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1 Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 1 of 8 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #1 must be completed within the allocated time (i.e., between 7:50 PM and 8:40 PM). It is a closed book and open mind exam. 2. Recall the material difference between i.e. (that is) versus e.g. (for example). 3. When you finish your exam, collect all of your personal items before approaching the professor since you must promptly exit the exam room upon finishing. As students finish their exams they will receive an answer key in exchange for their completed blue bubble answer sheets. For you to learn your individual exam grade you must use your marked up copy of your exam, so be sure to mark your answers on your copy of the exam. 4. This Exam #1 is worth 200 of the course total of 1,000 points. This objective exam has 21 questions graded as if there are 20. Each correct answer on this Exam #1 is worth 10 course points. Based upon the instructor's statistical analysis of all students' answers, the instructor unilaterally may alter the grading of specific exam questions. Any student may appeal the grading of any other exam questions. However, only if a student successfully appeals the ambiguity of AT LEAST TWO questions on this exam does that student objectively demonstrate non-harmless error due to any ambiguities. Also, a successful appeal only will change that student's exam grade and only will do so by the number of successful appeals in excess of ONE successful appeals. Appeals only affect the exam grades of those students that appeal. 5. All appeals of this exam s questions must be: [5A] typed; [5B] signed by the student in three ways, typed name, handwritten signature, and typed university identification number; [5C] immediately following the signature, list in sequence, solely by number, each of the questions being appealed; [5D] after the [5C] list, argue each question, one at a time; [5E] at the beginning of each question s [5D] appeal, identify two or more reasonable meanings that the question could have had; [5F] argue why one or more of the [5E] identified reasonable meanings is as appropriate or is more appropriate than the meaning used for the answer key answer; and [5G] personally handed to the instructor or to the instructor's MH 228 suite secretary no later than 6:15 PM, Wednesday, September 22, time is of the essence.

2 Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 2 of 8 NOTE: All a.k.a. (i.e., also know as) parentheticals are true. QUESTIONS: 1. The science of economics uses the tool(s) of: a. utils to describe units of utility to aid in the theoretical measurement of the fractional satisfaction of each person's unlimited wants. b. marginal analysis and opportunity cost to locate where (the assumed to be) rational person makes the decision to choose between alternatives. 2. Economics strives to be a science. a. A positivist approach focuses upon facts and explores for cause and effect. A normative approach focuses upon value choices and judgments. Science strives to align with the positivist approach and to minimize the influence of the normative approach. b. The budget line (a.k.a., budget constraint) displays the individual's maximum feasible monetized transactions from income. 3. Economics seeks explanatory ability by sorting costs and by sorting incomes into similar groups for analysis. a. There are four economic factors of production: land, labor, capital, and entrepreneurial ability. There are four economic payments for those four factors: rent, wages, interest, and profit. b. The law of diminishing marginal returns explains the frontier exchanges of maximal output graphed by the production possibilities curve.

3 Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 3 of 8 4. Economics uses assumptions: some are more accurate than others. a. Economics uses many graphs. To lie is to knowingly tell an untruth. All graph are lies (e.g., price is normative rather than positivist). b. Current decisions (e.g., buy consumer goods versus durable goods) alter which choices are available to the decision maker in the future. 5. Included within the range of questions that economics seeks to answer is "How will production be arranged?". a. Command systems are best suited to contexts that span over a short duration and/or to contexts that are optimized across a narrow array of optimization criteria. As either the duration increases and/or the array of criteria increase command systems clearly falter. Market systems are best suited to contexts that span over a long duration and/or to contexts that are optimized across a wide array of optimization criteria. b. In the Elements and Functions of Capitalism private property embodies self interest; prices measure self interest; markets coordinate self interest, and competition regulates self interest. In the Elements and Functions of Capitalism the role of government is to do nothing. 6. Some economic variables have a larger consequence than others. a. Labor specialization permits increasing output with decreasing inputs of labor. Labor specialization comes in two forms: ability specialization and time specialization. b. Technology can change rapidly and by a large magnitude. In addition to those change characteristics of technology, expectation changes also can reverberate throughout the entire economic system.

