ASUB Principles of Microeconomics

An economic system
is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
As a consequence of the problem of scarcity
Individuals have to make choices from among alternatives
Copyrights and trademarks are examples of
Property Rights
Economic resources are also called
factors of production
Economic systems differ according to which two main characters
Who owns the factors of production and the methods used to coordinate economic activity.
Economics is a social science that studies how individuals, institutions, and society may
Best use resources to maximize satisfaction of economic wants.
Economists would classify all of the following as “land” except
A hydroelectric dam
Money is not considered to be an economic resource because
As such it is not productive
Property rights are important because they
encourage cooperation by improving the chances of mutually agreeable transactions.
Specialization-the division of labor-enhances productivity and efficiency by
all of the above
1. allowing workers to take advantage of existing differences in their abilities and skills
2. avoiding the time loss involved in shifting from one production task to another
3. allowing workers to develop skills by working on one, or a limited number of tasks
The basic truth that underlies the study of economics is the fact that we all face
Scarcity
The four factors of production are:
land, labor, capital, and entrepreneurial ability.
The opportunity cost of doing or getting something is best and fully defined as:
The value of the best alternative that is given up in order to do or get something
The process of producing and accumulating capital goods is called
investment
When studying human behavior, economists assume rational self-interest. This means that:
People make decisions based on some desired outcome
Which of the following is a labor resource
A computer programmer.
Which of the following is not a main function of the entrepreneur?
To make routine pricing decisions.
Which of the following is not a typical characteristic of a market system?
Government ownership of most property resources.
Which of the following is one of the Five Fundamental Questions?
What goods and services will be produced?
Which of the following would not be considered a capital resource by economists?
A van used by a mother to transport the family around
A government subsidy to the producers of a product:
increases product supply.
A market is in equilibrium:
if the amount producers want to sell is equal to the amount consumers want to buy.
A market:
is an institution that brings together buyers and sellers.
Allocative efficiency is concerned with:
producing the combination of goods most desired by society.
An increase in the price of a product will reduce the amount of it purchased because:
consumers will substitute other products for the one whose price has risen.
Blu-ray players and Blu-ray discs are:
complementary goods
College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are:
inferior goods
Digital cameras and memory cards are:
complementary goods.
If there is a shortage of product X, and the price is free to change:
the price of the product will rise.
If there is a surplus of a product, its price:
is above the equilibrium level.
In the past few years, the demand for donuts has greatly increased. This increase in demand might best be explained by:
a change in buyer tastes.
Productive efficiency refers to:
the use of the least-cost method of production.
The law of supply indicates that, other things equal:
producers will offer more of a product at high prices than at low prices.
When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes the:
income effect.
Which of the following would not shift the demand curve for beef?
A reduction in the price of cattle feed.
(Consider This) Elastic demand is analogous to a __________ and inelastic demand to a _________.
Ace bandage; firm rubber tie-down
Based on the concept of price elasticity of demand, which of the following cases is most likely to occur?
Colleges charging lower tuition for low-income students.
Suppose that a firm has “pricing power” and can segregate its market into two distinct groups based on differences in elasticities of demand. The firm might charge:
a higher price to the group that has the less elastic demand.
Which of the following is not an example of pricing based on group differences in elasticity of demand?
Cash rebates for purchases of automobiles.
Compared to coffee, we would expect the cross elasticity of demand for:
tea to be positive, but negative for cream.
Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in:
the price of some other product
Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is:
relatively inelastic
If quantity demanded is completely unresponsive to price changes, demand is:
perfectly inelastic.
It takes a considerable amount of time to increase the production of pork. This implies that:
the short-run supply curve for pork is less elastic than the long-run supply curve for pork.
Supply curves tend to be:
more elastic in the long run because there is time for firms to enter or leave the industry.
The concept of price elasticity of demand measures:
the sensitivity of consumer purchases to price changes.
The demand for a luxury good whose purchase would exhaust a big portion of one’s income is:
relatively price elastic.
The demand for a necessity whose cost is a small portion of one’s total income is:
relatively price inelastic.
The demand schedules for such products as eggs, bread, and electricity tend to be:
relatively price inelastic.
The elasticity of demand for a product is likely to be greater:
the greater the amount of time over which buyers adjust to a price change.
The main determinant of elasticity of supply is the:
amount of time the producer has to adjust inputs in response to a price change.
The price elasticity of demand coefficient measures:
buyer responsiveness to price changes.
The supply curve of antique reproductions is:
relatively elastic.
