# Microeconomics Chapter 2 Extra notes

Senator Smith argues that replacing the income tax with a national sales tax would increase the level of output. Senator Wells objects that this policy would benefit the rich at the expense of the poor.
A. Both Senators' arguments are primarily about equa

D. Senator Smith's argument is primarily about efficiency, while Senator Well's argument is primarily about equality.

When you calculate your true costs of going to college, what portion of your room-and-board expenses should be included?
A. Your full room-and-board expenses should always be included.
B. None of your room-and-board expenses should ever be included.
C. Yo

D. You should include only the amount by which your room-and-board expenses exceed the expenses for rent and food if you were not in college.

Economics deals primarily with the concept of
A. scarcity.
B. money.
C. poverty.
D. banking.

A. Scarcity.

Approximately what percentage of the world's economies experience scarcity?
A. 25%
B. 50%
C. 75%
D. 100%

D. 100%.

Senator Smith argues that replacing the income tax with a national sales tax would increase the level of output. Senator Wells objects that this policy would benefit the rich at the expense of the poor.
A. Both Senators' arguments are primarily about equa

D. Senator Smith's argument is primarily about efficiency, while Senator Well's argument is primarily about equality.

Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two years of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program that would require you to quit C. The$45,000 salary that you will be able to earn after having completed your graduate program.

Which of the following is correct concerning opportunity cost?
A. Except to the extent that you pay more for them, opportunity costs should not include the cost of things you would have purchased anyway.
B. To compute opportunity costs, you should subtrac

A. Except to the extent that you pay more for them, opportunity costs should not include the cost of things you would have purchased anyway.

The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
A. goods are scarce.
C. income must be earned.
D. households face many decisions

In economics, the cost of something is
A. the dollar amount of obtaining it.
B. always measured in units of time given up to get it.
C. what you give up to get it.
D. often impossible to quantify, even in principle.

C. What you give up to get it.

Resources are
A. scarce for households but plentiful for economies.
B. plentiful for households but scarce for economies.
C. scarce for households and scarce for economies.
D. plentiful for households and plentiful for economies.

C. Scarce for households and scarce for economies.

Which of the following is most likely to produce scientific evidence about a theory?
A. a tenured economist employed at a leading university analyzing the impact of bank regulations on rural lending
B. a radio talk show host collecting data on how capital

A. A tenured economist employed at a leading university analyzing the impact of bank regulations on rural lending.

Points on the production possibilities frontier are
A. unattainable.
B. efficient.
D. inefficient.
E. normative.

B. Efficient.

In which of the following cases is the assumption most reasonable?
A. To address the impact of money growth on inflation, an economist assumes that money is strictly coins.
B. To estimate the speed at which a beach ball falls, a physicist assumes that it

C. To address the benefits of trade, an economist assumes that there are two people and two goods.

Which of the following statements about microeconomics and macroeconomics is not true?
A. Microeconomics and macroeconomics cannot be entirely separated.
B. Macroeconomics is concerned with economy-wide phenomena.
C. The study of very large industries is

C. The study of very large industries is a topic within macroeconomics.

Economic models are
A. built with assumptions.
B. created to duplicate reality.
C. usually made of wood and plastic.
D. useless if they are simple.

A. Built with assumptions.

Which of the following will not shift a country's production possibilities frontier outward?
A. a reduction in unemployment
B. an increase in the capital stock
C. an increase in the labor force

A. A reduction in unemployment.

Which of the following statements regarding the circular-flow diagram is true?
A. The factors of production are owned by firms.
B. If Susan works for IBM and receives a paycheck, the transaction takes place in the market for goods and services.
C. None of

E. The factors of production are owned by households.

Economic growth is depicted by
A. a movement along a production possibilities frontier toward capital goods.
B. a shift in the production possibilities frontier outward.
C. a movement from inside the curve toward the curve.
D. a shift in the production po

B. A shift in the production possibilities frontier outward.

In making which of the following statements is an economist acting more like a scientist?
A. The state should increase subsidies to universities because the future of our country depends on education.
B. The rate of inflation should be reduced because it

C. A reduction in unemployment benefits will reduce the unemployment rate.

Which of the following statements is normative?
A. Printing too much money causes inflation.
B. Large government deficits cause an economy to grow more slowly.
C. People work harder if the wage is higher.
D. The unemployment rate should be lower.

