True/False Questions Flashcards
#CHT3 1. If Japan has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item.
F
absolute advantage compares the quantities of inputs used in production while comparative advantage compares the opportunity costs
#CHT3 2. Comparative advantage, not absolute advantage, determines the decision to specialize in production.
T
#CHT3 3. Absolute advantage is a comparison among producers based on productivity.
T
#CHT3 4. Self-sufficiency is the best way to increase one's material welfare.
F
Restricting trade eliminates gains from trade.
#CHT3 5. Comparative advantage is a comparison among producers based on opportunity cost.
T
#CHT3 6. If a producer is self-sufficient, the production possibilities frontier is also the consumption possibilities frontier.
T
#CHT3 7. If a country's workers can produce 5 hamburgers per hour or 10 bags of French fries per hour, absent trade, the price of 1 bag of fries is 2 hamburgers.
F
The price of 1 bag of fries is 1/2 of a hamburger.
#CHT3 8. If producers have different opportunity costs of production, trade will allow them to consume outside their production possibilities frontiers.
T
#CHT3 9. If trade benefits one country, its trading partner must be worse off due to trade.
F
Voluntary trade benefits both traders.
#CHT3 10. Talented people that are the best at everything have a comparative advantage in the production of everything.
F
A low opportunity cost of producing one good implies a high opportunity cost of producing the other good.
#CHT3 11. The gains from trade can be measured by the increase in total production that comes from specialization.
T
#CHT3 12. When a country removes a specific import restriction, it always benefits every worker in that country
F
It may harm those involved in that industry.
#CHT3 13. If Germany's productivity doubles for everything it produces, this will not alter its prior pattern of specialization because it has not altered its comparative advantage.
T
#CHT3 14. If an advanced country has an absolute advantage in the production of everything, it will benefit if it eliminates trade with less developed countries and becomes completely self-sufficient.
F
Voluntary trade benefits all traders.
#CHT3 15. If gains from trade are based solely on comparative advantage, and ifall countries have the same opportunity costs of production, then there are no gains from trade.
T
#CHT4 1. A perfectly competitive market consists of products that are all slightly different from one another.
F
A perfectly competitive market consists of goods
offered for sale that are all exactly the same.
#CHT4 2. A monopolistic market has only one seller.
T
#CHT4 3. The law of demand states that an increase in the price of a good decreases the demand for that good.
F
The law of demand states that an increase in the price of a good decreases the quantity demanded of that good (a movement along the demand curve).
#CHT4 4. If apples and oranges are substittutes, an increase in the price of apples will decrease the demand for oranges.
F
It will increase the demand for oranges.
#CHT4 5. If golf clubs and golf balls are complements, an increase in the price of golf clubs will decrease the demand for golf balls.
T
#CHT4 6. If consumers expect the price of shoes to rise, there will be an increase in the demand for shoes today.
T
#CHT4 7. The law of supply states that an increase in the price of a good increases the quantity supplied of that good.
T
#CHT4 8. An increase in the price of steel will shift the supply of automobiles to the right.
F
An increase in the price of an input shifts the supply curve for the output to the left.
#CHT4 9. When the price of a good is below the equilibrium price, it causes a surplus.
F
It causes an excess demand.
#CHT4 10. The market supply curve is the horizontal summation of the individual supply curves.
T
#CHT4 11. If there is a shortage of a good, then the price of that good tends to fall
F
An excess demand causes the price to rise.
#CHT4 12. If pencils and paper are complements, an increase in the price of pencils causes the demand for paper to decrease or shift to the left.
T
#CHT4 13. If Coca-Cola and Pepsi are substitutes, an increase in the price of Coca-Cola will cause an increase in the equilibrium price and quantity in the market for Pepsi.
T
#CHT4 14. An advance in the technology employed to manufacture Rollerblades™ will result in a decrease in the equilibrium price and an increase in the equilibrium quantity in the market for Rollerblades™
T
CHT4
- If there is an increase in supply accompanied by a decrease in demand for coffee, then there will be a decrease in both the equilibrium price and quantity
in the market for coffee.