The supply of known Monet paintings is:
perfectly inelastic
Which of the following goods will least likely suffer a decline in demand during a recession?
Toothpaste
Chapter 7
Chapter 7
(Consider This) Newspaper dispensing devices seemingly “trust” people to take only a single paper, but the devices actually rely on the law of:
diminishing marginal utility.
Consider This) Unlike newspaper dispensing devices, soft drink dispensing machines do not permit people to take more than one can or bottle with each payment. The reason is that the:
marginal utility of extra soft drink cans or bottles declines slowly, particularly because they are storable and can be consumed late
According to economists, gift registries, returning gifts for cash refunds, and “recycling gifts”:
increase the efficiency of gift-giving because they allow the recipient to consume goods that provide greater utility and transfer away those goods that are less satisfying.
How did Apple overcome consumers’ diminishing marginal utility for iPads?
Apple introduced new features to entice previous buyers to purchase new models.
Mrs. Arnold is spending all her money income by buying bottles of soda and bags of pretzels in such amounts that the marginal utility of the last bottle is 60 utils and the marginal utility of the last bag is 30 utils. The prices of soda and pretzels are $.60 per bottle and $.40 per bag respectively. It can be concluded that:
Mrs. Arnold should spend more on soda and less on pretzels.
Noncash gifts:
reduce recipient utility relative to a cash gift because noncash gifts often fail to match recipient preferences.
The diamond-water paradox arises because:
essential goods may be cheap while nonessential goods may be expensive
The diamond-water paradox occurs because:
he price of a product is related to its marginal utility, not its total utility.
he fact that most medical care purchases are financed through insurance:
increases the amount of health care consumed by reducing the price of additional units of care.
The law of diminishing marginal utility states that:
beyond some point, additional units of a product will yield less and less extra satisfaction to a consumer.
The theory of consumer behavior assumes that consumers attempt to maximize:
Total utility.
The utility of a good or service:
is the satisfaction or pleasure one gets from consuming it.
Which of the following has been a significant factor in the ability of iPads to compete effectively against laptop and desktop computers?
Many consumers perceive that iPads are superior to laptops and desktop computers for the consumption of digital media.
While eating at Alex’s “Pizza by the Slice” restaurant, Kara experiences diminishing marginal utility. She gained 10 units of satisfaction from her first slice of pizza consumed and would only receive 5 units of satisfaction from consuming a second slice, at the same price. Based on this information we can conclude that:
Alex may have to lower the price to convince Kara to buy a second slice.
Why do people tend to eat more at all-you-can-eat buffet restaurants than at restaurants where each item is purchased separately?
Once the all-you-can-eat meal is purchased, consumers view additional trips back to the buffet as having a price of zero.
Heuristics
are shortcuts that save time and energy in decision making.
Last month Laura saw the value of her stock portfolio rise by $20,000. This month she saw the value of her portfolio decline by $20,000. According to behavioral economics:
the positive utility Laura received from seeing her portfolio value rise was less than the disutility she felt when its value declined.
Which of the following best explains the difference between neoclassical economics and behavioral economics?
Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors.
Neoclassical economists generally believe which of the following about human behavior?
When individuals make mistakes in decision making, they adjust to these errors and rarely repeat them.
Susie knows that too many sugary treats, while delicious when eaten, have long-term adverse effects on weight and health. Based on this information, a behavioral economist would expect Susie to:
eat more sugary treats than is optimal, as she likely gives more weight to present events and outcomes than to ones in the future.
In anonymous surveys, on average people rate themselves as “above average” with regard to characteristics such as intelligence, perceptiveness, and driving ability. According to behavioral economics, this contradictory result would most likely be caused by the:
overconfidence effect.
John’s friend Rosika won a major lottery jackpot. Seeing this, and despite the fact that millions don’t win and the odds of winning are infinitesimal, John goes out and buys a bunch of lottery tickets despite struggling financially. John’s decision to buy the lottery tickets under these circumstances would best be explained by the:
availability heuristic
Which of the following sets of personal characteristics best reflects what behavioral economists assume about how people make decisions?
People have preferences that depend on context, avoid and are bad at computation, often give in to temptation, and are often selfless in their behavior.
Bucky and Satchel are offered identical jobs, each paying $80,000 per year. According to behavioral economics:
how each will feel about the job offer will depend on their current positions and incomes.
According to the concept of framing effects:
whether a new situation is viewed as a gain or a loss depends on one’s starting position.
