1. If the per unit cost of production falls, then... A.) the supply curve shifts right (or down)

Transcription

1 1. If the per unit cost of production falls, then... A.) the supply curve shifts right (or down) B.) there is a downward movement along the existing supply curve which does not shift C.) the supply curve shifts left (or up) D.) the demand curve shifts right (or up) E.) equilibrium price for the item falls, and quantity falls

2 1. If the per unit cost of production falls, then... A.) the supply curve shifts right (or down) Yes, at the same price profits rise and firms would want to produce more or the supply curve shifts right. B.) there is a downward movement along the existing supply curve which does not shift This only happens when the demand curve shifts. C.) the supply curve shifts left (or up) Opposite, this happens when production costs rise since profits are reduced. D.) the demand curve shifts right (or up) No shift in the demand curve. E.) equilibrium price for the item falls, and quantity falls No, price falls and quantity RISES, draw a graph.

3 2. Long-run economic growth and higher future consumption may be best achieved by A.) government investment in bonds with a future payoff B.) moving along the current production possibilities curve and producing more consumption goods and fewer capital goods C.) a reduction in the level of externalities D.) lower current consumption freeing up resources for the production of capital goods

4 Long run economic growth and higher future consumption may be best achieved by A.) government investment in bonds with a future payoff B.) moving along the current production possibilities curve and producing more consumption goods and fewer capital goods Opposite, less economic growth. C.) a reduction in the level of externalities D.) lower current consumption freeing up resources for the production of capital goods

5 3. An Optimal, or Allocatively Efficient, level of production/consumption maximizing societal welfare occurs when marginal cost equals marginal benefit. Marginal cost at that level means A.) the cost of additional resources needed to produce one more of unit of output B.) total cost of production divided by the number or level of production C.) average profits per unit of output are maximized D.) the lowest possible cost per unit of

6 An Optimal, or Allocatively Efficient, level of production/consumption maximizing societal welfare occurs when marginal cost equals marginal benefit. Marginal cost at that level means A.) the cost of additional resources needed to produce one more of unit of output - The same applies to MC anywhere. B.) total cost of production divided by the number or level of production - This is average cost. C.) average profits per unit of output are maximized - No, total profits are maximized, not average. D.) the lowest possible cost per unit of output - No, that occurs at a lower production level lower than what is allocatively efficient.

7 4. Resources, inputs, or the factors of production, may be subdivided into the exhaustive list being: A.) land, labor, capital, and raw materials B.) land, labor, capital, and entrepreneurial ability C.) land, labor, and raw materials D.) rents, interest, and accumulated profits E.) bonds, stocks, and retained earnings4

8 4. Resources, inputs, or the factors of production, may be subdivided into the exhaustive list being: A.) land, labor, capital, and raw materials B.) land, labor, capital, and entrepreneurial ability Yes, types of income are also rents, wages, interest, and profits for these inputs or factors of production respectively. C.) land, labor, and raw materials D.) rents, interest, and accumulated profits - None of these are resources. E.) bonds, stocks, and retained earnings - None of these are resources.

9 6. Who is the author who in 1776 termed the Invisible Hand phase or concept referring to how people motivated by self interest in a market system by trade end helping others abet that was not their intention? A.) Ben Franklin B.) Alexander Hamilton First Treasury Secretary C.) Thomas Paine D.) Adam Smith E.) David Ricardo Followed Adam Smith applying his division of labor ideas and specialization increasing output to international trade by the theory of comparative advantage (1810).

10 Who is the author who in 1776 termed the Invisible Hand phase or concept referring to how people motivated by self interest in a market system by trade end helping others abet that was not their intention? A.) Ben Franklin B.) Alexander Hamilton C.) Thomas Paine D.) Adam Smith E.) David Ricardo Followed Adam Smith applying his division of labor ideas and specialization increasing output to international trade by the theory of comparative advantage (1810).

11 6. The idea that more total output can be produced if people specialize at individual tasks as opposed to individually doing everything themselves is best referred to as A.) falling relative unit replacement B.) economies of scale C.) falling variable costs D.) rising marginal output E.) the division of labor

12 6. The idea that more total output can be produced if people specialize at individual tasks as opposed to individually doing everything themselves is best referred to as A.) falling relative unit replacement B.) economies of scale More efficient to have fewer firms spreading out fixed costs. C.) falling variable costs D.) rising marginal output E.) the division of labor Yes, by Adam Smith, chapter one of the Wealth of Nations (1776.).