F
There will be a decrease in the equilibrium price, but the impact on the equilibrium quantity is ambiguous.
#CHT5 1. If the quantity demanded of a good is sensitive to a change in the price of that good, demand is said to be price inelastic.
F
Demand would be price elastic.
#CHT5 2. Using the midpoint method to calculate elasticity, if an increase in the price of pencils from 10 cents to 20 cents reduces the quantity demanded from 1,000 pencils to 500 then the demand for pencils is unit price elastic.
T
#CHT5 3. The demand for tires should be more inelastic than the demand for Goodyear brand tires.
T
#CHT5 4. The demand for aspirin this month should be more elastic than the demand for aspirin this year.
F
The longer the time period considered, the more price elastic the demand curve because consumers have an opportunity to substitute or change their behavior.
#CHT5 5. The price elasticity of demand is defined as the percentage change in the price of that good divided by the percentage change in quantity demanded of that good.
F
The price elasticity of demand is defined as the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.
#CHT5 6. If the cross-price elasticity of demand between two goods is positive, the goods are likely to be complements.
F
The two goods are likely to be substitutes.
#CHT5 7. If the demand for a good is inelastic, an increase in its price will increase total revenue in that market.
T
#CHT5 8. The demand for a necessity such as insulin tends to be elastic.
F
The demand for necessities tends to be inelastic.
#CHT5 9. If a demand curve is linear, the price elasticity of demand is constant it.
F
Demand will be price elastic in its upper portion and price inelastic in its lower portion.
#CHT5 10. If the income elasticity of demand for a bus ride is negative, then a bus ride is an inferior good.
T
#CHT5 11. The supply of automobiles for this week is likely to be more price inelastic than the supply of automobiles for this year.
T
#CHT5 12. If the price elasticity of supply for blue jeans is 1.3, an increase of 10 percent in the price of blue jeans would increase the quantity supplied of blue jeans by 13 percent.
T
#CHT5 13. The elasticity of supply tends to be more inelastic as the firm's production facility reaches maximum capacity.
T
#CHT5 14. An advance in technology that shifts the market supply curve to the right always increases total revenue received by producers.
F
It will increase total revenue only if demand is
price elastic.
#CHT5 15. The income elasticity of demand for luxury items, such as diamonds, tends to be large (greater than 1)
T
#CHT6 1. If the equilibrium price of gasoline is $1.00 per gallon and the government places a price ceiling of gasoline of $1.50 per gallon, the result will be a shortage of gasoline.
F
A price ceiling set above the equilibrium price is not binding.
#CHT6 2. A price ceiling set below the equilibrium price causes a surplus.
F
It causes a shortage.
#CHT6 3. A price floor set above the equilibrium price is a binding constraint.
T
#CHT6 4. The shortage of housing caused by a binding rent control is likely to be more severe in the long run when compared to the short run.
T
#CHT6 5. The minimum wage helps all teenagers because they receive higher wages than they would otherwise.
F
Some may be helped but others become Unemployed and still others quit school to earn what appears to a teenager to be a good wage.
#CHT6 6. A 10 percent increase in the minimum wage causes a 10 percent reduction in teenage employment.
F
It causes a 1 to 3 percent reduction unemployment.
#CHT6 7. A price ceiling that is not a binding constraint today could cause a shortage in the future if demand were to increase and raise the equilibrium price above the fixed price ceiling.
T
#CHT6 8. A price floor in a market always creates a surplus in that market.
F
It creates a surplus only if the floor is set above the equilibrium price.
#CHT6 9. A $10 tax on baseball gloves will always raise the price that the buyers pay for baseball gloves by $10.
F
The difference between what the sellers receive and the buyers pay will be $10, but the price received by the sellers usually will fall some so the price paid by the buyers will rise by less than $10.
#CHT6 10. The ultimate burden of a tax lands most heavily on the side of the market, that is less elastic.
T
#CHT6 11. If medicine is a necessity, the burden of a tax on medicine will likely land more heavily on the buyers of medicine.
