are production possibilities curves; the dashed lines are trading possibilities curves. The trading possibilities curves imply that:</p>
<p>world resources will be allocated more efficiently if the two nations specialize and trade based on comparative advantage</p>
<p>Suppose the world economy is composed of just two countries: Italy and Greece. Each can produce steel or chemicals, but at different levels of economic efficiency. The production possibilities curves for the two countries are shown in the graphs below.<br></br>
<br></br>
</p>
<p>Greece has a comparative advantage in chemicals</p>
<p>Which of the following statements is true?</p>
<p>Specialization will be less than complete among nations when opportunity costs increase as the nations produce more of a particular product</p>
<p>Refer to the graphs. These production possibilities curves</p>
<p>demonstrate that there can be gains from specialization and trade between the two nations.</p>
<p>The primary gain from international trade is:</p>
<p>more goods than would be attainable through domestic production alone.</p>
<p>Refer to the given diagram in which line AB is the U.S. production possibilities curve and AC is its trading possibilities curve. The international exchange ratio between beef and cheese (terms of trade):</p>
<p>is the absolute value of the slope of line AC</p>
In the real world, specialization is rarely complete because
nations normally experience increasing opportunity costs in producing more of the product in which they are specializing
Resource pricing is important because
ALL OF THESE REASONS
resource prices are a major determinant of money incomes
resource prices allocate scarce resources among alternative uses
resource prices, along with resource productivity, are important to firms in minimizing their costs
When economists say that the demand for labor is a derived demand, they mean that it is
related to the demand for the product or service labor is producing
Marginal revenue product measures the
amount by which the extra production of one more worker increases a firm’s total revenue.
The labor demand curve of a purely competitive seller
slopes downward because of diminishing marginal productivity
Assume labor is the only variable input and that an additional input of labor increases total output from 72 to 78 units. If the product sells for $6 per unit in a purely competitive market, the MRP of this additional worker is
$36
A firm will find it profitable to hire workers up to the point at which their
marginal resource cost is equal to their MRP
Marginal resource cost is
the increase in total resource cost associated with the hire of one more unit of the resource
The change in a firm’s total revenue that results from hiring an additional worker is measured by
the marginal revenue product
The MRP curve for labor
is downsloping and shows the relationship between wage rates and the quantity of labor demanded
<p>For a firm selling its product in a purely competitive market, the marginal revenue product of labor can be found by</p>
<p>multiplying marginal product by product price</p>
<p>Refer to the graph. Each of the three labor demand curves shown slopes downward because of the:</p>
<p>law of diminishing returns</p>
Which of the following will not cause a shift in the demand for resource X
A decline in the price of resource X
A decline in the price of resource A will
increase the demand for complementary resource B
The labor demand curve of a firm
will shift to the left if the price of the product the labor is producing falls
Employers will hire more units of a resource if the
productivity of the resource increases
If two resources are highly substitutable for one another
an increase in the price of one will increase the demand for the other
The demand curve for labor would shift leftward as the result of
a decrease in the productivity of labor
Elasticity of resource demand is measured by the
percentage change in resource quantity demanded divided by the percentage change in resource price
Resource X has many close substitutes, whereas resource Y has no close substitutes. Other things equal, we would expect
the demand for resource X to be more elastic than the demand for resource Y
The elasticity of resource demand measures the
B.
responsiveness of producers to changes in resource prices.
The equation MPL/PL = MPC/PC
is a necessary, but not sufficient, condition for the maximization of profits
The profit-maximizing and the least-cost combination of inputs are
such that the maximization of profits always entails the least-cost combination of inputs
The marginal productivity theory of income distribution suggests that
each individual should receive income based on his or her contribution to total output
