Exam #1 Flashcards
The problem of scarcity is that people face trade-offs. Which of the following trade-offs is the concern of economics?
a. Trade-offs faced by consumers in the purchase of goods
b. Trade-offs faced by workers between work and leisure
c. Trade-offs faced by firms in what goods to produce
d. all of the above
d. all of the above
Boeing Corporation and Airbus Industries are the only two producers of long-range commercial aircraft. This market is not perfectly competitive because
a. each company has annual sales of over $10 billion
b. each company can significantly affect prices
c. Airbus receives subsidies from the European Union
d. Airbus cannot sell aircraft to the United States government
b. each company can significantly affect prices
Describe a perfectly competitive market.
Goods offered for sale are all exactly the same
Buyers and sellers are so numerous
No single buyer or seller has any influence over the market price
Price takers: no buyers or sellers can influence the price
Suppose you are in charge of product pricing and marketing strategy for a pharmaceutical company. You will have greater ability to independently set prices for your product if:
a. there are no close substitutes for your product
b. there are lots of other firms selling closely related products in your market
c. your market is perfectly competitive
d. none of the above
a. there are no close substitutes for your product
Describe how the supply curve moves with lower and higher quantities.
Lower quantity = supply curve left
Higher quantity = supply curve right
Describe how the demand curve moves with lower and higher quantities.
Lower quantity = demand curve left
Higher quantity = demand curve right
When an industry’s raw material costs increase, other things remain the same,
a. the supply curve shifts to the left
b. the supply curve shift to the right
c. output increases regardless of the market price and the supply curve shifts upward
d. output decreases and the market price also decreases
a. the supply curve shifts to the left
Plastic and steel are substitutes in the production of body panels for certain automobiles. If the price of plastic increases, with other things remaining the same, we would expect:
a. the price of steel to fall
b. the demand curve for steel to shift to the right
c. the demand curve for plastic to shift to the left
d. nothing to happen to steel because it is only a substitute for plastic
b. the demand curve for steel to shift to the right
Assume that steak and potatoes are complements. When the price of steak goes up, the demand curve for potatoes:
a. shifts to the left
b. shifts to the right
c. remains constant
d. shifts to the right initially and then returns to its original position
a. shifts to the left
Two goods are complements if..?
an increase in the price of one leads to a decrease in the demand for the other
If the actual price were below the equilibrium price in the market for bread, a:
a. surplus would develop that cannot be eliminated over time
b. shortage would develop, which market forces would eliminate over time
c. surplus would develop, which market forces would eliminate over time
d. shortage would develop, which market forces would tend to exacerbate
b. shortage would develop, which market forces would eliminate over time
The demand for books is: Qd = 120 – P
The supply for books is: Qs = 5P
What is the equilibrium price of books sold?
a. 5
b. 10
c. 15
d. 20
d. 20
Set demand function equal to supply function and solve
The demand for books is: Qd = 120 – P
The supply for books is: Qs = 5P
What is the equilibrium quantity of books sold if the equilibrium price is 20?
a. 25
b. 50
c. 75
d. 100
d. 100
Plug 20 into function and solve
The demand for books is: Qd = 120 – P
The supply for books is: Qs = 5P
If P = $25, which of the following is true?
a. There is a surplus equal to 30
b. There is a shortage equal to 30
c. There is a shortage, but it is impossible to determine how large
d. There is a surplus, but it is impossible to determine how large
a. There is a surplus equal to 30
Plug 25 into both equations then compare answers
Qs > Qd by 30
If the price of $1.50 is a binding price imposed by the government, we can call it:
a. a price floor
b. a price ceiling
c. a socially optimal equilibrium price
d. a fiscal price
b. a price ceiling
If the price of $1.50 is NOT a binding price imposed by the government, we can call it:
a. a price floor
b. a price ceiling
c. a socially optimal equilibrium price
d. a fiscal price
a. a price floor
Which of the following best describes a horizontal demand curve?