4 Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 4 of 8 7. Technology is a major source of change in economics. a. Technology is the feasible combination of inputs. b. Technology is an idea plus a physical embodiment of that idea. 8. Economies are organized in an array of transactions. a. Two very different organizational needs of all economies are coordination and incentives. b. Outputs of the seller become inputs of the buyer; and that array of transactions can be envisioned as a straight line flow. 9. Supply and demand is a pair of major concepts in economics. a. Both supply and demand are graphed using the assumption of ceteris paribus (i.e., all other things held equal). Specifically, the supply and demand ceteris paribus assumes the non-price determinants are held constant. b. The law of demand graphs as a direct relationship (i.e., starts high and falls) because of the law of diminishing marginal utility. The law of supply graphs as an inverse relationship (i.e., starts low and rises) because of the law of increasing opportunity costs.

5 Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 5 of Economic analysis often reveals multiple layers of variables. a. The income effect is that a decrease in the price of a product "X" is experienced by the buyers of product "X" as equivalent to an increase in income (i.e., holding the Y intercept constant, rotates the budget line out along the X axis). b. The substitution effect is just like the income effect except that the substitution effect is due to a decrease in the price of a substitute good "Y". 11. Economists display in graph form the supply and the demand relationships. a. Both the market supply curve and market demand curve are constructed by vertically summing the individuals' curves for supply and demand. b. Both for supply curves and for demand curves a change in price causes a motion of the curve; whereas a change in a non-price determinate causes motion on the curve. 12. Demand curves are not all alike. Their shapes vary because the underlying relationships being graphed vary. a. A normal good (a.k.a., a superior good) has the standard inverse relationship (i.e., as income rises so too does demand; but, at the same time the law of diminishing marginal utility pushes down the quantity demanded). b. Very different from normal goods are inferior goods and luxury goods. Inferior goods display an increase in demand as income falls. Luxury goods display no or little demand at low income; and, high demand at high income.

6 Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 6 of Equilibrium (e.g., supply equal demand) is a major concept in economics. a. Economics assumes that once the market equilibrium is reached that combination of Pe and Qe is stable. b. All price ceilings cause a surplus ; and, all price floors cause a shortage. 14. Economics seeks explanatory ability by sorting costs and by sorting incomes into similar groups for analysis. a. If a firm achieves production efficiency, then the economy achieves allocation efficiency. b. Personal income of an individual, according to economics, is spent on: consumption, taxes, and savings. 15. Sometimes normative questions hide inside positivist facts. a. Most folks use the word "average" without knowing its technical meaning (i.e., x/n) and while confusing it with other measures of central tendency (e.g., median, mode). The mean, rather than the average, is the best measure for analysis of income distribution. b. The business form known as a "corporation" offers many advantages (e.g., risk spreading; minimizing the Principal/Agent Problem).

7 Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 7 of Economic analysis often reveals multiple layers of variables. a. All supply curves and all demand curves always fail to display the always present externalities (a.k.a., spillovers). b. Generically, supply and demand curves assume private goods. However, if public goods are involved, then routinely the free rider problem is present. 17. International trade is analyzed using principles of microeconomics. a. For international trade, a nation's absolute advantage is more important than that nation's comparative advantage. b. For international trade, the absolute level tariffs between trading nations is more important than the relative tariff between trading nations. 18. International trade is analyzed using principles of microeconomics. a. Economists assume that in long run trade between nations must balance. b. The foreign exchange rate is the price of one nation's money (e.g., USA dollar) as stated in units of another nation's money (e.g., Chinese Yuan). If the USA dollar appreciates against the Chinese Yuan then stuff at sold by Wal-Mart at retail costs the buyer more dollars.

8 Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 8 of Price and quantity are important to international trade. a. A tariff is a tax; thus, (typically) a tariff raises the market price and sellers get more revenue. b. A quota is a limit on quantity; thus, (typically) a quota raises the market price and sellers get more revenue. 20. Economic analysis often reveals multiple layers of variables. a. Domestic exporters prefer domestic non-tariff barriers; while domestic importers prefer domestic subsidies. b. Dumping is the exporting of unemployment. 21. Sometimes normative questions hide inside positivist facts. a. Globalization necessarily increases foreign trade. b. Globalization necessarily decreases a national government's actual power to regulate its own domestic markets. EXTRA CREDIT (i.e., all answers are correct): 22. During this semester I have a loved one stationed overseas. Given the time zone difference (e.g., 12 hours), my loved one' schedule would be aided if I my phone could ring during class so that I could exit the room and take that call. a. True. b. False.

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