D. The unemployment rate should be lower.

Tom Brady should pay someone else to mow his lawn instead of mowing it himself, unless
A. Brady has an absolute advantage over everyone else in mowing his lawn.
B. Brady has a comparative advantage over everyone else in mowing his lawn.

B. Brady has a comparative advantage over everyone else in mowing his lawn.

Suppose the world consists of two countries--the United States and Mexico. Furthermore, suppose there are only two goods--food and clothing. Which of the following statements is true?
A. None of these answers are true.
B. If the United States has a compar

E. If the United States has a comparative advantage in the production of food, then Mexico must have a comparative advantage in the production of clothing.

A country that currently does not trade with other countries could benefit by
B. restricting imports and promoting exports.
C. promoting imports and restricting exports.
D. restricting both imports and exports.

By definition, exports are
A. people who work in foreign countries.
B. limits placed on the quantity of goods brought into a country.
C. goods produced domestically and sold abroad.
D. goods in which a country has an absolute advantage.

C. Goods produced domestically and sold abroad.

Which of the following statements is true?
A. A self-sufficient country consumes outside its production possibilities frontier.
B. A self-sufficient country at best can consume on its production possibilities frontier.
C. Only countries with an absolute a

B. A self-sufficient country at best can consume on its production possibilities frontier.

Suppose the U.S. and Japan both produce airplanes and televisions and the U.S. has a comparative advantage in the production of airplanes while Japan has a comparative advantage in the production of televisions. If the U.S. exports airplanes to Japan and

C. Both countries, as a whole, will be better off.

Goods produced abroad and sold domestically are called
A. exports.
B. exchange rates.
C. opportunity costs.
D. imports.

D. Imports.

Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the production of linen. If these two countries decide to trade,
A. Without additional information about opportunity costs, this question cannot be ans

B. Belarus should export linen to Russia.

If a nation has an absolute advantage in the production of a good,
A. it will specialize in the production of that good and export it.
B. it can produce that good using fewer resources than its trading partner.
C. it can produce that good at a lower oppor

B. It can produce that good using fewer resources than its trading partner.

Alexis is a lawyer. She bills her clients $100 an hour for her services. She can also mow her lawn in 30 minutes. She can hire someone to mow her lawn who takes an hour. Of the following prices, which is the highest Alexis would pay someone to mow her law B.$49.

All of the following shift the supply of watches to the right except
A. manufacturers' expectations of lower watch prices in the future.
B. an advance in the technology used to manufacture watches.
C. All of these answers cause an increase in the supply o

E. An increase in the price of watches.

If an increase in consumer incomes leads to a decrease in the demand for camping equipment, then camping equipment is
A. a normal good.
B. a complementary good.
C. a substitute good.
D. an inferior good.

D. An inferior good.

A monopolistic market has
B. at least a few sellers.
D. only one seller.
E. firms that are price takers.

D. Only one seller.

An increase (rightward shift) in the demand for a good will tend to cause
A. a decrease in the equilibrium price and an increase in the equilibrium quantity.
B. an increase in the equilibrium price and a decrease in the equilibrium quantity.
C. none of th

D. An increase in the equilibrium price and quantity.

The law of demand states that an increase in the price of a good
A. does none of these answers.
B. increases the quantity supplied of that good.
C. decreases the quantity demanded for that good.
D. decreases the demand for that good.
E. increases the supp

C. Decrease the demand for that good.

The law of supply states that an increase in the price of a good
A. increases the quantity supplied of that good.
B. decreases the quantity demanded for that good.
C. decreases the demand for that good.
D. does none of these answers.
E. increases the supp

A. Increase the quantity supplied of that good.

An inferior good is one for which an increase in income causes a(n)
A. increase in supply.
B. increase in demand.
C. decrease in demand.
D. decrease in supply.

