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Back to Subjects - Economics

Macro Economics

Macro Economics 1. Developing a model of an economy means answering the question(s) of: d. what to produce, how to produce and for whom to produce. e. Only what to produce and how to produce, since distribution is not the task of economics. 2. Every year during the holidays there seems to be a great demand for some particular "hot" toy. This is an example of the effect of _________ on demand. 3. A market is in equilibrium when there is: 4. The equilibrium quantity in a market could remain unchanged if there were a/an _________ in demand offset by a/an ________ in supply. 5. Which of the following is microeconomics? a. A study of national output growth in Japan. b. A study of IBM sales since 1995. c. A study of Irish employment levels. d. A study of unemployment in Sweden. e. None of the above can be considered microeconomics. 6. Which of the following would NOT cause the demand for a normal good or service to decrease? a. An increase in the price of the product. b. The income available to the household decreases. c. Other goods which are good substitutes become available. d. Households have negative expectations about future income, wealth and prices. e. None of the above. All of the above would cause a decrease in demand. 7. Refer to Figure 4.1. Which panel best depicts the following situation: I do not buy Cola Cola at the supermarket because another brand is on sale. 8. If there were an increase in the price of hamburger, a. the quantity demanded of hamburger would decrease. b. the demand for catsup would decrease. c. the demand for hamburger rolls would decrease. 9. The conventional bowed-out shape of the production possibilities curve implies a. producers are unable to utilize specialized resources efficiently. b. shifting production from one good to another leads to increasing opportunity costs. c. shifting production from one good to another leads to decreasing opportunity costs. d. when producing two goods, output is maximized when some of each good is produced, rather than producing all of one good or all of the other good. Answers: 1.d 2.a, 3.e 4.a, 5.b, 6.a, 7.d, 8.d, 9.b Consider the following information on a group of buyers and sellers. Buyer 1 has marginal benefits for each of three goods equal to $4, $6 and $9. Buyer 2 has marginal benefits for each of three goods equal to $3, $8 and $9. Seller 1 has marginal costs for each of three goods equal to $2, $7 and $9 Seller 2 has marginal costs for each of three goods equal to $5, $10 and $11. a. Using this information, construct precise supply and demand tables for this market. b. What are the equilibrium price and quantity outcomes for this market? Explain your answer. 1. The price of gasoline increases by 20% and remains at the new higher level. Which of the following statements is true? a. Initially after the price change the price elasticity of demand will be less elastic than it will be a few years after the price change. b. Initially after the price change the price elasticity of demand will be more elastic than it will be a few years after the price change. c. Price elasticity of demand for gasoline will not be affected by the change in the price of gasoline over the long run. d. Demand for gasoline will increase after people adjust to the new higher price. 2. If the cross-price elasticity of demand between two goods is negative, then the two goods are 3. Refer to Figure 5.5. The demand for tickets is 4. The price elasticity of demand is the a. ratio of the change in price to the change in quantity demanded. b. ratio of the change in quantity demanded to the change in price. c. ratio of the percentage change in price to the percentage change in quantity demanded. d. ratio of the percentage change in quantity demanded to the percentage change in price. 5. As you move down a straight-line downward-sloping demand curve, the price elasticity of demand c. remains constant because the slope is constant. d. may become more or less elastic depending on the slope of the demand curve. 6. Total revenue will increase if price d. rises and demand is unitarily elastic. 7. Refer to Figure 5.7. Using the midpoint formula, if the price of a Gardenburger is increased from $8 to $10, the price elasticity of demand equals 8. Assume you earn $75,000 a year and your favorite entertainment magazine costs you $25 a year. Your demand for the sports magazine is likely to be 9. If the income elasticity of good Z is .5, then good Z is 10. The government wants to reduce the consumption of electricity by 5%. The price elasticity of demand for electricity is -.4. The government should a. raise the price of electricity by 2%. b. raise the price of electricity by 0.08%. c. raise the price of electricity by .125%. d. lower the price of electricity by 0.4%. 1:a 2:b 3:b 4:d5:b 6:b 7:a 8:a 9:b 10:e Short Answer 1.(5 points) Alarmed by the cost of health care, Senator Bell has sponsored a bill placing a ceiling on the fees charged by physicians. Using supply and demand analysis and the concept elasticity, analyze Senator Bell's bill. Predict the impact of his bill in the short and long run. Illustrate your analysis with the appropriate diagram(s). b. can be applied to the analysis of any decision-making process. c. applies to consumers but not to firms. d. refers only to actual payments and incomes. 