PRACTICE Exam 1

Decisions must frequently be made by individuals, organizations, and even nations. Facilitating better decision-making is a fundamental goal of economics. The analytical framework advocated by economists that enables one to make informed decisions is called

the economic way of thinking

What is the difference between microeconomics and macroeconomics?

Microeconomics is the study of decision making undertaken by individuals while macroeconomics looks at the behavior of the economy as a whole.

The three fundamental economic questions that a nation addresses in order to allocate society’s scarce resources include all of the following except:

Why will the items be produced?

The rationality assumption as used in economics

states that people respond to incentives.

The ceteris paribus assumption means

other thing equal

"We ought to do more for the education of our children." Statements using words like ought or should are

normative statements.

Factors of production include

land, labor, physical capital, human capital and entrepreneurship.

Each individual must make choices because

resources are limited and therefore cannot satisfy one’s many competing wants.

Opportunity cost

is the value of the next best alternative as a result of choosing some given alternative.

A point inside the PPC means that

resources are not being fully utilized due to unemployment or inefficiency.

The production possibilities curve will shift outward (upward, and or, to the right) when

economic growth occurs.

The productivity gains achieved by specialization are to

comparative advantage.

What is the difference between absolute advantage and comparative advantage?

Absolute advantage is when someone can produce more of a good using a given quantity of inputs while comparative advantage is when someone can produce a good at a lower opportunity cost.

Which of the following statements is true?

Everyone can benefit when people specialize where they have a comparative advantage and then trade with each other

Which of the following good is an inferior good?

When consumer income increases, the demand for eggs decreases.

Which of the following would cause an increase in the demand for fish?

Which of the following would cause an increase in the demand for beef?

An increase in the price of chicken, a substitute for fish. An increase in the price of fish, a substitute for beef.

Which of the following is consistent with the law of supply?

An increase in the market price of oranges causes an increase in the production of oranges.

Which of the following will cause an outward (rightward) shift in supply?

A technological improvement.

Assume the cost of aluminum used by soft-drink companies increases. Which of the following correctly describes the resulting effects in the market for canned soft drinks?
I. The demand for soft drinks increases
II. The quantity of soft drinks demanded decreases.
III. The supply of soft drinks decreases
IV. The quantity of soft drinks supplied decreases.

II and III

a. If the demand and supply curves increase (shift outward) by identical proportions then
b. What if the increase in demand were larger than the increase in supply?
c. What if the increase in demand were smaller than the increase in supply?

a. equilibrium price stays the same and the quantity rises. b. The equilibrium price and quantity increase c. Equilibrium price falls and quantity rises.

Buyers and sellers receive information about what should be bought and what should be produced

from prices in a market system.

In market system, how are the terms of exchange established?

The forces underlying supply and demand interact to set a price.

When demand decreases and the (upward sloping) supply curve remains in the same position,

price falls and equilibrium quantity falls.

When supply increase and the (downward-sloping) supply curve remains in the same position,

price falls and equilibrium quantity rises.

The market for corn is initially in equilibrium. Suppose the production of biofuels, which use corn as an input, decreases, and at the same time, decreases in the price of oil cause farm production costs to fall. Which of the following explains the effect on equilibrium price and quantity in the corn market?

The price of corn will rise, but the effect on equilibrium quantity cannot be determined without more information.

Government-enforced prices such as price ceilings

disrupt the rationing function performed by prices in a market system.

Black markets usually arise when there are

price ceilings.

Price ceilings, such as rent controls

lead to the deterioration of existing housing, reduce tenant mobility as people may be reluctant to change apartments, discourage the construction of new housing. (all of the above.)

Suppose that owners of high-rise office buildings are the main employers of custodial workers in a city. The city has decided to impose rent controls, and it has established a rent ceiling below the previous equilibrium rental rate for offices throughout the city.
a. How will the quantity of offices that building owners lease change?
b. How will the market wage and equilibrium quantity of labor services provided by custodial workers be affected by the imposition of rent controls?

a. The quantity of office buildings supplied will decrease. b. The market wage will fall and the equilibrium quantity will fall.

Suppose the market price of corn is $5 a bushel but the government sets a price of $7. As a result,

the government must purchase the surplus to maintain the price.

Labor is a key input at fast-restaurants. Suppose that the government boosts the minimum wage above the equilibrium wage of fast-food workers. Which of the following best describes the response of the quantity of labor employed at restaurants?

Fewer workers will be employed since the wage increase will induce managers to seek to substitute other inputs for the now relatively more expensive labor.

The primary losers from minimum wages are

teenage and unskilled workers.

Market failure occurs when

the unrestrained market economy lead to too few or too many resources going to a specific economy activity.

A cost or benefit of an economic activity that has an impact on an individual’ s well-being, even though the individual was not directly involved in the activity, is know as a(n)

externality.

Which of the following is a primary difference between a public good and private good?

Private goods are subject to the principle of rival consumption while public goods are not.

Other than correcting externalities, other economic functions of government include

providing a legal system, allocating public goods, promoting competition, and stabilizing the economy.

Over the long run any government’s fundamental revenue sources are

taxes and user charges.

A proportional tax, or flat-rate tax

takes the same percentage of a person’s taxable income in tax regardless of their level of income.

Leslie works 35 hours a week at a wage rate of $20. Thus, her total weekly income is $700. On this income, she pays total taxes of $49.00. However, she calculates that on the last hour that she works, she pays $2.00.
This system of taxation would be classified as ___.
Jonathan works 35 hours a week at a wage rate of $20. Thus, his total weekly income is $700. On this income, he pays total taxes of $140.00. However, he calculates that on the last hours that we works, he pays $4.00.
This system of taxation would be classified as ___.

progressive proportional

Leslie works 30 hours a week at a wage rate of $15. Thus , her total weekly income is $450. On this income, she pays total taxes of $27.00. However, she calculates that on the last hour that she works, she pays $3.00.
Leslie’s average tax rate is __%.
Leslie’s marginal tax rate is __%.

Carole works 25 hours a week at a wage rate of $10. Thus , her total weekly income is $250. On this income, she pays total taxes of $12.50. However, she calculates that on the last hour that she works, she pays $2.00.
Carole’s average tax rate is __%.
Carole’s marginal tax rate is __%.

6 ($27/$450)=.06 20 ($3/$15)=.2 5 ($12.5/$250)=.05 20 ($2/$10)=.2