Popular in Course
Popular in Economcs
This 16 page Class Notes was uploaded by Raegan Lynch on Sunday October 11, 2015. The Class Notes belongs to ECON202 at Duquesne University taught by KevinShaver in Fall. Since its upload, it has received 35 views. For similar materials see /class/221282/econ202-duquesne-university in Economcs at Duquesne University.
Reviews for PrinciplesofMacroEcon
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/11/15
ECON 201 Exam 1 Study Guide I will test your understanding of the objectives taken from the syllabus listed below using multiple choice and short answer questions The suggested answers are provided below each objective 1 Explain scarcity and its implications for trade o s opportunity cost and the production possibilities frontier A Define opportunity cost Opportunity cost is the cost of the choices you make expressed in terms of forgone alternatives B Explain why scarcity a ects poor and rich people alike or why all people face trade 0 s The fact of life is that scarcity limits our in nite desires which means that we must learn how to allocate our resources and time in the most ef cient way in order to maximize our wellbeing for rich and poor alike This means our decisions must take into account the forgone alternatives ie opportunity costs In other words we must always think in terms of tradeoffs C Describe the production possibilities frontier and its relationship to opportunity cost Production possibilities frontier PPF shows a how much can be produced with a given set of nite resources and b how much of one good you will have to give up to produce more of the other good ie the opportunity cost The slope of the PPF tells you the opportunity cost of one good in terms of the other If the slope is constant ie PPF is a straight line then the opportunity cost of producing an extra unit of good is the same at any point on the PPF line which means that resources are not specialized However if PPF is curved the opportunity cost ie slope increases as you produce more of one good which tells you that resources are specialized The opportunity cost of the good on the horizontal axis is equal to the slope while the opportunity cost of the good on the vertical axis is equal to the inverse of the slope The PPF teaches you to think in terms of tradeoffs The PPF also allows you to differentiate between production efficiency a point on the PPF vs a point below it and allocative ef ciency one point on the PPF might be less desirable than another point on the PPF 2 Explain the di erence between absolute advantage and comparative advantage and its relevance for trade A Define comparative advantage and absolute advantage The theory of comparative advantage developed by economist David Ricardo argues that people and countries should specialize in activities with the lowest opportunity cost If people specialize in these activities then they sacri ce less in terms of other forgone opportunities and can attain better standards of living by trading with each other Higher standards of living ie consumption outside the original PPF can be attained from specialization and exchangetrade The theory of comparative advantage suggests that any country can bene t from a unilateral free trade with other countries even if the other countries do not return the favor Still don t get why Ask me Having absolute advantage in some good on the other hand means that a country can produce this good cheaper or in larger quantity than another country which says nothing about the opportunity cost of producing this good or what goods countries should trade in That s why absolute advantage is absolutely irrelevant in trade 3 Explain the law of demand and the law of supply the factors that can cause an increase or decrease in each and how the market reaches equilibrium A Explain the law of supply and the law of demand The law of demand simply states that as the price of some good falls people buy more of it Graphically the law of demand looks as a movement along the downwardsloping demand curve from higher price and lower quantity to lower price and higher quantity demanded The law of supply states that as the price rises producers are willing to supply a greater quantity of this good Graphically the law of supply looks as a movement along the upwardsloping supply curve from lower price and quantity to higher price and quantity Attention NEVER shift the demand or supply curve in response to a price change of the same good B Differentiate between shifts in and movements along supply or demand curves For movements along the curve see above Otherwise you must know the ve shifters of demand income prices of related goods expectations population size and preferences and the three shifters of supply input costs technology and expectations and be able to show graphically how changes in the aforementioned shifters can change ie shift demand or supply Only changes in the above shifter will shift the supply or demand nothing else C Discuss the factors that shift demand and supply curves See above Make sure you can analyze what happens to price and quantity when both demand and supply shift simultaneously You may end up with an ambiguous change in price or quantity when both demand and supply shift simultaneously