# Microeconomics Exam 1

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1. Name 4 Economic Resources
• 1. Land
• 2. Labor
• 3. Capital
• 4. Entrepreneurship
2. Why are resources scarce?
Wants for produced goods and services are assumed always expanding
3. The value of the best alternative given up when a choice is made
Opportunity Cost
4. Latin for "holding all else unchanged"
The Ceteris Paribus Assumption
5. What are the three big Economic Questions?
• 1. What to Produce
• 2. How to Produce
• 3. For Whom to Produce
6. A listing of the quantities of an item buyers wish to purchase at various possible prices, all else [besides the price] unchanged
Demand Schedule
7. Graph showing the quantities buyers wish to purchase at various possible prices, all else unchanged; or - a graph of a demand  schedule
Demand Curve
8. Graph showing the quantities sellers wish to produce and   sell at various possible prices, all else unchanged, or -- a graph of a   demand schedule
Supply Curve
9. All else equal, as the price of an item rises the quantity buyers wish to purchase decreases; or - inverse relation between price and quantity demanded, ceteris paribus)
The Law of Demand
10. All else equal, as the price of an item rises the quantity sellers wish to produce and sell increases; or - direct relation between price and quantity supplied, ceteris paribus.
The Law of Supply
11. A move ALONG a fixed demand curve from one point to another as a result of a change in the price of the item, all else unchanged
A Change in Quantity Demanded
12. A move ALONG a fixed supply curve from one point to another, as a result of a change in the price of the item, all else unchanged
A Change in Quantity Supplied
13. Shift of Demand Curve to the right; happens when a non-price determinant of demand changes to make the quantities buyers wish to purchase increase at each and every possible price
Increase in Demand
14. Shift of Demand Curve to the left; happens when a   non-price determinant of demand changes to make the quantities buyers wish to purchase decrease at each and every possible price
Decrease in Demand
15. Shift of Supply Curve to the right; happens when a non-price determinant of Supply changes so as to make sellers wish to sell   more at each and every possible price
Increase in Supply
16. Shift of Supply Curve to the left; happens when a non-price determinant of Supply changes so as to make sellers wish to sell   less at each and every possible price
Decrease in Supply
17. The one price at which quantity demanded matches quantity supplied
Equilibrium Price
18. The actual price a product is selling for at any moment
Market Price
19. The quantity of an item bought and sold when market price equals equilibrium price
Equilibrium Quantity
20. Surplus occurs if market price is above equilibrium price, also known as excess quantity supplied; effect of a surplus is to push market price down
Surplus
21. Shortage occurs if market price is below equilibrium price, also known as   excess quantity demanded; effect of a shortage is to push market price up
Shortage
22. Equilibrium price and quantity increase
Demand Increases
23. Equilibrium price and quantity decrease
Demand Decreases
24. Equilibrium price decreases but quantity increases
Supply Increases
25. Equilibrium price increases but quantity   decreases
Supply Decreases
26. Is a good whose demand increases if incomes   increase, ceteris paribus
Normal Good
27. Is a good whose demand decreases if   incomes increase, ceteris paribus
Inferior Good
28. Two goods are_______ if a rise in the price of one   increases the demand for the other; these are products which compete with each other for the consumer's dollar. Example: wireless phones and line phone service
Substitutes (in demand)
29. Two goods are _________ if consumers tend to buy them  together.If they are complements a rise in the price of one decreases the demand for the other one.
Complements
30. Makes it illegal to charge a price below a   certain level; it keeps market price from falling to equilibrium price; it results in a surplus, which   the government must buy; its purpose is generally to protect the interests of the products' producers by propping their selling price up
Price Floor
31. Makes it illegal to charge a price above a certain level;   it keeps market price from rising to equilibrium price; it results in   a shortage, which can be a problem for people who wish to purchase   the good or service,but can't find it
Price Ceiling
32. when market forces, left alone, result in too much or too little of a product being produced. In either case [too much produced, so that resources are over allocated to that good, or too little produced, so that resources are under allocated to the good], market equilibrium results in inefficient use of resources
Market Failure
33. Dominance of an industry by a few producers leads to restriction of output in order to raise the market price--too little is produced
Market Failure #1: Lack of Competition
34. These are harm caused to third parties by a product, either when it is   produced (e.g. air pollution) or when it is consumed (e.g.second-hand   cigarette smoke); These products are overproduced if market forces are left   alone. Solution: government requires reduction in pollution or taxes the   product or the pollution. These steps both reduce the output level and   correct the pollution problem, in effect making firms pay all their costs of   production, including the "external" costs they previously did not   have to pay)
Market Failure #2:   Negative Externalities
35. People other than the buyer or the seller of a product
Third Parties
36. Benefits to third parties caused by production or other people's consumption of a product. Example: vaccinations, or elementary schooling. Problem: markets left alone produce too little of these products   compared to society's wants for them. Solution: government subsidizes these   industries or requires people to purchase them, in order to promote their   consumption.
