Term
| The key economic concept that serves as the basis for the study of economics is: |
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Definition
|
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Term
| What is the economic meaning of the expression that "there is no such thing as a free lunch"? |
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Definition
| It means that there is an opportunity cost when resources are used to provide "free" products. |
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Term
| A reduction in the level of unemployment would have which effect with respect to the nation's production possibilities curve? |
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Definition
| It would not shift the curve; it would be represented by moving from a point inside the curve toward the curve |
|
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Term
| A point on the frontier of the production possibilities curve is: |
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Definition
| attainable and the economy is efficient |
|
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Term
Use the table to complete the following question.
The following economy produces two products.Refer to the above table. In moving from possibility A to F, the cost of a unit of steel in terms of a unit of wheat: |
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Definition
|
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Term
| A movement along the production possibilities curve would imply that |
|
Definition
| society has chosen a different set of outputs |
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Term
| What to produce in a market economy is ultimately determined by the |
|
Definition
| spending decisions of households. |
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Term
| In the circular flow model, households: |
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Definition
| buy products and sell resources. |
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Term
| Competition is more likely to exist when: |
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Definition
| there is free entry into and exit out of industries. |
|
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Term
| The money income of households consists of the sum of |
|
Definition
| wages plus rents plus interest plus profits |
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Term
| Along a production possibilities curve, an increase in the production of one type of good can be accomplished only by: |
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Definition
| decreasing the production of the other type of good. |
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Term
| Economic growth may be represented by a: |
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Definition
| rightward shift of the production possibilities curve. |
|
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Term
|
Definition
| Illustrates the interdependence of businesses and consumers. |
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Term
| In a market economy, entrepreneurs are most concerned with: |
|
Definition
| maximizing profits or minimizing losses. |
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Term
| Within a market economy, some industries may be declining while other industries may be expanding. This indicates that: |
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Definition
| resources are being reallocated |
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Term
| In which of the following statements are the terms "demand" and "quantity demanded" used correctly? |
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Definition
| When the price of ice cream rose, the quantity demanded of ice cream fell, and the demand for ice cream toppings fell. |
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Term
| College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start their careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are: |
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Definition
|
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Term
| An increase in the price of a product will reduce the amount of it purchased because: |
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Definition
| consumers will substitute other products for the one whose price has risen. |
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Term
| The demand curve shows the relationship between |
|
Definition
| price and quantity demanded |
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Term
| Other things equal, which of the following might shift the demand curve for gasoline to the left? |
|
Definition
| the development of a low-cost electric automobile |
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Term
| A surplus of a product will arise when price is: |
|
Definition
| above equilibrium with the result that quantity supplied exceeds quantity demanded |
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Term
| A leftward shift of a product supply curve might be caused by |
|
Definition
| some firms leaving an industry |
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Term
| Which of the following would not shift the demand curve for beef? |
|
Definition
| a reduction in the price of cattle feed |
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Term
| Camille's Creations and Julia's Jewels both sell beads in a competitive market. If at the market price of $5, both are running out of beads to sell (they can't keep up with the quantity demanded at that price), then we would expect both Camille's and Julia's to: |
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Definition
| raise their price and increase their quantity supplied |
|
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Term
| Refer to the data below. Equilibrium price will be: |