2. A study of whether or not employers discriminate against women by paying them lower wages and assigning them to lower-level positions than men would be in the area of 3. Refer to Figure 2.3. A point like point B represents a situation of a. full employment but production inefficiency. b. less than full employment but production efficiency. c. both full resource employment and production efficiency. d. less than full employment and production inefficiency. 4. Consider two countries, Germany and Sweden. Germany devotes a larger portion of its production to capital. Which of the following statements is most likely true? a. Germany is a poorer country than Sweden. b. Germany will move up its production possibility curve faster than Sweden. c. Sweden is producing inside its production possibility frontier, while Germany is producing at a point on its production possibility frontier. d. Germany's production possibility frontier will shift up and out farther and faster than Sweden's. a. will be provided by a free market system and private corporations. b. will be provided by a private corporation. c. will be paid for voluntarily by users. d. will not be efficiently provided by a completely free market system. 6. Refer to Figure 4.21. When the economy moves from point A to point B, there has been a. an increase in demand and an increase in supply. b. an increase in demand and an increase in quantity supplied. c. an increase in quantity demanded and an increase in quantity supplied. d. an increase in quantity demanded and in increase in supply. 7. An insect that is resistant to currently used pesticides has infested the cotton crop, and this year's crop is only half of what was produced last year. You accurately predict that this a. will shift the supply curve of cotton to the right, the equilibrium price of cotton will increase, and the demand for cotton will fall. b. will shift the supply curve of cotton to the right, the equilibrium price of cotton will increase, and the quantity demanded of cotton will decrease. c. will shift the supply curve of cotton to the left, the equilibrium price of cotton will increase, and the quantity demanded of cotton will decrease. d. will shift the supply curve of cotton to the left, the equilibrium price of cotton will increase, and the demand for cotton will fall. 8. Which of the following will NOT cause a shift in the demand curve for compact discs? c. a change in the price of prerecorded cassette tapes d. a change in the price of compact discs 9. During an economic downturn when consumer income falls, the demand for ice cream increases and the demand for chocolate cake decreases. This implies that a. ice cream and chocolate cake are complements. b. ice cream is a normal good and chocolate cake is an inferior good. c. ice cream is an inferior good and chocolate cake is a normal good. d. ice cream is an economic bad and chocolate cake is an economic good. 10. Demand curves are derived while holding constant a. income, tastes, and the price of the good. c. income, tastes, and the price of other goods. d. tastes and the price of other goods. 11. The Pizza World restaurant had to increase the price of its pizzas due to higher input costs, but found that the number of pizzas sold actually increased slightly. The likely explanation is: a. a violation of the law of supply. b. a violation of the law of demand. c. an outward shift in the demand curve for dinners. 12. A frozen food manufacturer can produce either pizzas or pepperoni rolls. As a result of an increase in the price of pepperoni rolls, the firm produces more pepperoni rolls and fewer pizzas. An economist would explain this by saying a. the supply of pepperoni rolls increased and the supply of pizzas decreased. b. there has been an increase in the quantity supplied of pepperoni rolls and a decrease in the quantity supplied of pizzas. c. there has been an increase in the quantity supplied of pepperoni rolls and a decrease in the supply of pizza. d. the supply of pepperoni rolls increased and the quantity supplied of pizza decreased. 13. VCR's and videotapes are complements. An increase in the price of VCR's would cause which of the following in the market for videotapes? a. The equilibrium price and quantity of videotapes would increase. b. The equilibrium price and quantity of videotapes would decrease. c. The equilibrium price of videotapes would increase and the equilibrium quantity would decrease. d. The equilibrium price of videotapes would decrease and the equilibrium quantity would increase. 14. Improvements in technology have reduced the cost of producing personal computers. You accurately predict that in the market for personal computers, there will be a. an increase in the quantity supplied of personal computers, a reduction in the price and an increase in the quantity demanded. b. an increase in the supply of personal computers, a decrease in the price and an increase in the quantity demanded. c. an increase in the supply of personal computers, a reduction in the price and increase in the demand. d. a decrease in the supply of personal computers, an increase in the price and a decrease in the demand. 