Market Failure #3: Positive Externalities
37. Are goods which, once produced, provide   benefits available to everyone, regardless of whether they paid for the good or not. Examples: lighthouse, national defense, streetlights. Problem:   profit-seeking firms won't produce these goods, because they can't make a   profit, since people have the option of being "free-riders" --   enjoying the benefits without paying. In markets left alone these products would not be produced at all. Solution: government taxes people and provides these products.
Market Failure #4:   Public Goods
38. People who enjoy the benefits of a product without paying for the product
Free Riders
39. Taking each decision one step at a time, and deciding to take an action if and only if its expected marginal benefit is greater than its expected marginal cost
Marginal Reasoning
Marginal Benefit/Marginal Cost
41. Refers to "responsiveness" or   "sensitivity"--the sensitivity of one variable to a change in a second variable
Elasticity
42. A measure of the sensitivity of quantity demanded to a change in the product's price, all else unchanged
Price Elasticity of Demand
43. When Ed is less than one This means that the percentage change in quantity demanded was LESS than the percentage change in price The demand curve is negatively sloped and relatively steep in this case Meaning: this product's customers, in this price range, are NOT very sensitive to price changes
Inelastic Demand
44. When Ed is greater than one This means that the percentage change in quantity demanded was greater   than the percentage change in price The demand curve is negatively sloped but relatively flat in this case Meaning: this product's customers, in this price range, are SENSITIVE to   changes in price; they're comparison shoppers
Elastic Demand
45. When Ed is approximately equal to one This means that in percentage terms quantity demanded changed just about   as much as price changed, so Ed comes out equal to 1
Unit Elasticity
46. When a small increase in price makes quantity demanded go to zero;
Ed= infinity
Demand curve is perfectly flat.
Perfectly Inelastic Demand
47. When a change in price leads to no change at all in quantity demanded.
Ed = 0
Demand curve is straight up and down [vertical] in shape
Perfectly Inelastic Demand
48. If a one-product firm brings in during a time period [all the money coming in] is equal to PxQ, or Price times Quantity.
If you sell 5 units at \$10 each, total revenue = \$50.
Total Revenue
49. The Latin expression ceteris paribus means
A. Everything else being equal
B. Economic model
C. Economists are partly right
D. Partial scarcity is certain
A. Everything else being equal
50. The opportunity cost of watching a particular program on television might be
A. All of the alternative programs that appear on other channels which you are unable to see
B. Zero because there is no money expenditure involved
C. The alternative use of the time you would have made if you had not watched the tv program
D. Zero it the television program benefits you or helps you learn about the world
C. The alternative use of the time you would have made if you had not watched the tv program
51. Which of the following pairs is the most likely to exhibit a direct relationship?
A. Cholesterol levels and the likelihood of developing heart disease.
B. The price of gasoline and the amount of gasoline that people purchase.
C. Outdoor temperature and heating oil sales.
D. Annual income and weekly pawn shop visits.
A. Cholesterol levels and the likelihood of developing heart disease.
52. An increase in the demand for a product means that the
A. Demand curve shifts to the left
B. Demand curve shifts to the right
C. Supply curve shifts to the right, thereby lowering the product's price
D. Supply curve shifts to the left, thereby raising the product's price
B. Demand curve shifts to the right
53. The law of demand states that, ceteris paribus, price and quantity demanded are
A. Directly related
B. Inversely related
C. Not predictably related
D. Independent of one another
B. Inversely related
54. A movement along the demand curve for automobiles is caused by a change in
A. The price of automobiles the price of automobiles
B. The price of gasoline
C. Customers' incomes
D. Both "b" and "c" above
• A. The price of automobiles the price of automobiles
• (Only a change in the price of the product in question moves you from one point to another along a fixed demand curve.)