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Definition
|
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Term
| Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and that potatoes are a consumer substitute for bread, we would expect the price of wheat to |
|
Definition
| rise, the supply of bread to decrease, and the demand for potatoes to increase |
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Term
| An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction is based on the assumption that: |
|
Definition
| bicycles are normal goods |
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Term
| Which of the following will not cause the demand for product K to change? |
|
Definition
| a change in the price of K |
|
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Term
| At the point where the demand and supply curves for a product intersect: |
|
Definition
| the quantity that consumers want to purchase and the amount producers choose to sell are the same |
|
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Term
| Refer to the diagram below, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market: |
|
Definition
| demand has increased and equilibrium price has decreased |
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Term
| If the price elasticity of demand for a good is .75, the demand for the good can be described as: |
|
Definition
|
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Term
| If an increase in the supply of a product results in a decrease in the price, but no change in the actual quantity of the product exchanged, then: |
|
Definition
| the price elasticity of demand is zero |
|
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Term
| Along a linear downward-sloping demand curve, the price elasticity of demand will be: |
|
Definition
| different across each price range |
|
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Term
| Refer to the graph below. If the price is P3, then the total revenue is represented by areas: |
|
Definition
|
|
Term
| The price elasticity of demand is a measure of the: |
|
Definition
| responsiveness of quantity demanded to a change in price. |
|
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Term
| A product priced at $5 has annual sales of 1,000 units. When price is reduced to $4, quantity increases to 1,250 units. Other things unchanged, the price elasticity of demand for the product is: |
|
Definition
|
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Term
| You are the newly appointed sales manager of the Rock Record Company and have been charged with the task of increasing revenues. Your economics consultants have informed you that at present price and output levels, price elasticity of demand for your product is less than one. You should: |
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Definition
|
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Term
| At a price of $20 per unit, 140 units of good W are demanded and 100 units are supplied. When the price is raised to $30 per unit, 100 units are demanded and 140 units are supplied. The price elasticity of supply in this range is: |
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Definition
|
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Term
| An increase in the price of a good will cause total revenue to fall if price elasticity of demand is: |
|
Definition
|
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Term
| You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1. To increase total revenues, you should: |
|
Definition
| increase the price of the software |
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Term
| Which product is most likely to be the most price elastic? |
|
Definition
|
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Term
| If in the short run the demand for mass transit is inelastic and in the long run the demand is elastic, then a price: |
|
Definition
| increase will increase total revenue in the short run but decrease total revenue in the long run. |
|
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Term
| Economists distinguish between the short run and the long run by noting that: |
|
Definition
| some inputs cannot be varied in the short run |
|
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Term
| In which instances will total revenues decline? |
|
Definition
| Price rises and Ed equals 2.47 |
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Term
| Which is not characteristic of a product with relatively inelastic demand? |
|
Definition
| There are a large number of good substitutes for the good |
|
|
Term
| You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1. To increase total revenues, you should: |
|
Definition
| increase the price of the software |
|
|
Term
| Refer to the diagram below. The equilibrium price and quantity in this market will be: |
|
Definition
|
|
Term
| Use the graph below to complete the following question. |
|
Definition
| is not attainable, given society's available resources and technology |
|
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Term
| The production possibilities curve represents which of the following? |
|
Definition
| maximum combinations of goods attainable with fixed resources |
|
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Term
| Refer to the graph below. If the price of the product increases from $5 to $6 because of a decrease in supply, total revenue would: |
|
Definition
|
|
Term
| If a 5 percent fall in the price of a product causes the quantity demanded of the product to increase by 10 percent, the demand is: |
|
Definition
|
|
Term
| The basic difference between the short run and the long run is that: |
|
Definition
| at least one resource is fixed in the short run, while all resources are variable in the long run. |
|
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Term