D Discuss how adjustments in price and quantity bring the market in to equilibrium Prices are crucial to a well functioning market because they re ect information and incentives according to which markets allocate resources Price adjustments enable markets to clear shortages 0r surpluses and achieve equilibrium where quantity demanded equals to quantity supplied ie allocative efficiency is achieved If a shortage exists the price will rise and allocate the good to those who are willing to pay more for it whether you like it or not is a normativesubjective argument If a surplus exists the price will have to drop to entice more consumers to purchase that product clearing the market of excess production 4 Explain price elasticity of demand and price elasticity of supply and identify the determinants of each A Given prices and quantities calculate price elasticity Q2 Q1 Q2 Q1 2 I suggest that you use the arch or m1dpomt elast1c1ty formula Suppose that the 2 1 P P2 original price of a good is 9 and the new price is 10 Suppose that the quantity demanded at 9 is 150 and 110 at 10 According to the arch elasticity formula price elasticity of demand 110 15013010 995 031011 282 or 282 in absolute value The same formula can be used to calculate the price elasticity of supply and income elasticity of demand where price is substituted with income B Interpret price elasticity of demand and price elasticity of supply The elasticity estimate above tells us that when the price increases by 1 the quantity demanded decreases by 282 which is a rather elastic response While demand or supply curve can be perfectly elastic or inelastic in theory most of them are somewhere between these two extremes in reality In general any activity that is too difficult or too costly to change is rather inelastic If elasticity is lower than 1 in absolute value demand or supply is said to be inelastic but if it is greater than 1 it is rather elastic Elasticity 0f 1 is said to be unit elastic C Discuss the determinants of elasticity Elasticity refers to the responsiveness of quantity supplied or demanded to changes in the price of a good or changes in income The elasticity of any response depends on the timeframe ie short term vs long term market scope food vs beef and the availability of substitutes D Describe the relationship between total revenue anal price elasticity of demand Elasticity is not the same as a slope In fact with a straightline demand curve the price elasticity of demand increase from ltl to gt1 as we move up the demand curve Somewhere in the middle of the demand curve elasticity is equal to 1 and only at this point total revenue is at its maximum 5 Explain the roles anal effects of government intervention in markets in the cases of price controls anal taxes A Distinguish between a price ceiling and a price floor anal determine if a price control is binding or non binaling A binding price ceiling is a law put in place by the government with the intention to force the price below the market equilibrium A binding price oor is a law put in place by the government with the intention to force the price above the market equilibrium for whatever reason Price oors and ceilings may become ineffective or not binding overtime as market prices rise or fall respectively However when price controls are binding they unleash havoc on the market B Discuss the relationship between price elasticity of demand price elasticity of supply anal the economic incialence of a tax Who really pays taxes is the question asked and answered by the tax incidence analysis Terminology you need to know legal or statutory tax incidence tells you who is supposed to be paying taxes while economic tax incidence tells you who is actually paying taxes In other words we don t care about who is officially charged with a tax because it may not tell us who actually bares the tax burden The actual tax burden economic incidence depends on the relative elasticity of supply and demand period If demand is more elastic than supply sellers pay most of the tax burden even if buyers are officially charged with it If supply is more elastic than demand buyers pay most of the tax burden even if sellers charges with the tax as is typically the case Thus the more inelastic your behavior the more of a tax burden you will pay regardless of who is officially responsible for paying the tax For example the sales tax is officially levied on sellers but who pays it in reality Probably you the consumer You need to be able to show graphically how the tax burden is distributed between buyer and sellers in a supply and demand graph and how this burden changes with the elasticity of demand and supply C Discuss the economic e ects of binaling price controls Price oors minimum wage and price ceilings rent caps imposed by the government distort the signals and incentives faced by people forcing them to allocate resources inefficiently For example the minimum wage law increases unemployment and prices making even those lucky few who have a job with a higher wage no better off than before Rent controls on the other hand reduce the availability and quality of apartments promote discrimination black markets and corruption Thus price controls produce a myriad of unintended consequences About 93 of