15. Which of the following will unambiguously occur when there is a simultaneous decrease in demand and a decrease in supply? a. an increase in equilibrium price c. an increase in equilibrium quantity d. a decrease in equilibrium quantity 16. Refer to Figure 5.1. The market is initially in equilibrium at point B. If demand shifts from D2 to D1 and the price of chicken remains constant at $4.00, there will be a. an excess supply of 200 million pounds of chicken. b. an excess demand of 200 million pounds of chicken. c. an excess supply of 100 million pounds of chicken. d. an excess demand of 100 million pounds of chicken. 17. Price is determined solely by demand when 18. The government imposes a maximum price on apartments that is BELOW the equilibrium price. You accurately predict that a. the law will have no economic impact. b. the law will create a surplus of apartments. c. renters will find that landlords start offering to furnish the apartments. d. landlords are less likely to do routine maintenance work in the apartments. 19. The Bill Branch Tool Company wants to increase the quantity of tools it sells by 10%. If the price elasticity of demand is -2.5 the company must 20. Refer to Figure 5.6. Using the midpoint formula, if the price of a hamburger is increased form $2 to $4, the price elasticity of demand equals 21. If total revenue increases after a price increase, demand is 22. If the owner of an ice cream store charges a $1.20 for an ice cream cone his total revenue is $540 a day. If he lowers the price to $1.00 his total revenue is $500 a day. The demand for ice cream is d. neither elastic nor inelastic because this situation violates the law of demand. 23. The charge for a long-distance telephone call is $1.00 a minute between 8 AM and 5 PM and $.75 a minute between 5 PM and 11 PM. This can be explained by the fact that the demand for long-distance telephone calls is __________ between 8 AM and 5 PM and the demand for long-distance telephone calls is __________ between 5 PM and 11 PM. c. perfectly elastic; perfectly inelastic 24. The ABC Computer Company spends a lot of money for advertising designed to convince you that their personal computers are superior to all other computers and that the other computers are essentially clones of one another. If the ABC Company is successful, a. the demand for ABC personal computers and the demand for other firms' personal computers will become less price elastic. b. the demand for ABC personal computers and the demand for other firms' personal computers will become more price elastic. c. the demand for ABC personal computers will become more price elastic but the demand for other firms' personal computers will become less price elastic. d. the demand for ABC personal computers will become less price elastic but the demand for other firms' personal computers will become more price elastic. 25. If the quantity demanded of tea decreases by 8% when the price of coffee decreases by 16%, the cross-price elasticity of demand between tea and coffee is 26. One way to define an industry would be to group together products that a. all have the same price elasticity of demand. b. have an income elasticity of demand greater than one. c. all have the same elasticity of supply. d. have high and positive cross-price elasticity of demand. 27. The limits imposed on household choices by income, and product prices are the c. assumption of perfect knowledge. 28. The law of diminishing marginal utility a. refers to the decrease in total satisfaction as more units of the good are consumed. b. refers to the fall in additional satisfaction created by consumption of more and more units of a good. c. refers to the idea that total utility eventually becomes negative. 29. The MUX/MUY is twelve and the PX/PY is eight, so the consumer should buy 30. The law of diminishing marginal utility allows us to conclude that a. supply curves always slope upward. b. total utility will always increase by an increasing amount as consumption increases. c. a consumer will always buy positive amounts of all goods. d. demand curves always slope downward and to the right. 31. On which of the following goods would a price change have the largest income effect? 32. The conventional bowed-out shape of the production possibilities curve implies a. producers are unable to utilize specialized resources efficiently. b. shifting production from one good to another leads to increasing c. shifting production from one good to another leads to decreasing opportunity costs. d. when producing two goods, output is maximized when some of each good is produced, rather than producing all of one good or all of the other good. 33. Developing a model of an economy means answering the question(s) of: d. what to produce, how to produce and for whom to produce. e. Only what to produce and how to produce, since distribution is not the task of economics. 