| If a firm increases all of its inputs by 10 percent and its output increases by 10 percent, then: |
|
Definition
| it is encountering constant returns to scale |
|
|
Term
| In which instances will total revenues decline? |
|
Definition
| Price rises and Ed equals 2.47 |
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Term
| The vertical distance between ATC and AVC reflects: |
|
Definition
| the average fixed cost at each level of output. |
|
|
Term
| You are the newly appointed sales manager of the Rock Record Company and have been charged with the task of increasing revenues. Your economics consultants have informed you that at present price and output levels, price elasticity of demand for your product is less than one. You should: |
|
Definition
|
|
Term
| The demand curve shows the relationship between: |
|
Definition
| price and quantity demanded. |
|
|
Term
| To the economist, total cost includes: |
|
Definition
| explicit and implicit costs, including a normal profit |
|
|
Term
| If the price of product L increases, the demand curve for close-substitute product J will |
|
Definition
|
|
Term
|
Definition
| any cost which does not change when the firm changes its output |
|
|
Term
| If a technological advance increases a firm's labor productivity, we would expect its |
|
Definition
| average total cost to fall |
|
|
Term
| The key economic concept that serves as the basis for the study of economics is: |
|
Definition
|
|
Term
| If an increase in the supply of a product results in a decrease in the price, but no change in the actual quantity of the product exchanged, then: |
|
Definition
| the price elasticity of demand is zero |
|
|
Term
| Economic growth may be represented by a: |
|
Definition
| rightward shift of the production possibilities curve |
|
|
Term
| In the figure below, curves 1, 2, 3, and 4 represent the: |
|
Definition
| MC, ATC, AVC, and AFC curves respectively |
|
|
Term
| A point on the frontier of the production possibilities curve is: |
|
Definition
| attainable and the economy is efficient |
|
|
Term
| If an economy is producing at a point inside a production possibilities curve: |
|
Definition
|
|
Term
| Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and that potatoes are a consumer substitute for bread, we would expect the price of wheat to: |
|
Definition
| rise, the supply of bread to decrease, and the demand for potatoes to increase. |
|
|
Term
| Other things equal, which of the following might shift the demand curve for gasoline to the left? |
|
Definition
| the development of a low-cost electric automobile |
|
|
Term
| Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and average variable costs of $150. The firm's total fixed costs are: |
|
Definition
|
|
Term
| A point inside the production possibilities curve is: |
|
Definition
| attainable, but the economy is inefficient |
|
|
Term
Use the table to complete the following question(s).
The following economy produces two products.
Refer to the above table. The total opportunity cost of the three units of steel is: |
|
Definition
|
|
Term
| If a firm decides to produce no output in the short run, its costs will be: |
|
Definition
|
|
Term
| An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction is based on the assumption that: |
|
Definition
| bicycles are normal goods |
|
|
Term
| Refer to the diagram below, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market: |
|
Definition
| demand has increased and equilibrium price has decreased |
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Term
What effect should each of the following have on the demand for gasoline in a competitive market? State what happens to demand. Explain your reasoning in each case and relate it to a demand determinant.
(a) an increase in the number of cars
(b) the economy moves into a recession
(c) an increase in the price of car insurance, taxes, maintenance
(d) consumer expectations of substantial price increases in gasoline
Student Answer: (a)demand will increase because of increase in buyers (b)demand will decrease because there are less workers and less income (c)demand would decrease because of increase of other items listed (d)current demand will increase because of potential increase of price in future |
|
Definition
(a) Demand would increase because there would be more buyers of gasoline. The additional buyers would come from the additional cars and trucks.
(b) Demand would decrease because consumer and business incomes would fall. Consumer and businesses would have less money to spend on gasoline.
(c) Demand would decrease because of increase in the price of complementary goods. Car insurance, car taxes, and car maintenance expenses are complements to gasoline.
(d) Current demand for gasoline would increase because consumer expectations about the future have changed and may prompt consumers to “buy now” to beat the future price increases. |
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Term
Indicate whether each of the following statements applies to microeconomics or macroeconomics:
a. The unemployment rate in the United States was 5.0% in April 2008.
b. A U.S. software firm discharged 15 workers last month and transferred the work to India.
c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise.
d. U.S. output, adjusted for inflation, grew by 2.2% in 2007.
e. The consumer price index rose by 2.8% in 2007. |
|
Definition
(a)macro (b)micro (c)micro (d)macro (e)macro
Instructor Explanation: Macroeconomics – (a), (d), and (e)
Microeconomics – (b) and (c) |
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Term
Suppose the price of widgets rises from $5 to $7 and consumption of widgets falls from 25 widgets a month to 15 widgets. Calculate your price elasticity of demand of widgets. What can you say about your price elasticity of demand of widgets? Is it Elastic, Inelastic, or Unitary Elastic? Why? Please show your work.