economists agree that price controls and trade barriers exemplify the worst type of government intervention in the economy In other words price controls fail to reach their objectives while hurting the rest of the economy The following multiple choice questions are for your practice Try answering them as if these were the test questions ie un bold the answers 1 Fundamental economic problems arise from 0 A our wants exceeding our scarce resources B the unequal distribution of income C turmoil in the stock market D the fact that society has more than it needs Scarcity is experienced by A only the wealthy B only the poor C everyone D only producers Scarcity can be eliminated through A wise use of our resources B the use of market mechanisms C exploration that helps us find new resources D None of the above because scarcity cannot be eliminated Economics is best de ned as the science of choice and how people cope with A differences in wants B scarcity C differences in needs D different economic systems Macroeconomics is concerned with A individual consumers B the effects on Ford Motor of a strike by the United Auto Workers C government decision making concerning farm price supports D economy wide variables The study of the choices made by individuals is part of the definition of A microeconomics B normative economics C macroeconomics D positive economics An economic model is A a statement that describes how the world should be B a collection of facts that describe the real world C a generalization that summarizes all the normative assumptions we make about a particular issue D a description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand Opportunity cost is best defined as A the value of the next best alternative that is given up in making a choice B the total of all other alternatives that are given up in making a choice C how much money is paid for something D how much money and time it takes to consume something N Opportunity cost is expressed in a production possibilities frontier PPF by a movement A from the region within the PPF to the region outside of the PPF B from the region within the PPF to a point on the PPF C along the PPF where to gain more of one good it is necessary to give some of another good D from the region outside of the PPF to a point on the PPF A production possibilities frontier PPF A identi es the combination of two goods or services that should be produced B shows combinations of two goods or services that are attainable with given resources C de nes a boundary between what is needed and what is not needed D involves a tradeoff between what is wanted and what is needed Economic growth is A an outward shift of the PPF B an inward shift of the PPF C an expansion of production D Both answers A and C are correct Increasing opportunity cost implies that A producing additional units of one good results in increasing amounts of lost output of the other good B producing additional units of one good results in proportionately smaller reductions in the output of the other good C the production possibilities frontier will be a straight line D the society will be producing inside its production possibilities frontier If an economy is operating at a point inside the production possibilities frontier then A society39s resources are being inefficiently utilized B economic policy must retard further growth of the economy C the PPF curve will shift inward D society s resources are being used to produce too many consumer goods Joe likes to sleep late in the mornings and play tennis in the afternoons The opportunity cost of Joe attending his morning class for one hour is A an hour of tennis given up B an hour of sleep given up C nothing because he is paying for his class D both the tennis given up and the sleep given up An opportunity cost of future economic grth is A so high that places such as Hong Kong have had to do without it B decrease in consumption in the present time period C essentially zero because economic growth leads to such large gains in the long run D decreased by the creation of capital goods rather than consumption goods ON 00 O N A reduction in the amount of unemployment A shifts the production possibilities frontier outward B moves the economy39s point of production closer to the production possibilities frontier C moves the economy39s point of production further away from the production possibilities frontier D moves the economy39s point of production along the production possibilities frontier An inducement to take a particular action is called A an incentive B the marginal cost C the marginal benefit D opportunity cost Which factor of production earns pro t A land B entrepreneurship C money D human capital Which factor of production earns most income in the United States A capital D entrepreneurship A natural resource such as fishing territories is considered an example of A both land and labor B only capital C land labor capital and entrepreneurship D land only Positive economic statements A are related only to microeconomics B prescribe what should be C cannot be tested against the facts D can be tested against the facts The statement quotUnemployment should be kept at or below a level of 6 percentquot is A a positive statement B a normative statement C an