13 7. The main determinate of what is produced is A.) consumer wants B.) producer costs C.) profits D.) marketing

14 7. The main determinate of what is produced is A.) consumer wants Only half the equation (demand), no business will produce if there is no profit. B.) producer costs Only half the equation (supply), no consumer will purchase if there is no benefit. C.) profits Yes. D.) marketing This is only a manipulation of consumer wants to shift demand.

15 8. Diminishing Marginal Utility best refers to... A.) the change in output divided by the change in inputs B.) added happiness via consumption of one more of an item falls as more is consumed. C.) the reason why demand curves slope upward when prices rise D.) how adding one more unit of input results in additional output, but the change in added output per unit of input falls as more of an input is utilized

16 8. Diminishing Marginal Utility best refers to... A.) the change in output divided by the change in inputs - Marginal product. B.) added happiness via consumption of one more of an item falls as more is consumed - Yes, each additional unit consumed brings less additional happiness or utility than the prior one consumed, a general assumption in economics. C.) the reason why demand curves slope upward when prices rise - Demand curves slope DOWNward when prices rise or people buy less at higher prices - the law of demand. D.) how adding one more unit of input results in additional output, but the change in added output per unit of input falls as more of an input is utilized - Diminishing marginal product.

17 9. For Normal Goods, an increase in consumer income will... A.) shift the supply curve right (or down) B.) shift the supply curve left (or up) C.) cause quantity consumed to rise and price to fall D.) shift the demand curve right (or up) E.) cause a movement up along the existing demand curve

18 9. For Normal Goods, an increase in consumer income will... A.) shift the supply curve right (or down) - No shift in supply since no change in profits at each price level. B.) shift the supply curve left (or up) - No shift in supply since no change in profits at each price level. C.) cause quantity consumed to rise and price to fall - No, price will RISE, draw a graph and shift demand right. This would only occur if the supply curve shifts right or down, e.g. by lower production costs or better technology. D.) shift the demand curve right (or up) - Yes, definition of a Normal Good, opposite shift for an Inferior Good. E.) cause a movement up along the existing demand curve - No, the demand curve for Normal Goods shifts right when income rises, a movement along the existing demand curve to a new equilibrium only occurs when the supply curve shifts.

19 10. If the per unit cost of production falls, then... A.) the supply curve shifts right (or down) B.) there is a downward movement along the existing supply curve which does not shift C.) the supply curve shifts left (or up) D.) the demand curve shifts right (or up) E.) equilibrium price for the item falls, and quantity falls

20 10. If the per unit cost of production falls, then... A.) the supply curve shifts right (or down) - Yes, at the same price profits rise and firms would want to produce more or the supply curve shifts right. B.) there is a downward movement along the existing supply curve which does not shift - This only happens when the demand curve shifts. C.) the supply curve shifts left (or up) - Opposite, this happens when production costs rise since profits are reduced. D.) the demand curve shifts right (or up) - No shift in the demand curve. E.) equilibrium price for the item falls, and quantity falls - No, price falls and quantity RISES, draw a graph.

21 11. Externalities are best described as how A.) feed back effects impact supply or demand, e.g. higher auto demand leads to higher auto worker income and even higher purchasing of cars B.) consumption or production involves costs or benefits borne or enjoyed by other non-market participants C.) higher business taxes cause the cost of production to rise not being a normal cost to purchase resources D.) consumption of a good leaves less available for others to consumer E.) free rider problems with those who use coupons or have subsidies to purchase things at a lower cost than others who pay full price, thus causing the average price paid by others to rise -

22 11. Externalities are best described as how A.) feed back effects impact supply or demand, e.g. higher auto demand leads to higher auto worker income and even higher purchasing of cars - More at discarding the Ceteris Paribus assumption. B.) consumption or production involves costs or benefits borne or enjoyed by other non-market participants - Yes, e.g. pollution by a factory, and since marginal social costs are not equal to marginal social benefits, the market equilibrium which only matches up marginal costs and benefits of market participants is not optimal or inefficient. C.) higher business taxes cause the cost of production to rise not being a normal cost to purchase resources D.) consumption of a good leaves less available for others to consumer - Half of the definition of a public good. E.) free rider problems with those who use coupons or have subsidies to purchase things at a lower cost than others who pay full price, thus causing the average price paid by others to rise -