Student Answer: price elasticity of demand of widgets = (change in quantity of demand x/original quantity of demand) ---------------------------------------------------------------------- (change in price of x/original price of x) change in quantity=15-25=-10 original quantity= 25 change in price(7-5)=2 original price = 7 = -10/25 = -0.4 -------- ----- = -1.40 2/7 0.2857 When the price falls the demand for the product rises it is inelastic because the price elasticity of demand of widgets is less than 1
Instructor Explanation: Using Initial Value Method
% change in Quantity Demanded = 10/25*100 = 40%
% change in Price = 2/5*100 = 40%
Ed = 40%/40% = 1 → Unitary Elastic
Using Midpoint Value Method
% change in Quantity Demanded = 10/20*100 = 50%
% change in Price = 2/6*100 = 33.33%
Ed = 50%/33.33% = 1.5 → Elastic |
|
Definition
| Outstanding Vetina! Using the Midpoint Value Method % change in Quantity Demanded = 10/20*100 = 50% % change in Price = 2/6*100 = 33.33% Ed = 50%/33.33% = 1.5 → Elastic |
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|
Term
| A purely competitive firm's output is currently such that its marginal cost is $4 and marginal revenue is $5. Assuming profit maximization, the firm should: |
|
Definition
| Leave price unchanged and raise output |
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|
Term
| In the standard model of pure competition, a profit-maximizing entrepreneur will shut down in the short run if: |
|
Definition
| Total revenue is less than total variable costs |
|
|
Term
| Refer to the graph below. The level of output at which this firm will produce is: |
|
Definition
|
|
Term
| When demand increases, in the short run the purely competitive firm: |
|
Definition
| Will earn higher profits or experience smaller losses |
|
|
Term
| A firm should increase the quantity of output as long as its: |
|
Definition
| Marginal revenue is greater than its marginal cost |
|
|
Term
| Consider the purely competitive firm pictured below. The firm is earning: |
|
Definition
| Normal profits, since its price just covers ATC |
|
|
Term
| If a purely competitive firm shuts down in the short run: |
|
Definition
| it will realize a loss equal to its total fixed costs |
|
|
Term
| The purely competitive firm below will: |
|
Definition
| Produce with short-run losses |
|
|
Term
| If a firm is a price taker, then the demand curve for the firm's product is: |
|
Definition
|
|
Term
| Given the table below, what is the short-run profit-maximizing level of output for the firm? |
|
Definition
|
|
Term
| Which is a feature of a purely competitive market? |
|
Definition
| Products are standardized or homogeneous |
|
|
Term
| A profit-maximizing firm in the short run will expand output: |
|
Definition
| As long as marginal revenue is greater than marginal cost |
|
|
Term
| Refer to the graph below. The level of output at which this firm will shut down is: |
|
Definition
|
|
Term
| The MR = MC rule applies: |
|
Definition
| to firms in all types of industries |
|
|
Term
| When a firm produces less output, it can reduce: |
|
Definition
| Its variable costs but not its fixed costs |
|
|
Term
| A monopoly is most likely to emerge and be sustained when |
|
Definition
| Economies of scale are large relative to market demand |
|
|
Term
| Which is a major criticism of a monopoly as a source of allocative inefficiency? |
|
Definition
| A monopolist fails to expand output to the level where the consumers' valuation of an additional unit is just equal to its opportunity cost |
|
|
Term
| Refer to the graph below. The profit-maximizing monopolist in it will set its price at: |
|
Definition
|
|
Term
| A profit-maximizing monopolist facing the situation shown in the graph below should: |
|
Definition
|
|
Term
| Which statement is correct? |
|
Definition
| Monopolist firms are sheltered from competitive forces and such an environment makes them subject to X-inefficiency |
|
|
Term
| At the profit-maximizing level of output, a monopolist will always operate where |
|
Definition
| Price is greater than marginal cost |
|
|
Term
| Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by: |
|
Definition
| Marginal cost = marginal revenue |
|
|
Term
| In response to a cost-reducing technological breakthrough in the production of its product, a profit-maximizing monopolist will normally: |
|
Definition
| Decrease the price it charges for its product |
|
|
Term
| The supply curve for a monopoly is: |
|
Definition
|
|
Term
| The economic incentive for price discrimination depends on: |
|
Definition
| Differences among buyers' demand elasticities |
|
|
Term
| One defining characteristic of pure monopoly is that |
|
Definition
| The monopolist produces a product with no close substitutes |
|
|
Term
| Suppose that a monopolist calculates that at present output and sales, marginal cost is $1.00 and marginal revenue is $2.00. He or she could maximize profits by: |
|
Definition
| Decreasing price and increasing output |
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|
Term
| Which of the below shows the correct relationship between demand and marginal revenue? |
|
Definition
|
|
Term
| Compared to the purely competitive firm, a pure monopoly: |
|
Definition
| Is able to use barriers to entry and maintain positive economic profits in the long run |
|
|
Term
| If a monopolist produces 100 units of output at a market price of $5 per unit with marginal revenue per unit equaling $4, we would expect that if the monopolist's good was provided under pure competition, quantity would be: |
|
Definition
| Higher than 100 units, price lower than $5, and MR = price |