assumption D a prediction In order to unscramble cause and effect economists use A incentives B ceteris paribus Latin for holding everything else constant C tradeoffs N O N l N 00 N 0 LA 0 D the post hoc fallacy The market in which an individual sells the use of his or her labor is a A mixed market B foreign exchange market C product market D factor market Markets are best de ned as A places where people can inspect goods and services carefully B hypothetical constructs used to analyze how people form their tastes and preferences C arrangements Where buyers and sellers get together to buy and sell D specific geographic locations where people get together to buy and sell Production ie technological inefficiency can be defined as A minimizing opportunity cost B providing for the immediate needs of the greatest proportion of the population C producing outside the production possibilities frontier D producing inside the production possibilities frontier Allocative inefficiency can be defined as A minimizing opportunity cost B providing for the immediate needs of the greatest proportion of the population C producing a less desirable bundle of goods on the production possibilities frontier D producing at a point below the production possibilities frontier A country possesses a comparative advantage in the production of a good if A it is able to produce more of this good per hour than can any other country B the opportunity cost in terms of forgone output of alternative goods is lower for this country than it is for its trading partners C it possesses an absolute advantage in the production of this good D all of the above The idea of comparative advantage implies that people or countries A can gain from trading B should specialize in the production of goods with the lowest opportunity cost C can consume at a point outside their production possibilities frontier after trade D all of the above The kitchen manager at an Italian restaurant is deciding what assignments he should give to his two cooks John and David John can make 25 pizzas or 40 servings of pasta per hour and David can make 20 pizzas or 30 servings of pasta Which of the following should be the manager s choice A John will make pizza because he has comparative advantage in making pizza B Fire David because he is not as productive as John John will do both jobs C David will make pizza because he has comparative advantage in making pizza D John and David both will spend half their time making pizza and half their time making pasta because each has a comparative advantage in making pizza LA LA LA LA LA LA LA Increasing opportunity costs suggests that A various types of labor are perfect substitutes for one another B some factors of production are specialized or better suited for some tasks than others C all labor and capital are perfectly interchangeable D there is no difference between inputs used in a production process The production possibilities frontier represents A the maximum amount of labor and capital available to society B the maximum rate of growth of capital and labor in a country C the maximum levels of production that can be attained D combinations of goods and services among which consumers are indifferent Betty and Ann live on a desert island With a day s labor Ann can produce 8 sh or 4 J coconuts Betty can produce 6 sh or 2 coconuts Ann s opportunity cost of producing 1 coconut is and she should I 39 quot in the r o A 6 sh coconuts B 0 sh coconuts C 8 sh sh D 2 sh coconuts Comparative advantage is A the ability to perform an activity at a higher opportunity cost than anyone else B the ability to perform an activity at a zero opportunity cost C the ability to perform an activity at a lower opp01tunity cost than anyone else D identical to absolute advantage A person has an absolute advantage in an activity if that person can A produce fewer goods in a given amount of time than another person B perform the activity at a lower opportunity cost than anyone else C produce more goods in a given amount of time than another person D perform that activity at a higher opportunity cost than anyone else According to the principle of comparative advantage if a rich country trades with a poor country then A the rich country will bene t and the poor country will lose B the rich country will lose and the poor country will bene t C both countries will bene t D neither of the countries will bene t Which famous economist described the principle of comparative advantage as we know it today A Adam Smith B David Ricardo C John Maynard Keynes D Milton Friedman 38 The quotlaw of supply states that other things remaining the same rms produce A less of a good the more it costs to produce it B more of a good the higher its price C less of a good as the required resources become scarcer D more of a good the less it costs to produce it and the equilibrium LA 0 s E D quotU 2 o w 0 H o m a E um E o 8 E I31 7 E U 2 o o O H 00 N m a E o 5 D fall decrease Price dollars per 50H drink Quantity soil drinks 40 Consider the gure above showing supply curves for so drinks Suppose the economy is at point a An increase in the price of a soft drink is shown as a movement from point a to A none of the points that are illustrated B point b C point e D point 11 4 4 4 3 s iquot 