C. Decrease in demand.

Which of the following statements is true about the impact of an increase in the price of lettuce?
A. The demand for lettuce will decrease.
B. The equilibrium price and quantity of salad dressing will rise.
C. Both the demand for lettuce will decrease and

D. The equilibrium price and quantity of salad dressing will fall.

Which of the following shifts the demand for watches to the right?
A. an increase in the price of watches
B. a decrease in the price of watches
D. a decrease in consumer incomes if watches are a normal good
E. a decrease in the pr

E. A decrease in the price of watch batteries if watch batteries and watches are complements.

Suppose both buyers and sellers of wheat expect the price of wheat to rise in the near future. What would we expect to happen to the equilibrium price and quantity in the market for wheat today?
A. Price will increase; quantity will increase.
B. The impac

E. Price will increase; quantity is ambiguous.

In general, a steeper supply curve is more likely to be
B. price elastic.
C. unit price elastic.
D. price inelastic.

D. Price inelastic.

The price elasticity of demand is defined as
A. the percentage change in income divided by the percentage change in the quantity demanded.
B. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that go

B. The percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.

The price elasticity of demand is defined as the percentage change in the price of that good divided by the percentage change in quantity demanded of that good.
True
False

False

If the quantity demanded of a good is sensitive to a change in the price of that good, demand is said to be price inelastic.
True
False

False

The demand for a necessity such as insulin tends to be elastic.
True
False

False

If consumers always spend 15 percent of their income on food, then the income elasticity of demand for food is
A. 1.00.
B. 0.15.
C. 1.15.
D. 1.50.

A. 1.00.

The income elasticity of demand for luxury items, such as diamonds, tends to be large (greater than 1).
True
False

True

If a demand curve is linear, the price elasticity of demand is constant along it.
True
False

False

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to$40 per month, the number of subscribers will fall to 20,000. Using the midpoint method for calculating

C. 1.4.

If consumers think that there are very few substitutes for a good, then
A. demand would tend to be price elastic.
B. supply would tend to be price elastic.
C. supply would tend to be price inelastic.
D. none of these answers are true.
E. demand would tend

E. Demand would tend to be price inelastic.

A price floor
A. sets a legal maximum on the price at which a good can be sold.
B. is not a binding constraint if it is set above the equilibrium price.
C. always determines the price at which a good must be sold.
D. sets a legal minimum on the price at w

D. Sets a legal minimum on the price at which a good can be sold.

The burden of a tax falls more heavily on the sellers in a market when
A. both supply and demand are inelastic.
B. demand is inelastic and supply is elastic.
C. both supply and demand are elastic.
D. demand is elastic and supply is inelastic.

D. Demand is elastic and supply is inelastic.

Studies show that a 10 percent increase in the minimum wage
A. decreases teenage employment by about 1 to 3 percent.
B. decreases teenage employment by about 10 to 15 percent.
C. increases teenage employment by about 1 to 3 percent.
D. increases teenage e

A. Decreases teenage employment by about 1 to 3 percent.

Within the supply-and-demand model, a tax collected from the sellers of a good shifts the
A. demand curve downward by the size of the tax per unit.
B. demand curve upward by the size of the tax per unit.
C. supply curve upward by the size of the tax per u

C. Supply curve upward by the size of the tax per unit.

The surplus caused by a binding price floor will be greatest if
A. demand is inelastic and supply is elastic.
B. supply is inelastic and demand is elastic.
C. both supply and demand are elastic.
D. both supply and demand are inelastic.

C. Both supply and demand are elastic.

Suppose the equilibrium price for apartments is $500 per month and the government imposes rent controls of$250. Which of the following is unlikely to occur as a result of the rent controls?
A. The quality of apartments will improve.
B. There will be a sh

A. The quality of apartments will improve.

A binding price ceiling creates
A. a shortage.
B. a surplus.
C. an equilibrium.
D. a shortage or a surplus depending on whether the price ceiling is set above or below the equilibrium price.

A. A shortage.

A tax placed on a good that is a necessity for consumers will likely generate a tax burden that
A. falls more heavily on buyers.
B. falls entirely on sellers.
C. falls more heavily on sellers.
D. is evenly distributed between buyers and sellers.