Internationally, participation differences in organ donation programs are mostly attributed to:
what default option is set for participation or nonparticipation
Alex was willing to pay $50 for the new World Cup soccer ball. When he received it as a gift, he was willing to sell it, but for no less than $80. According to behavioral economists:
Alex’s behavior is consistent with the endowment effect.
Which of the following cognitive biases refers to people’s tendency to attribute their successes to personal ability and effort, and failures to forces outside their control?
Self-serving bias.
Specialty shops can charge and get customers to pay higher prices for identical goods than they would pay in “big box” stores. Assuming that these differences are driven by store appearance rather than differences in services provided, which of the following best explains this phenomenon?
Framing effects
Dorothy likes to invest in gold as part of her overall financial investment portfolio, as her gut tells her it will increase dramatically in value. Her favorite and generally only source of investment advice is Wizard’s Gold Hour on the OZ cable channel. As a result of this advice, Dorothy’s portfolio mix is suboptimal, as it is too heavily weighted in gold. Behavioral economists would say that Dorothy suffers from:
confirmation bias.
Which of the following statements best reflects how a behavioral economist views individual decision making?
Balin tries to make good, well-thought-out decisions, but his desire for utility in the present means that he often gives in to costly temptations.
According to prospect theory, firms are more likely to shrink packages than raise prices because:
consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money.
Whenever Josh goes to his favorite restaurant, he wants to buy tiramisu, his favorite dessert. Despite the fact he would enjoy the flavor of the tiramisu the same amount every time, Josh only buys it when others are having dessert, and never buys it if he would be the only one having dessert. Behavioral economists would say that Josh’s decision is affected by:
framing effects.
According to behavioral economics:
each successive unit of loss hurts, but less than the previous unit.
In developing prospect theory, which of the following did behavioral economists not discover about people’s reaction to goods and bads?
People feel equivalent losses and gains in equal measure, supporting the assumption that consumers behave rationally.
Because gun violence is portrayed frequently on television and in movies, people mistakenly assign too high of a probability that they will fall victim to gun violence, and too low of a probability to more likely but less publicized events. This phenomenon illustrates:
the effect of the availability heuristic.
A central focus of prospect theory is:
how people deal with “bads,” as well as how they deal with “goods.”
Dan was certain that his upcoming economics test would be so easy that he could wait to study until the night before and still do well on the exam. When he cracked open his book and notes the night before the exam, he realized he should’ve started studying earlier. According to behavioral economics, Dan’s error was caused primarily by:
a planning fallacy.
When people convince themselves that they “knew all along” what was going to happen, when in fact their predictions were incorrect, they suffer from:
hindsight bias.
According to behavioral economists, the human brain frequently employs heuristics because:
they save energy and time in decision making.
(Consider This) Children are charged less than adults for admission to professional baseball games but are charged the same prices as adults at the concession stands. This pricing system occurs because:
the seller can prevent children from buying game tickets for adults but cannot prevent children from buying concession items for adults.
(Consider This) Which of the following statements is true about U.S. firms?
Over half are bankrupt within the first five years after starting up.
(Last Word) “Patent trolls:”
buy up patents in order to collect royalties and sue other companies.
(Last Word) Eliminating patents would tend to
encourage innovation in products made up of many different technologies but discourage innovation of easy-to-copy products requiring large R&D costs to create.
(Last Word) Temporary shutdowns of firms are most widespread when:
the economy experiences recession.
(Last Word): Amazon’s rise to become the world’s largest online retailer was largely driven by:
massive economies of scale in distribution logistics and data storage.
(Last Word): Network effects on the Internet:
help firms like Google and Facebook dominate their respective markets.
A purely competitive seller is:
a “price taker.”
Creative destruction is least beneficial to:
workers in the “destroyed” industries.
Creative destruction is:
the process by which new firms and new products replace existing dominant firms and products.
Economists would describe the U.S. automobile industry as:
an oligopoly.
In which of the following industry structures is the entry of new firms the most difficult?
Pure monopoly.
Price discrimination is:
only illegal if used to lessen or eliminate competition.
Price discrimination refers to:
the selling of a given product at different prices to different customers that do not reflect cost differences.
Pure monopoly refers to:
a single firm producing a product for which there are no close substitutes
Which of the following best approximates a pure monopoly?
The only bank in a small town.
Which of the following distinguishes the short run from the long run in pure competition?
Firms can enter and exit the market in the long run but not in the short run.
Which of the following industries most closely approximates pure competition?
Agriculture
Which of the following is an example of creative destruction?
Automobile production causes the wagon industry to shut down.
Which of the following is not a barrier to entry?
X-inefficiency.