5 gt a c a 4n 5 223 Q Q E D E DI O O 1 1 D1 15 Dz n i Quantity pounds Quantity pounds FigureA igure 2 52 E S D 0 0 CL 2 539 2 a 52 E a o O 13 E 3 D 3 D a 939 Quantity pounds Quantity pounds Figure C Figure D The above gures show the market for oranges Which gures shows the effect of new successful advertising campaigns to eat more oranges A FigureA E Figure B C Figure D D Figures A and D new shoes each year This experience suggests A supply curve of shoes shi ed rightward B demand curve for shoes shifted le ward C supply curve of shoes shi ed le ward D demand curve for shoes shifted rightward Every spring motorists do more driving than during the winter months Every spring the price of gasoline increases and the motorists buy more gasoline This experience suggests the A quotlaw of supply does not always hold for necessities like gasoline B laws of supply and demand are both contradicted for gasoline though only during the spring driving season C quotlaw of demand does not always hold for necessities like gasoline D None of the above answers are correct During the last decade the price of shoes rose substantially yet people bought more pairs of t the A A A u A 0 VI 0 UI When supply and demand both increase the A quantity de nitely decreases but price may not B quantity definitely increases but price may not C price de nitely decreases but quantity may not D price de nitely increases but quantity may not If the quantity of textbooks supplied is 10000 per year and the quantity of textbooks demanded is 12000 per year there is a A shortage rise B shortage fall C surplus fall D surplus rise in the market and the price will The quotlaw of supplyquot holds true because as the price of a good increases the opportunity cost of A producing the good decreases B not producing the good decreases C producing the good increases D not producing the good increases Suppose Frosty Pops cereal is an inferior good An increase in income A has no impact on the demand for Frosty Pops B has no income effect C leads to an increase in the demand for Frosty Pops D leads to a decrease in the demand for Frosty Pops Cupcakes and granola bars are substitutes in consumption Suppose the price of a granola bar increases As a result the demand for A granola bars will decrease that is the demand curve will shift leftward B cupcakes will increase that is the demand curve will shift rightward C cupcakes will decrease that is the demand curve will shift leftward D granola bars will increase that is the demand curve will shift rightward Which of the following increases the demand for a normal good now A an decrease in the price of a substitute B an increase in the price of a complement C a decrease in income D The price of the good is expected to increase in the future When income increases the demand curve for productX shifts rightward and the demand curve for product Y shifts leftward These shifts mean that A X and Y are complements B Xand Yboth normal goods C X is a normal good and Y is an inferior good D X is an inferior good and Y is anormal good Which of the following best re ects an increase in quantity supplied rather than an increase in supply A The producer of cellular phones experiences lowers costs of production B More sellers enter the computer market C The price of a product soars because of vastly increased consumer demand D The effect in the machine tool industry after the industrial unions negotiate higher wages Elasticity generally measures the A percentage change in a variable B change in a variable C responsiveness of a variable to a change in another variable D slope ofa curve When the price of oranges increases from 4 to 6 per bag the quantity demanded of oranges decreases from 800 bags to 700 bags The price elasticity of demand is equal to in absolute value A 13 or 03333 C l4 or 025 D 37 or 04286 Ifdemand is inelastic an increase inthe price will A decrease total revenue B increase the quantity demanded C not change total revenue D increase total revenue If the demand curve for tacos is a downward sloping straight line at which of the following prices is the demand for tacos more elastic A a price of 100 per taco B a price of 050 per taco C a price of 150 per taco D There is not enough information given to determine at which price the demand is most elastic Which goods have more elastic demands A goods whose purchase represents a small percentage of income B goods with few substitutes C goods with many substitutes D goods which are necessities If a 20 percent increase in the price of a used car results in a 10 percent decrease in the quantity of used cars demanded then the demand for used cars is A unit elastic B inelastic C arc elastic D elastic If the price elasticity of demand for clothing is 064 this implies that VI 0 ON O N ox 4 ON Ul The demand for A a 10 percent increase in the price of clothing leads to a 64 percent decrease in the quantity demanded B if there is an increase in the price of clothing the total expenditures on clothing decreases C a 64 percent increase in price the price of clothing leads to a 10 percent decrease in the quantity demanded D Both answers A and C are correct To maximize its revenue A a rm facing inelastic demand should always raise its price B a rm should always charge the