23 The following are production possibilities tables for Spain and the Ireland. Assume that before specialization and without free trade, that the optimal production/consumption mix for Spain is alternative D, and for Ireland is alternative X with total world output being 20 units of Cars and 24 units of Food. Addta,m 12. If specialization and trade are allowed between Ireland and Spain, what are the potential world gains from trade? A.) +12 units of Cars, and +12 units of Food B.) +10 units of Cars, and + 4 units of Food C.) + 6 units of Cars, and + 4 units of Food D.) + 0 units of Cars, and + 6 units of Food - Countries specialize producing items which they have a comparative advantage or lowest opportunity cost - Spain has an opportunity cost for 1 Car more being 1 unit less of Food (12F-18F)/(18C-12C) = -6F/+6C = -1F per additional Car produced, and the same 1-1 for more Food for less Cars (6C-12C)/(24F-18F) = -6C/+6F = -1C, for simplicity all points have the same opportunity cost. For Ireland the opportunity cost of 1 more Car is (4F-6F)/(12C-8C) = -2F/+4C = -½F per additional Car produced, and Ireland s opportunity cost of 1 more unit of Food is (4C-8C)/(8F-6F) = -4C/+2F = -2C. Thus Spain with lower opportunity costs in Food (-1C versus -2C for Ireland) should specialize at Food production at point F, and Ireland with lower opportunity costs in Cars (-½F versus -1F for Spain) should specialize in Car production at point U. Total world production at points F and U are 20 units of Cars and 30 units of Food, +0 units of Car production and +6 units of Food compared to the situation (20C and 24F) without specialization and free trade.

24 The following are production possibilities tables for Spain and the Ireland. Assume that before specialization and without free trade, that the optimal production/consumption mix for Spain is alternative D, and for Ireland is alternative X with total world output being 20 units of Cars and 24 units of Food. Addta,m 12. If specialization and trade are allowed between Ireland and Spain, what are the potential world gains from trade? A.) +12 units of Cars, and +12 units of Food B.) +10 units of Cars, and + 4 units of Food C.) + 6 units of Cars, and + 4 units of Food D.) + 0 units of Cars, and + 6 units of Food - Countries specialize producing items which they have a comparative advantage or lowest opportunity cost - Spain has an opportunity cost for 1 Car more being 1 unit less of Food (12F-18F)/(18C-12C) = -6F/+6C = -1F per additional Car produced, and the same 1-1 for more Food for less Cars (6C-12C)/(24F-18F) = -6C/+6F = -1C, for simplicity all points have the same opportunity cost. For Ireland the opportunity cost of 1 more Car is (4F-6F)/(12C-8C) = -2F/+4C = -½F per additional Car produced, and Ireland s opportunity cost of 1 more unit of Food is (4C-8C)/(8F-6F) = -4C/+2F = -2C. Thus Spain with lower opportunity costs in Food (-1C versus -2C for Ireland) should specialize at Food production at point F, and Ireland with lower opportunity costs in Cars (-½F versus -1F for Spain) should specialize in Car production at point U. Total world production at points F and U are 20 units of Cars and 30 units of Food, +0 units of Car production and +6 units of Food compared to the situation (20C and 24F) without specialization and free trade.

25 13. What is NOT considered a component of GDP? A.) San Miguel purchasing a new machine to make reusable bottles - This is GDP, part of Real Investment, a new capital good is produced. B.) government spending on trash removal - Yes, Government component for a service produced. C.) government spending of social security or pensions - No, the P in GDP means something is Produced, but a transfer payment represents redistribution and nothing being produced. D.) a domestically built bamboo bike exported to a foreign country - This is part of GDP since something Domestically Produced - the D and P in GDP, and part of net Exports.