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Term
| Explain how (if at all) each of the following events affects the location of a country’s production possibilities curve. |
|
Definition
a)The quality of education increases-the curve would shift outward
(b)The number of unemployed workers increases-this should not affect the location of the curve
(c)A new technique improves the efficiency of extracting copper from ore-the curve would shift outward
(d)A devastating earthquake destroys numerous production facilities-the curve would shift inward |
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Term
| Suppose that, on the basis of a nation’s production possibilities curve, an economy must sacrifice 10,000 pizzas domestically to get the 1 additional industrial robot it desires but that it can get the robot from another country in exchange for 9000 pizzas. Relate this information to the following statement: “Through international specialization and trade, a nation can reduce its opportunity cost of obtaining goods and thus move outside its production possibilities curve? |
|
Definition
| Every nation is limited by combinations of outputs which are indicated by the production possibilities curve. When international specialization occurs domestic resources are directed to output that a nation produces. International trade is exchanging of goods produced by one nation with other goods that are produced abroad. Output gains from a greater international specialization and trade present economic growth. |
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Term
| Briefly explain the use of graphs as a way to represent economic relationships. What is an inverse relationship? How does it graph? What is a direct relationship? How does it graph? |
|
Definition
| Graphs are a visual representation of the relationship between two variables or sets of data. An inverse relationship is when two variables change in opposite directions causing a negative relationship. An inverse relationship is graphed with a downward slope. A direct relationship is the positive relationship between two variables that change in the same direction. A direct relationship always graph as an upward slope. |
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Term
| In the 1990s thousands of “dot-com” companies emerged with great fanfare to take advantage if the internet and new information technologies. A few like Google, eBay, and Amazon have generally thrived and prospered, but many others struggled and eventually failed. Explain these varied outcomes in terms of how the market system answers the question “What goods and services will be produced?” |
|
Definition
| Many firms were lured into the dot-com industry with the expectation of economic profits. Because of the overflow of firms and lack of information, many of the firms failed because they were not earning economic profits. When firms like Google, Ebay and Amazon realized that they could not produce profits in the dot-com industry they removed themselves from industry and they industry declined. Because so many firms were competing to establish themselves in the market, economic costs could not be covered because of higher prices. |
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Term
| What effect will each of the following have on supply of auto tires? |
|
Definition
(a)A technological advance in the method of producing tires-supply will increase
(b)A decline in the number of firms in the tire company-supply will decrease
(c)An increase in the price of rubber used in the production of tires-supply will decrease
(d)The expectation that the equilibrium price of auto tires will be lower in the future than currently-supply will increase
(e)A decline in the price of the large tires used for semi-trucks and earth-hauling rigs(with no change in price of auto tires)-supply will increase
(f)The levying of a per-unit tax on each auto tire sold-supply will decrease
(g)The granting of a 50 cent per unit subsidy for each auto tire produced-supply will increase |
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Term
| In 2001 an outbreak of hoof and mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hide prices, the supply of leather goods and the price of leather goods? |
|
Definition
| Supply of cattle hide decreased, hide prices increased, supply of leather goods decreased and price of leather goods increased. |
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Term
| Critically evaluate: “In comparing the two equilibrium positions in Figure 3.7a, I note that a larger amount is actually demanded at a higher price. This refutes the law of demand. |
|
Definition
| The second equilibrium occurs after demand has decreased. The decrease has shifted because of a change in determinants, which caused a decrease in demand. Each equilibrium price refers to a different demand situation. The fact that less is purchased as a lower price when demand decreases doesn’t refute the law of demand. |
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Term
| Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as shown in the table below. Suppose that the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Explain carefully the main effects. Demonstrate your answer graphically. Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effects of this price floor? Demonstrate your answer graphically. |
|
Definition
The shortage of wheat will cause the government to establish a price ceiling. The ceiling prevents the price of wheat from rising in order to encourage greater production, discourage consumption, and relieve the shortage.