A. Falls more heavily on buyers.

Within the supply-and-demand model, a tax collected from the buyers of a good shifts the
A. supply curve upward by the size of the tax per unit.
B. demand curve upward by the size of the tax per unit.
C. demand curve downward by the size of the tax per un

C. Demand curve downward by the size of the tax per unit.

Which of the following statements is true if the government places a price ceiling on gasoline at $1.50 per gallon and the equilibrium price is$1.00 per gallon?
A. A significant increase in the demand for gasoline could cause the price ceiling to become

A. A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint.

The seller's cost of production is
A. the minimum amount the seller is willing to accept for a good.
B. the seller's producer surplus.
C. the seller's consumer surplus.
D. the maximum amount the seller is willing to accept for a good.
E. none of these ans

A. The minimum amount the seller is willing to accept for a good.

If a market is efficient, then
A. all of these answers are true.
B. the market allocates output to the buyers who value it the most.
C. the market allocates buyers to the sellers who can produce the good at least cost.
D. the quantity produced in the mark

A. All of these answers are true.

If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then
A. total surplus is maximized.
B. the cost of production on the last unit produced exceeds the value placed on it by buyers.
C. producer surplus is maximi

E. The value placed on the last unit of production by buyers exceeds the cost of production.

An increase in the price of a good along a stationary supply curve
A. decreases producer surplus.
B. improves market equity.
C. does all of these answers.
D. increases producer surplus.

D. Increases producer surplus.

Suppose that the price of a new bicycle is $300. Sue values a new bicycle at$400. It costs $200 for the seller to produce the new bicycle. What is the value of total surplus if Sue buys a new bike? A.$100
B. $200 C.$300
D. $500 E.$400

B. $200. If a buyer's willingness to pay for a new Honda is$20,000 and she is able to actually buy it for $18,000, her consumer surplus is A.$0.
B. $20,000. C.$38,000.
D. $2,000. E.$18,000.

D. \$2,000.

A buyer's willingness to pay is
C. that buyer's minimum amount he is willing to pay for a good.
D. that buyer's maximum amount he is willing to pay for a good.

D. That buyer's maximum amount he is willing to pay for a good.

An increase in the price of a good along a stationary demand curve
A. decreases consumer surplus.
B. improves the material welfare of the buyers.
C. improves market efficiency.
D. increases consumer surplus.

A. Decrease consumer surplus.

Consumer surplus is the area
A. below the demand curve and above the supply curve.
B. below the supply curve and above the price.
C. above the supply curve and below the price.
D. above the demand curve and below the price.
E. below the demand curve and a

E. Below the demand curve and above the price.

Adam Smith's "invisible hand" concept suggests that a competitive market outcome
A. minimizes total surplus.
B. maximizes total surplus.
C. both minimizes total surplus and generates equality among the members of society.
D. generates equality among the m

B. Maximizes total surplus.

A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.
True
False

False

If a tax is doubled, the deadweight loss from the tax more than doubles.
True
False

True

A larger tax always generates a larger deadweight loss.
True
False

True

A tax on gasoline is likely to
A. cause a greater deadweight loss in the long run when compared to the short run.
B. cause a greater deadweight loss in the short run when compared to the long run.
C. generate a deadweight loss that is unaffected by the ti

A. Cause a greater deadweight loss in the long run when compared to the short run.

A deadweight loss results when a tax causes market participants to fail to produce and consume units on which the benefits to the buyers exceed the costs to the sellers.
True
False

True

If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue.
True
False

True

If a tax on a good is doubled, the deadweight loss from the tax
A. doubles.
B. could rise or fall.
C. stays the same.
D. increases by a factor of four.

D. Increase by a factor of four.

...

D. A + B + E.

Which of the following would likely cause the greatest deadweight loss?
A. a tax on salt
B. a tax on cruise line tickets
C. a tax on gasoline
D. a tax on cigarettes

B. A tax on cruise line tickets.

A tax will generate a greater deadweight loss if supply and demand are inelastic.
True
False

False