55. Assuming that shoe repair is an inferior good, an increase in consumer income, other things being equal, will cause a(n)
A. Leftward shift in the demand curve
B. Downward movement along the demand curve
C. Rightward shift in the demand curve
D. Upward movement along the demand curve
A. Leftward shift in the demand curve
56. Two goods are substitutes only if
A. An increase in price of one leads to an increase in the demand for the other
B. A decrease in the demand for one leads to a decrease in the supply of the other
C. An increase in the price of one leads to a decrease in the demand for the other a
D. Decrease in the price of one leads to a decrease in the supply of the other
A. An increase in price of one leads to an increase in the demand for the other
57. Two goods that are substitutes are
A. Bacon and eggs
B. Cameras and film
C. Tennis rackets and tennis balls
D. Movie theater tickets and video rentals
• D.  Movie theater tickets and video rentals
• (movie theater tickets and video rentals: These are at least to some extent substitutes -- competing with each other for the consumers' dollar)
58. A supply curve reflects the
A. Inverse or negative relationship between price and quantity supplied
B. Positive or direct relationship between demand and supply
C. Inverse or negative relationship between price and quantity demanded
D. Direct or positive relationship between price and quantity supplied
D. Direct or positive relationship between price and quantity supplied
59. In a market, competitive forces guarantee that any price other than the equilibrium price is
A. Market-clearing
B. Stable
C. Temporary
D. UnAffordable
C. Temporary
60. If you were a government official and wanted to raise the price of wheat, which of the following actions might you take?
A. Take wheat from government storage and sell it
B. Encourage farmers to use more fertilizer
C. Lower the price of rye
D. Encourage farmers to grow less wheat
D. Encourage farmers to grow less wheat
61. Which of the following best explains the determination of the equilibrium price of a product?
A. Production costs.
B. The supply of a good.
C. The interaction of supply and demand.
D. The decisions of government.
C. The interaction of supply and demand.
62. If the current market price is above the equilibrium price, then
A. The quantity supplied will exceed the quantity demanded at the current price
B. The quantity demanded exceeds the quantity supplied at the current price
C. There will be a tendency for the price to rise
D. Demand will shift to the left
A. The quantity supplied will exceed the quantity demanded at the current price
63. A change in supply CANNOT be caused by a change in
A. Resource prices
B. Technology
C. Prices of other goods
D. The price of the good itself
D. The price of the good itself
64. If the price of potato chips increases, other things equal, the demand for potato-chip dip will
A. Not change; only quantity demanded will change
B. Increase, because the goods are substitutes
C. Decrease, because the goods are substitutes
D. Decrease, because the goods are complements
D. Decrease, because the goods are complements
65. Which of the following is true if the price of coffee increases?
A. The demand for tea, a substitute good, will decrease
B. The demand for coffee will increase
C. The demand for coffee and tea will decrease
D. The demand for tea, a substitute good, will increase
D. The demand for tea, a substitute good, will increase
66. A demand curve for the Steel Porcupines' concert tickets would show the
A. Quality of service that customers demand when they buy a ticket
B. Number of people who would like to attend the concert
C. Number of tickets the promoters are willing to sell at each price
D. Number of concert tickets that customers wish to purchase at each possible price
D. Number of concert tickets that customers wish to purchase at each possible price
67. A technological breakthrough lowers the cost of manufacturing VCRs. As a result, the market changes to a new equilibrium because of a(n)
A. Increase in supply of VCRs
B. Decrease in supply of VCRs
C. Increase in demand for VCRs
D. Decrease in demand for VCRs
A. Increase in supply of VCRs
68. The law of demand is graphically illustrated by a(n)
A. Perfectly vertical (straight up and down) demand curve
B. Perfectly horizontal (flat) demand curve
C. Upward-sloping demand curve
D. Downward-sloping demand curve
D. Downward-sloping demand curve
69. An INCREASE in the quantity demanded of a good is generally due to
A. A rise in the price of the good
B. A fall in the price of the good
C. A rise in income, assuming the good is a normal good
D. A rise in income, assuming the good is an inferior good
B. A fall in the price of the good
70. Economists argue that the biggest reason individual homeowners usually don't hire a private contractor to fill the potholes on their street is because
