In- Class Quizzes (123456) Flashcards
The idea that only the government can organize economic activity in a way that promotes economic well-being for a country as a whole
a. Is a basic principle regarding individual decision-making
b. Was promoted by the economist Adam Smith in a well-known 1776 book
c. Supports in the idea that the “invisible hand” should guide economic activity
d. Amounts to a denial of one of the basic principles regarding interactions among people
d. Amounts to a denial of one of the basic principles regarding interactions among people
The idea that only the government can organize economic activity contradicts fundamental economic principles about market interactions
- Adam Smith, in his 1776 book “The Wealth of Nations”, introduced the concept of the “invisible hand”, which suggests that free markets, guided by self-interest, can allocate resources efficiently
- The belief that only the government can organize the economy denies the principle that individuals and businesses, through voluntary exchanges, can drive economic prosperity
Suppose the government imposes a $40 tax on the buyers of refridgerators. The tax would
a. Shift the demand curve downward by less than $40
b. Create a $20 tax burden each for buyers and sellers
c. Raise the equilibrium price by $40
d. Discourage market activity
d. Discourage market activity
A tax on buyers of refridgerators reduces their willingness to pay, shifting the demand curve downward. This results in a lower equilibrium quantity and price
- A tax always discourages market activity, meaning fewer refridgerators will be bought and sold
- The full $40 tax is not necessarily paid entirely by buyers; some of it may be shared with sellers, depending on the relative elasticities of supply and demand
- However, the main, certain effect of the tax is that it reduces market activity
Suppose that corn farmers want to increase their total revenue. Knowing that the demand for corn is inelastic, corn farmers should
a. Reduce the number of acres on which they plant corn
b. Increase spending on fertilizer in an attempt to produce more corn on the acres they farm
c. Plant more corn so that they would be able to sell more each year
d. Contribute to a fund that promotes technological advances in corn production
a. Reduce the number of acres on which they plant corn
When demand is inelastic, consumers are not very responsive to price changes. This means:
- If farmers increase the supply of corn, the price will drop significantly, leading to lower total revenue (bad strategy)
- If farmers reduce the supply of corn, the price will rise, and because demand is inelastic, total revenue will increase (good strategy)
Thus, reducing the number of acres planted would be the best strategy to increase total revenue
If the price elasticity of supply for a window manufacturer is 1.5
a. All of the below are correct
b. The manufacturer is likely operating very near capacity
c. Supply is considered to be inelastic
d. a 10% increase in the price of windows results in a 15% increase in the quantity of windows supplied
d. a 10% increase in the price of windows results in a 15% increase in the quantity of windows supplied
b. A high elasticity (1.5) suggests the manufacturer can easily increase production, meaning they are not near capacity
c. Inelastic supply mean PES < 1, but 1.5 is inelastic
d. Using the elasticity formula:
%deltaQ = Elasticity x %deltaP = 1.5 x 10% = 15%
You love peanut butter. You hear on the news that 50% of the peanut crop in the South has been wiped out by drought and that this will cause the price of peanuts to double by the end of the year. As a result, your demand for peanut butter
a. Decreases as you look for a substitute good
b. Will increase but not until the end of the year
c. Increases today
d. Shift left today
c. Increases today
a. Not immediately. Demand for substitues (almond butter) might increase later, but initially, people will rush to buy peanut butter before prices rise
b. No, the demand increases today because consumers act before prices go up
d. Incorrect because the demand curve shifts right (higher demand today)