T
#CHT6 12. When we use the model of supply and demand to analyze a tax collected from the buyers, we shift the demand curve upward by the size of the tax.
F
We shift the demand curve downward by the size of the tax.
#CHT6 13. A tax collected from buyers has an equivalent impact to a same size tax collected from sellers.
T
#CHT6 14. A tax creates a tax wedge between a buyer and a seller. This causes the price paid by the buyer to rise, the price received by the seller to tall, and the quantity sold to fall.
T
#CHT6 15. The government can choose to place the burden of a tax on the buyers in a market by collecting the tax from the buyers rather than the sellers.
F
The burden of a tax is determined by the relative elasticities of supply and demand.
#CHT7 1. Consumer surplus is the amount a buyer is willing to pay for a good minus the seller's cost.
F
Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays.
#CHT7 2. If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.
T
#CHT7 4. Producer surplus is a measure of the unsold inventories of suppliers in a market.
F
It is a measure of the benefits of market participation to the sellers in a market.
#CHT7 8. Total surplus is the cost to sellers minus the value to buyers.
F
Total surplus is the value to buyers minus the cost to sellers.
#CHT7 5. Consumer surplus is a good measure of buyers' benefits if buyers are rational.
T
#CHT7 6. Cost to the seller includes the opportunity cost of the seller's time.
T
#CHT7 7. The height of the supply curve is the marginal seller's cost.
T
#CHT7 10. Producer surplus is the area above the supply curve and below the price.
T
#CHT7 11. The major advantage ofallowing free markets to allocate resources is that the outcome of the allocation is efficient.
T
#CHT7 12. Equilibrium in a competitive market maximizes total surplus.
T
#CHT7 13. The two main types ofmarket failure are market power and externalities.
T
#CHT7 14. Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market.
T
#CHT8 1. In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold.
T
#CHT8 2. If a tax is placed on a good and it reduces the quantity sold, there must be a deadweight loss from the tax.
T
#CHT8 3. Deadweight loss is the reduction in consumer surplus that results from a tax.
F
Deadweight loss is the reduction in total surplus that results from a tax.
#CHT8 4. When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.
F
The loss of producer and consumer surplus exceeds the revenue from the tax. The difference is deadweight loss.
#CHT8 5. If John values having his hair cut at $20 and Mary's cost of providing the haircut is $10, any tax on haircuts larger than $10 will eliminate the gains from trade and cause a $20 loss of total surplus.
F
The loss in total surplus is the buyer’s value minus the seller’s cost or $20 - $10 = $10
#CHT8 6. If a tax is placed on a good in a market where supply is perfectly inelastic, there is no deadweight loss and the sellers bear the entire burden of the tax.
T
#CHT8 7. A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.
F
The more elastic the demand curve, the greater the deadweight loss, and the demand for cigarettes (a necessity) should be more inelastic than the demand for luxury boats (a luxury).
#CHT8 8. A tax will generate a greater deadweight loss if supply and demand are inelastic.
F
A tax generates a greater deadweight loss when supply and demand are more elastic.
#CHT8 9. A tax causes a deadweight loss because it eliminates some of the potential gains from trade.
T
#CHT8 10. A larger tax always generates more tax revenue.
F
As a tax increases, revenue first rises and then falls as the tax shrinks the market to a point where all trades are eliminated and tax revenue is zero.
#CHT8 11. A larger tax always generates a larger deadweight loss.
T
#CHT8 12. If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue.
T
#CHT8 13. A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.
F
Taxes collected from either the buyers or the sellers are equivalent. That is why economists simply use a tax wedge when analyzing a tax and avoid the issue altogether.
#CHT8 14. If a tax is doubled, the deadweight loss from the tax more than doubles.
T
#CHT8 15. A deadweight loss results when a tax causes market participants to fail to produce and consume units on which the benefits to the buyers exceed the costs to the sellers.
T
#CHT13 1. Total revenue equals the quantity of output the firm produces times the price at which it sells its output.