A. It costs too much
B. The value to the neighborhood exceeds the cost of repair
C. Others who use the street will probably be free-riders
D. There are negative externalities associated with the repair
C. Others who use the street will probably be free-riders
71. In the case of negative externalities in production, the firm's internal costs
A. Exceed the external costs
B. Are less than the external costs
C. Equal the external costs
D. Understate the true cost of producing the product
D. Understate the true cost of producing the product
72. Which of the following are NOT methods of dealing with externalities?
A. Relying on voluntary compliance
B. Taxing the output of industries that pollute
C. Creating legal environmental standards
D. Increasing public spending on cleanup/reduction
A. Relying on voluntary compliance
73. When there are positive externalities associated with grade school education, if the choice to purchase education were left to the free market there would be
A. Not enough education purchased to meet society's desires
B. Too much education purchased to meet society's desires
C. An ideal level of education bought and sold
D. From society's point of view, too low a price set for educational services
A. Not enough education purchased to meet society's desires
74. If each of us relied exlusively on the market to determine what to buy, we would probably end up with few, if any,
A. Streetlights
B. Strawberries
C. CDs
D. Raincoats
A. streetlights (streetlights: Since, once produced, streetlights benefit everyone, whether they paid for them or not, they are public goods, and private firms would have great difficulties producing them for profit.)
75. Which of the following is the BEST example of a public good?
A. Cars
B. Education
C. You have to purchase a radio in order to enjoy its benefits, so it is not a public good
D. Air Traffic Control
B. Education: Education is a good with positive externalities, but it is not a public good
76. If the demand curve over a certain range is "price elastic," this implies that
A. The percentage change in the quantity demanded exceeds the percentage change in product price, when all that changes is the product price
B. Percentage change in price exceeds the percentage change in quantity demanded, when all that changes is the product price
C. Product has no good substitutes
D. The percentage change in quantity demanded exceeds one, when the product price changes
A. The percentage change in the quantity demanded exceeds the percentage change in product price, when all that changes is the product price
77. If demand is price ELASTIC, a DECREASE in price causes
A. An increase in total revenue
B. A decrease in total revenue
C. An unpredictable change in total revenue which may be positive or negative
D. No change in total revenue
• A. An increase in total revenue
• (an increase in total revenue: Since the percentage increase in quantity bought is greater than the percentage decrease in price, total revenue (Price times Quantity) increases if price falls when the demand curve is elastic.)
78. Another word for elasticity is
A. Highness
B. Rigidity
C. Correctness
D. Responsiveness
D. Responsiveness
79. Suppose Good Food's supermarket raises the price of its steak and finds its total revenue from steak sales does NOT change. This is evidence that price elasticity of demand for steak is
A. Perfectly elastic
B. Perfectly inelastic
C. Unitary elastic
D. Inelastic
C. Unitary elastic
80. A LOWER price elasticity of demand occurs when
A. Many substitutes for the product exist
B. The quantity demanded is more responsive to price changes
C. Few substitutes exist for the product
D. You consider the long-run rather than the shorter-run results
C. Few substitutes exist for the product
81. If a 10 percent cut in price causes a 15 percent increase in sales, all else constant, then
A. Total revenue will decrease after the price cut
B. Demand is price inelastic in this range
C. Demand is price elastic in this range
D. Demand is unit elastic in this range
• C. Demand is price elastic in this range
• (since the percentage change in quantity demanded (15%) is greater than the percentage change in price (10%), demand IS elastic in this range.)
82. Price elasticities of supply are
A. The same as price elasticities of demand
B. Negative numbers
C. Positive numbers
D. Greater than one
C. Positive numbers
 Author: nikki002 ID: 227900 Card Set: Microeconomics Exam 1 Updated: 2013-07-23 16:14:42 Tags: Microeconomics Exam Folders: Description: Microeconomics Exam 1 Show Answers: