Midterm 1

Question 1

Opportunity Cost

Answer 1

is what we give up when we choose one thing over another

Question 2

Consumer Surplus

Answer 2

the net gain to an individual buyer from the
purchase of a good. It is equal to the difference between the buyer’s willingness to pay and the price paid

Question 3

Producer Surplus

Answer 3

the value to producers of their sales above their cost of production

Question 4

PPF

Answer 4

Production Possibilities Frontier
A model that illustrates the tradeoffs facing an economy that produces only two goods

Question 5

Comparative Advantage

Answer 5

when a country can produce a good at a lower cost in terms of other goods (lower opportunity cost)

Given up/Gained

Question 6

Absolute Advantage

Answer 6

produce a greater quantity of a good with same quantity of inputs per unit of time

Question 7

normal good

Answer 7

good or service whose demand increases when a consumer’s income increases and demand decreases when income decreases

Question 8

inferior good

Answer 8

good or service whose demand decreases when a consumer’s income increases and demand increases when income decreases

Question 9

complements

Answer 9

goods or services that are used together because the use of one enhances the use of the other

Question 10

subtitutes

Answer 10

goods or services that can be used in place of one another

Question 11

fiscal policy

Answer 11

economic policies that involve government spending and taxes

Question 12

monetary policy

Answer 12

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

Question 13

sunk costs

Answer 13

costs that are made in the past and cannot be recovered

Question 14

law of diminishing returns

Answer 14

as additional increments of resources are devoted to a certain purpose, the marginal benefit from those additional increments will decline

Question 15

allocative efficiency

Answer 15

when the mix of goods being produced represents the mix that society most desires

Question 16

productive efficiency

Answer 16

given the available inputs and technology, it’s impossible to produce more of one good without decreasing the quantity of another good that’s produced

Question 17

law of demand:

Answer 17

a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant

Question 18

law of supply:

Answer 18

the common relationship that a higher price leads to a higher quantity supplied of a certain good or service and a lower price leads to a lower quantity supplied, while all other variables are held constant

Question 19

law of diminishing marginal utility:

Answer 19

as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units

Question 20

deadweight loss:

Answer 20

the loss in social surplus that occurs when a market produces an inefficient quantity

Question 21

unitary elastic:

Answer 21

when a given percent price change in price leads to an equal percentage change in quantity demanded

Question 22

cross-price elasticity of demand:

Answer 22

the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B

Question 23

wage elasticity of labor supply:

Answer 23

the percentage change in hours worked divided by the percentage change in wages

Question 24

elastic demand:

Answer 24

a high responsiveness of quantity demanded or supplied to changes in price

Question 25

interest elasticity of savings:

Answer 25

the percentage change in the quantity of savings divided by the percentage change in interest rates

Question 26

elastic supply:

Answer 26

when the calculated elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

Question 27

The law of diminishing marginal returns

Answer 27

states that adding an additional factor of production results in smaller increases in output.

Question 28

The law of increasing opportunity cost:

Answer 28

As you increase the production of one good, the opportunity cost to produce the additional good will increase.