highest price possible regardless of the elasticity of demand C a rm facing elastic demand should always raise its price D None of the above answers is correct Ifthe price of a good increases from 3 to 4 and the quantity demand remains unchanged then the demand 1s A somewhat elastic B perfectly elastic C in nite D perfectly inelastic Total revenue for skis is at a maximum when the price elasticity of demand is A between 0 and 1 B greater than 1 D 1 is more elastic than the demand for A food exotic vacations B Pepsi all soft beverages C chewing gum cars D all personal computers Dell computers The income elasticity of demand is A negative for a normal good and positive for an inferior good B always positive C always negative D positive for a normal good and negative for an inferior good Inferior goods are goods A for which the demand increases when income increases B that are consumed only by people with inferior taste C that have a negative income elasticity of demand D that are inferior in quality If the cross elasticity of demand between coffee and tea is positive an increase in the price of tea will shift the demand curve for A tea leftward B coffee leftward C tea rightward D coffee rightward 66 The cross elasticity of demand is calculated as the percentage change in the A price of one good divided by the percentage change in the quantity demanded of another good B quantity demanded of one good divided by the percentage change in the price of another good C quantity demanded of one good divided by the percentage change in the quantity demanded of another 00 D price of one good divided by the percentage change in the price of another good 67 A market demand curve is constructed by A a vertical summation of each individual demand curve B averaging each individual demand curve C dividing one individual demand curve b the number of consumers in the market D a horizontal summation of each individual demand curve 68 The sellers pay the entire sales tax levied on a good When demand is perfectly or supply is perfectly a inelastic inelastic elastic elastic inelastic elastic elastic inelastic P957 69 The incidence of sales tax is determined by the a price elasticities of supply and demand b greed ofthe sellers c federal government in all cases d level of government for example local state or federal Which imposes the tax 5 S o o o o Rent dollars per month x o 0 u o o r o o D w A 5 Quunmy lhousands olaparrmcms per month 70 In the gure above originally the apartment rental market is in shortrun and longrun equilibrium With a rent of 600 per month Then the government imposes a rent ceiling of 500 per month The rent ceiling leads to a A shortage of 2000 apartments B surplus of 1000 apartments C shortage of 1000 apartments D surplus of 2000 apartments 71 Price ceilings in the housing market create A efficiency but often cause housing to deteriorate B inefficiency housing deterioration and black market activity C inefficiency but lead to the building of more housing D efficiency and lead to the building of more housing 72 A price oor A always results in a shortage B results in a surplus if the oor price is greater than the equilibrium price C results in a sh01tage if the floor price is greater than the equilibrium price D always results in a surplus 73 An effective minimum wage is a price that the quantity of lowskilled labor demanded A ceiling decreases B oor increases C ceiling increases D oor decreases 74 Strong minimum wage regulations A discourage markets from adjusting to change B encourage markets to adjust to change C are favored by owners of supermarkets D are favored by owners of fastfood restaurants 75 AtaX on sellers will a shift the demand curve upwards by the amount of the taX b shift the demand curve downwards by the amount of the tax c shift the supply curve upwards by the amount of the tax d shift the supply curve downwards by the amount of the tax 78 A 200 per unit taX imposed on buyers will a shift the demand curve upwards by 200 b shift the demand curve upwards by some amount less than 200 depending on the buyers burden of the tax c shift the demand curve downwards by 200 d shift the demand curve downwards by some amount less than 200 depending on the buyers burden of the tax The following diagram shows the supply and demand curves in a particular market Figure 65 79 Refer to Figure 6 5 Suppose a tax of 9 per unit is imposed on the sellers in this market How much will buyers pay per unit after the tax is imposed a b Between 5 and 10 0 Between 10 and 14 d 14 80 Refer to Figure 6 5 Suppose a tax of 9 per unit is imposed on the sellers in this market What will be the burden of the tax on the buyers in this market a 0 1 4 0 5 d 9 81 Suppose that a market supply curve is highly inelastic and that the demand curve is highly elastic If a tax is imposed on the buyers in this market a the buyers will bear a greater burden of the tax than the sellers b the sellers will bear a greater burden of the tax than the buyers 0 the buyers and sellers are likely to share the burden of the tax equally d the buyers and sellers will not share the burden equally but it is impossible to determine who will bear the greater burden of the tax without more information
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'