34. Every year during the holidays there seems to be a great demand for some particular "hot" toy. This is an example of the effect of _________ on demand. 35. A market is in equilibrium when there is: 36. The price of gasoline increases by 20% and remains at the new higher level. Which of the following statements is true? a. Initially after the price change the price elasticity of demand will be less elastic than it will be a few years after the price change. b. Initially after the price change the price elasticity of demand will be more elastic than it will be a few years after the price change. c. Price elasticity of demand for gasoline will not be affected by the change in the price of gasoline over the long run. d. Demand for gasoline will increase after people adjust to the new higher price. 37. The price elasticity of demand is the a. ratio of the change in price to the change in quantity demanded. b. ratio of the change in quantity demanded to the change in price. c. ratio of the percentage change in price to the percentage change in quantity demanded. d. ratio of the percentage change in quantity demanded to the percentage change in price. 38. As you move down a straight-line downward-sloping demand curve, the price elasticity of demand c. remains constant because the slope is constant. d. may become more or less elastic depending on the slope of the demand curve. 39. Assume you earn $75,000 a year and your favorite entertainment magazine costs you $25 a year. Your demand for the sports magazine is likely to be 40. If the income elasticity of good Z is -1.5, then good Z is 1. (5pts.) Consider the following information on a group of buyers and sellers. Buyer 1 has marginal benefits for each of three goods equal to $4, $6 and $9. Buyer 2 has marginal benefits for each of three goods equal to $3, $8 and $9. Seller 1 has marginal costs for each of three goods equal to $1, $3 and $7 Seller 2 has marginal costs for each of three goods equal to $4, $5 and $9. a. Using this information, construct precise supply and demand tables for this market. b. What are the equilibrium price and quantity outcomes for this market? Explain your answer. 1. (5 pts.) Seeing the success of Philorea, a developing Asian country, in raising its export revenues from automobile sales by reducing prices, Coconoa plans to reduce the price of its principal export commodity, sugar. Why was Philorea successful? Will Coconoa�s plan yield similar success?? Explain using the concepts developed in class. 2. Explain the diamond water paradox and its solution. 3. Outline the two theories of value (relative prices) explained in class. 1. The law of diminishing returns is evidenced by d. marginal cost below average total cost. 2. To qualify as perfectly competitive, a market must (among other things) a. Contain a large number of independent buyers and sellers none of whom, acting alone, can influence the equilibrium price. b. Contain no impediments to the free entry and exit of market participants. c. Involve the trading of an item all units of which are viewed as identical by buyers. 3. External economies may be attributable to c. Decreases in input prices associated with industry growth. 4. Which of the following is most likely to be a variable cost for a firm? a. The interest payments made on loans. b. The franchiser's fee that a restaurant must pay to the national restaurant chain. c. The monthly rent on office space that it leased for a year. d. The payroll taxes that are paid on employee wages. _____________________________________________________________________ Number of TC VC ATC AFC AVC _____________________________________________________________________ 1 50 3 46.67 _____________________________________________________________________ 5. Refer to Figure 8.5. If Sherry produces zero sweaters, her total fixed costs are d. indeterminate from this information. 6. Refer to Figure 8.5. If Sherry produces two sweaters, the marginal cost of the second sweater is e. indeterminate from this information. 7. If you know that average variable cost is falling, then you can deduce that a. marginal cost is below average variable cost. b. marginal cost is below average fixed cost. 8. Which of the following is true in the long run for a perfectly competitive firm that is successfully maximizing its profit: c. Price equals minimum average cost. 9. Refer to Figure 9.7. After Luxury Luggage produces 1,000 suitcases, this graph reveals 10. Resources are efficiently allocated to the production of goods and services for consumers when price d. equals the lowest point on the average variable cost curve. e. none of the above, since efficiency is a long run, not a short run, concept. Answers: 1:C 2:E 3:C 4:D 5:C 6:A 7:A 8:C 9:C 10:A 1. (5 points) Illustrate the case of a typical firm in perfect competition making an economic profit in the short run. Show all the relevant cost and revenue curves as well as the amount of profit and the price and quantity choices of the firm. Show the efficient level of output. Show how this short run illustration would change in the long run. Show the effect of the long run change on the supply and demand Bibliography:

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