a. Demand is infinitely elastic
b. Demand is completely inelastic
c. Demand becomes more inelastic the lower the price
d. Demand becomes more elastic the lower the price
a. Demand is infinitely elastic
What is the Elasticity of Demand for the following:
Infinitely elastic
Completely elastic
Elastic
Inelastic
Unit elastic
Ed = infinity = perfectly/infinitely elastic
Ed = 0 = completely inelastic = vertical line
Ed > 1 = elastic
Ed < 1 = inelastic
Ed = 1 = unit elastic
The income elasticity of demand refers to:
a. a change in income following a change in quantity demanded
b. the substitution of one good for another as income changes
c. the percentage change in quantity demanded resulting from a 1-percent increase in income
d. the change in income required for quantity demand to change by 1%
c. the percentage change in quantity demanded resulting from a 1-percent increase in income
If two goods are substitutes, the cross-price elasticity of demand must be:
a. negative
b. positive
c. zero
d. infinite
b. positive
If two goods are complements, the cross-price elasticity of demand must be:
a. negative
b. positive
c. zero
d. infinite
a. negative
What is the cross-price elasticity of demand?
How much the Qd of one good responds to a change in the price of another good
Percentage change in Qd of the first good divided by the percentage change in price of the second good
For U.S. consumers, the income elasticity of demand for fruit juice is 1.1. If the economy enters a recession next year and consumer income declines by 2.5%, what is the expected change in the quantity of fruit juice demanded next year?
a. -2.75%
b. +2.75%
c. -27.5%
d. +27.5%
a. -2.75%
Ei = % change quantity / % change income
1.1 = % change quantity / -0.025
Describe normal and inferior goods
What is the income elasticity for each?
Normal good
An increase in income leads to an increase in demand (shift right)
Inferior good
An increase in income leads to a decrease in demand (shift left)
Normal goods: income elasticity > 0
Inferior goods: income elasticity < 0
Suppose the U.S. demand curve for gasoline shifts rightward, and the U.S. supply curve for gasoline remains unchanged. As a result, the price of gasoline increases by 9 percent, and the equilibrium quantity increases by 3 percent. Which of the following statements is true based on this information?
a. The price elasticity of supply for gasoline is roughly 0.33
b. The price elasticity of supply for gasoline is roughly 3
c. The price elasticity of demand for gasoline is roughly 0.33
d. The price elasticity of demand for gasoline is roughly -3
a. The price elasticity of supply for gasoline is roughly 0.33
Es = % change Q / % change P
= 0.03 / 0.09
= 0.33
The demand for packs of Pokémon cards is given by the equation Qd = 500 – 45P. At a price of $2.50 per pack, what is the quantity demanded?
a. 387.5
b. 264.7
c. 168.9
d. 347.8
a. 387.5
Plug in and solve
The demand for packs of Pokémon cards is given by the equation Qd = 500 – 45P. At a price of $2.50 per pack, the quantity demanded is 387.5. What is the price elasticity of demand at $5.00 per pack?
a. 0.507
b. 0.672
c. 0.238
d. 0.765
a. 0.507
Ed = % change in Q / % change in P
Midpoint method = { (Q2 – Q1 ) / [ (Q2 + Q1) / 2] } / { (P2 – P1) / [(P2 + P1) / 2] }
Q1 = 387.5
Q2 = 500 – 45P = 500 – 45(5) = 275
P1 = 2.5
P2 = 5
= { 275 – 387.5) / [ (275 + 387.5) / 2] } / { (5 – 2.5) / [(5 + 2.5) / 2] }
= 0.341 / 0.67
= 0.507
What is the most important factor that explains differences in living standards across countries?
a. the quantity of money
b. the level of unemployment
c. productivity
d. equality
c. productivity
Which of the following would shift the demand for Chiefs football jerseys to the right?
a. The Chiefs play in the Super Bowl
b. The price of the jerseys decreases by $15
c. The technology of sewing machines used to make the jerseys improved
d. The price of Purdue football jerseys decreases
a. The Chiefs play in the Super Bowl