T
#CHT13 2. Wages and salaries paid to workers are an example of implicit costs of production.
F
Wages and salaries are explicit costs of production because dollars flow out of the firm.
#CHT13 3. If total revenue is $100, explicit c;osts are $50, and implicit costs are $30, then accounting proflt equals $50.
T
#CHT13 4. If there are implicit costs of production, accounting proflts will exceed economic proflt.
T
#CHT13 5. When a production function gets flatter, the marginal product is increasing.
F
Marginal product is the slope of the production function, so marginal product is decreasing when the production function gets flatter.
#CHT13 6. If a firm continues to employ more workers within the same size factory, it will eventually experience diminishing marginal product.
T
#CHT13 7. If the production function for a flrm exhibits diminishing marginal product, the corresponding total-cost curve for the firm will become flatter as the quantity of output expands.
F
Diminishing marginal product means that it requires ever greater amounts of an input to produce equal increments of output so total costs rise at an increasing rate.
#CHT13 8. Fixed costs plus variable costs equal total costs.
T
#CHT13 9. Average total costs are total costs divided by marginal costs.
F
Average total costs are total costs divided by the quantity of output.
#CHT13 10. When marginal costs are below average total costs, average total costs must be falling.
T
#CHT13 11. If, as the quantity produced increases, a production function flrst exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will be U-shaped.
T
#CHT13 12. The average-total-cost curve crosses the marginal-cost curve at the minimum of the marginal-cost curve.
F
The marginal cost curve crosses the average total-cost curve at the minimum of the average total-cost curve.
#CHT13 13. The average-total-cost curve in the long run is flatter than the average-total cost curve in the short run.
T
#CHT13 14. The efficient scale for a firm is the quantity ofoutput that minimizes marginal cost.
F
Efficient scale minimizes average total costs.
#CHT13 15. In the long run, as a firm expands its production facilities, it generally first experiences diseconomies of scale, then constant returns to scale, and finally economies of scale.
F
A firm generally experiences economies of scale, constant returns to scale, and diseconomies of scale as the scale of production expands.
#CHT14 1. The only requirement for a market to be perfectly competitive is tor the market to have many buyers and sellers.
F
The goods offered for sale are largely the same and (possibly) firms can freely enter or exit the market.
#CHT14 2. For a competitive firm, marginal revenue equals the price of the good it sells.
T
#CHT14 3. If a competitive firm sells three times the amount ofoutput, its total revenue also increases by a factor of three.
T
#CHT14 4. A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue.
T
#CHT14 5. If marginal cost exceeds marginal revenue at a firm's current level of output, the firm can increase profit if it increases its level of output.
F
The firm increases profits if it reduces output.
#CHT14 6. A competitive firm's short-run supply curve is the portion of its marginal cost curve that lies above its average-total-cost curve.
F
It is the portion ofthe MC curve that lies above its average-variable-cost curve.
#CHT14 7. A competitive firm's long-run supply curve is the portion of its marginal cost curve that lies above its average-variable-cost curve.
F
It is the portion ofthe MC curve that lies above its average-total-cost curve.
#CHT14 8. In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down.
F
The firm will continue to operate in the short run as long as price exceeds average variable costs.
#CHT14 9. In a competitive market, both buyers and sellers are price takers.
T
#CHT14 10. In the long run, if the price firms receive for their output is below their average total costs of production, some firms will exit the market.
T
#CHT14 11. In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.
T
#CHT14 12. The short-run market supply curve is more elastic than the long-run market supply curve.
F
The long-run market supply curve is more elastic than
the short-run market supply curve.
#CHT14 13. In the long run, perfectly competitive firms earn small but positive economic profits.
F
They earn zero economic profits in the long run.
#CHT14 14. In the long run, if firms are identical and there is free entry and exit in the market, all firms in the market operate at their efficient scale.
T
#CHT14 15. If the price of a good rises above the minimum average total cost of production, positive economic profits will cause new ftrms to enter the market, which drives the price back down to the minimum average total cost of production.
T