26 13. What is NOT considered a component of GDP? A.) San Miguel purchasing a new machine to make reusable bottles - This is GDP, part of Real Investment, a new capital good is produced. B.) government spending on trash removal - Yes, Government component for a service produced. C.) government spending of social security or pensions - No, the P in GDP means something is Produced, but a transfer payment represents redistribution and nothing being produced. D.) a domestically built bamboo bike exported to a foreign country - This is part of GDP since something Domestically Produced - the D and P in GDP, and part of net Exports.

27 14. Real Investment Expenditures component of GDP is best described as A.) stock market transactions purchasing financial assets B.) purchase of raw materials used in production C.) gross purchases of both new and used or existing machinery, factories, and equipment D.) purchase of gold or silver held for value and not used in production E.) none of the above

28 14. Real Investment Expenditures component of GDP is best described as A.) stock market transactions purchasing financial assets - Not part of GDP since nothing is produced, just an exchange of pre-existing property rights. B.) purchase of raw materials used in production - Intermediate good used in production, not part of GDP. C.) gross purchases of both new and used or existing machinery, factories, and equipment - is incorrect. Newly produced capital or real investment goods are part of GDP, but purchases of used or preexisting real investment goods are not since nothing is produced. For something to be part of GDP, something has to be produced, hence the P in GDP. If a firm purchases an old factory originally built in 1975, that is part of 1975 GDP when built and resale is not part of GDP. D.) purchase of gold or silver held for value and not used in production - Not part of GDP since nothing is produced, just an exchange of pre-existing property rights. E.) none of the above

29 15. Real GDP is best considered A.) a quantity measure of output or value in pesos of constant purchasing power B.) durable and nondurable goods produced, but not services or intangibles C.) Consumption Expenditures minus Real Investment Expenditures D.) the actual dollar value of output produced in various years E.) Nominal GDP minus any depreciation of the capital stock

30 15. Real GDP is best considered A.) a quantity measure of output or value in pesos of constant purchasing power - Yes, very important. Nominal GDP is actual pesos of purchases of final goods and services produced, but because of inflation this makes actual real output levels across time not comparable by this measure. Real GDP is a quantity measure in pesos which have constant purchasing power, thus the real quantity of output can be compared over time. B.) durable and nondurable goods produced, but not services or intangibles - No, services are part of GDP inasmuch as goods. C.) Consumption Expenditures minus Real Investment Expenditures D.) the actual dollar value of output produced in various years - Nominal GDP. E.) Nominal GDP minus any depreciation of the capital stock - This is Net Domestic Product, not watched since hard to measure depreciation.

31 16. Which group would benefit most from deflation or falling nominal input and output prices? A.) employed persons since real wages rise B.) creditors who had lent money prior at fixed interest rates C.) debtors who had borrowed money prior at fixed interest rates D.) retired persons dependent on Social Security with entitlement checks

32 16. Which group would benefit most from deflation or falling nominal input and output prices? A.) employed persons since real wages rise - If input and output prices rise, this includes the input being labor and when nominal wages and output prices fall such does not impact the real wage. B.) creditors who had lent money prior at fixed interest rates - Yes, deflation benefits creditors who are paid back debts with money which has a higher purchasing power. Consider at the extreme lending someone 100, deflation occurs, and being paid back with 100 which is enough to buy a new shirt. C.) debtors who had borrowed money prior at fixed interest rates - Opposite, deflation hurts debtors since they pay back debts with money which has higher purchasing power than expected, or the real value of debt owed has risen. D.) retired persons dependent on Social Security with entitlement checks

33 17. The Multiplier Effect is reduced when A.) the Marginal Propensity to Consume (MPC) is small B.) the Marginal Propensity to Save (MPS) is small C.) the Average Propensity to Consume (APC) is small D.) the economy operates a less than full-employment

34 17. The Multiplier Effect is reduced when A.) the Marginal Propensity to Consume (MPC) is small - Yes, the multiplier is 1/(1-MPC), if the MPC is smaller 1/(1-MPC) is smaller, or equivalently the MPS is higher, each successive round of spending is smaller reducing the multiplier effect. B.) the Marginal Propensity to Save (MPS) is small - Opposite, this reduces leakages increasing each successive round of spending. C.) the Average Propensity to Consume (APC) is small D.) the economy operates a less than full-employment - While the multiplier shifts Aggregate Demand the same amount left or right being the initial change in spending times 1/(1-MPC), if the economy operates a less than full employment where short-run Aggregate Supply is horizontal, the actual change in real output by the multiplier is highest, such versus when the economy operates near full-employment where short-run Aggregate Supply becomes more vertical reducing the actual impact of the multiplier on real output levels.