The surplus of wheat will cause a price floor to be established. The floor prevents the price from falling to eliminate the surplus. |
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Term
| What effect would a rule stating that university students must live in university dormitories have on the price elasticity of demand for dormitory space? What impact might this in turn have on room rates? |
|
Definition
| Having this rule would make the price elasticity of demand more inelastic. Especially if there are no other universities nearby that the students could transfer to. If this rule was in place, then universities would be able to raise their dormitory prices and not have to worry about students moving to find cheaper housing elsewhere. |
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Term
| You are chairperson of a state tax commission responsible for establishing a program to raise new revenue through excise taxes. Why would elasticity of demand be important to you in determining the products on which the taxes should be levied? |
|
Definition
| Elasticity would be very important. The key would be selecting goods that are inelastic. The decrease in quantity demanded of a product as a result of the price increase caused by the excise tax will be less than the increase price yet still in proportion. This will cause tax revenue to increase. |
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Term
| The kinked demand model of noncollusive oligopoly assumes that: |
|
Definition
| Rivals will ignore price increases and match price cuts |
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|
Term
| Assume that in a monopolistically competitive industry, firms are earning economic profit. This situation will: |
|
Definition
| Attract other firms to enter the industry because the barriers to entry are low |
|
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Term
| Under oligopoly, if one firm in an industry significantly increases advertising expenditures in order to capture a greater market share, it is most likely that other firms in that industry will: |
|
Definition
| Decide to increase advertising expenditures even if it means a reduction in profits |
|
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Term
| A monopolistically competitive firm is producing at an output level in the short run where average total cost is $4.50, price is $4.00, marginal revenue is $2.50, and marginal cost is $2.50. This firm is operating: |
|
Definition
| With a loss in the short run |
|
|
Term
| Monopolistic competition is characterized by firms: |
|
Definition
| Producing differentiated products |
|
|
Term
| In which industry is monopolistic competition most likely to be found? |
|
Definition
|
|
Term
| A major reason that firms form a cartel is to: |
|
Definition
|
|
Term
| Which is not a form of product differentiation for the monopolistically competitive firm? |
|
Definition
| Standard hours and procedures |
|
|
Term
| A monopolistically competitive industry is like a purely competitive industry in that: |
|
Definition
| Neither industry has significant barriers to entry |
|
|
Term
| In the long run, a representative firm in a monopolistically competitive industry will typically |
|
Definition
| Earn a normal profit, but not an economic profit |
|
|
Term
| Demand and marginal revenue curves are downward sloping for monopolistically competitive firms because: |
|
Definition
| Product differentiation allows each firm some degree of monopoly power |
|
|
Term
| In monopolistic competition, a firm has a limited degree of "price-making" ability. This means that the firm will: |
|
Definition
| Set price above marginal cost |
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Term
The graph depicts a monopolistically competitive firm
Refer to the above graph. In the short run, this monopolistically competitive firm will set price at: |
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Definition
| $65 and produce 35 units of output |
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Term
| An oligopolistic market is consistent with: |
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Definition
All firms making economic profits
A small number of firms in the industry
The existence of barriers to entry |
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Term
| When firms in an industry reach an agreement to fix prices, divide up market share, or otherwise restrict competition, they are practicing the strategy of: |
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Definition
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