35 18. What is the equilibrium level of Y (or Output or Income or Aggregate Expenditures)? A.) 2,400 B.) 1,000 C.) 800 D.) 600 E.) none of the above [Hint: What is the equilibrium condition? Aggregate Expenditures or total spending purchasing output must equal...?] Y = C + I + G + X Equilibrium condition (equivalent to crossing the 45E degree line) where output (GDP) = Aggregate Expenditures (C+I+G+X) to purchase such. Y = *Y Plug in given assumptions for C, I, G, and X. Y = *Y Reduce by adding up integers. (1!.75)*Y = 600 Reduce again by subtracting.75*y from both sides..25* Y = 600 Reduce again. Y = 2,400 Finished solving by multiplying both sides by What is the equilibrium level of Consumption Expenditures? A.) 2,050 B.) 1,800 C.) 1,250 D.) 1,000 E.) none of the above Simply plug into the consumption function the level of income calculated prior. C = *DI Consumption function, given C = *2,4000 Plug in equilibrium DI = 2,400 calculated prior. C = ,800 = 2,050 Reduce, done. or Since Y = C + I, and know Y = 2,400 and I = 350, Y - I = C or 2, = 2,050 = C.

36 20. Suppose rising consumer optimism about the future causes the Consumption function to shift up by 100 or new C = *Y. What is the resulting change in the equilibrium level of Y (or Output or Income or Aggregate Expenditures)? A.) +0 B.) +400 C.) +200 D.) +100 E.) none of the above Two ways: 1.) Use Multiplier. MPC =.75, thus multiplier = 1/(1-MPC) = 1/(1-.75) = 4. Change in initial expenditures = +100 via consumption function shifting up. Change in equilibrium GDP or Aggregate Expenditures = 4*(+100) = ) Crank out new result and compare. Y = C + I + G + X Equilibrium condition (equivalent to crossing the 45E degree line) where output (GDP) = Aggregate Expenditures (C+I+G+X) to purchase such. Y = *Y Plug in given assumptions for C, new I, G, and X. Y = *Y Reduce by adding up integers. (1!.75)*Y = 700 Reduce again by subtracting.75*y from both sides..25* Y = 700 Reduce again. Y = 2,800 Finished solving by multiplying both sides by 4. ÄY = 2,800-2,400 = +400 Compare result with C = *Y to prior result with C = *Y.

37 21. The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing it is known as the: A) output-maximizing rule. B) profit-maximizing rule. C) shut-down rule. D) break-even rule Which of the following is correct? A) When total product is rising, both average product and marginal product must also be rising. B) When marginal product is falling, total product must be falling. C) When marginal product is falling, average product must also be falling. D) Marginal product rises faster than average product and also falls faster than average product. 23. Which of the following definitions is correct? A) Accounting profit + economic profit = normal profit. B) Economic profit - accounting profit = explicit costs. C) Economic profit = accounting profit - implicit costs. D) Economic profit - implicit costs = accounting profits.

38 24. The above diagram shows two product supply curves. It indicates that: A) over range Q1Q2 price elasticity of supply is greater for S1 than for S2. B) over range Q1Q2 price elasticity of supply is greater for S2 than for S1. C) over range Q1Q2 price elasticity of supply is the same for the two curves. D) not enough information is given to compare price elasticities.

39 25. Average fixed costs can be determined graphically by: A) summing the marginal costs of any number of units of output and dividing the sum by that output. B) the vertical distance between TC and TVC. C) the vertical distance between AVC and MC. D) the vertical distance between ATC and AVC.

40 In the above figure, curves 1, 2, 3, and 4 represent the: A) ATC, MC, AFC, and AVC curves respectively. B) AFC, MC, AVC, and ATC curves respectively. C) MC, ATC, AVC, and AFC curves respectively. D) ATC, AVC, AFC, and MC curves respectively.