Flashcards and Answers – economics 1

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Professor Williams tutors her next-door neighbor’s son in economics. Instead of paying her for this service, the neighbor washes the professor’s car. This is an example of:
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b. Barter (exchange of a service without the use of money)
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Which of the following is not true about money?
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c. It must be minted by the government in order to have value (money is anything generally accepted as a medium of exchange)
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Money is functioning as a medium of exchange if you:
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c. Purchase coffee at the local coffee shop before class. (a medium of exchange is accepted as payment for goods and services).
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If Justin takes $75 from his cookie jar and deposits it in his checking account, the immediate result is that:
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a. The value of M1 stays the same (this cash was already counted in the money supply)
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When a bank makes a loan:
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b. it creates a transactions-account balance for the borrower (the loan becomes funds made available to the borrower to make purchases).
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Ceteris paribus, if Tamika pays off a loan at the bank then over time:
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d. The money supply becomes smaller. (repayment of loans decreases the money supply because there is less money in circulation)
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Which of the following is true for U.S. banks?
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a. Banks must keep only a fraction of total deposits as reserves (banks keep a fraction of deposits and loan out the rest)
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The reserve requirement directly limits the ability of banks to:
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d. Make new loans. (banks cannot loan out all the money they take in)
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Suppose a bank a $1,000,000 in deposits and a minimum reserve requirements of 20 percent. Then required reserves are:
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c. $200,000 (twenty percent times $100,000,000 is $200,000)
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If excess reserves are $25,000, demand deposits are $100,000 and the minimum reserve requirement is 20 percent, then total reserves are:
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c. $45,000 (percentage of requirement of demand deposits plus excess reserves equals total reserves. Example: twenty percent of $100,000 is $20,000 which means 20,000 must be held in reserve. the 25,000 in excess reserves plus the 20,000 that is the minimum reserves equals 45,000)
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Initially a bank has a minimum reserve requirement of 20 percent and no excess reserves. If $20,000 is deposited in the bank, then the bank can, ceteris paribus:
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b. Lend $16,000 (deposit-0.20xdeposit)
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If the banking system has a required reserve ration of 15 percent, then the money multiplier is:
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b. 6.67 (Multiplier= 1 divided by required reserve ratio)
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If total reserves for a bank are $10,000, excess reserves are zero, and demand deposits are $100,000, then the money multiplier must be:
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b. 10 (multiplier= 1 divided by required reserve ratio)
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Suppose the entire banking system has $50 million in excess reserves and a required reserve ration of 10 percent. The deposit-creation potential of the banking system is:
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a. $500 million (excess reserves of banking system x money multiplier = potential deposit creation)
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An increase in the amount of bank loans should shift the aggregate:
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d. Demand curve to the right (the loans banks offer to their customers will be used to purchase new cars, homes, business equipment, and other output).
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U.S. monetary policy relies on the:
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b. Federal Reserve System’s control over the money supply (the Federal Reserve is the government agency that controls the nation’s money supply).
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The 12 regional Fed banks do not:
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c. Accept deposits from individuals (The Fed Banks act as a central banks for private banks, not for individuals).
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The Federal Reserve Board of Governors has:
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a. Seven members appointed by the president of the United States (the 7 members of the board are appointed by the president and confirmed by the U.S. Senate).
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Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term so that they:
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c. Make decisions based on economic, rather than political considerations. (They are not beholden to any elected official and will hold office longer than any president).
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Requires reserves:
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c. Are the minimum amount of reserves a bank is required to hold. (Banks must hold a minimum amount of deposits in reserve).
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Suppose the banks in the Federal Reserve System have $400 million in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is decreased to 0.05, then excess reserves will increase by:
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b. $20 million (reserve requirement equals Reserve Ratio multiplied by transaction accounts).
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The rate of interest banks charge each other for lending reserves is the:
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a. Federal fund rate (Interbank borrowing is the federal funds market; and the interest rate banks charge each other is the federal funds rate).
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By raising or lowering the ____, the Fed changes the cost of money for banks, which impacts the incentive to borrow reserves.
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b. Discount rate (By raising or lowering the discount rate, the Fed changes the cost of money for banks and therewith the incentive to borrow reserves).
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The principal mechanism for directly changing the reserves of the banking system is:
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c. Open-market operations (The Fed purchases and sales of government bonds for the purpose of altering bank reserves).
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Which of the following is not a monetary policy tool for shifting the aggregate demand curve?
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b. Government spending (Government spending does not cause a shift because it does not affect quantity output demanded by individual consumers. government spending is considered fiscal policy).
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Which of the following will cause an increase in aggregate demand?
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c. Expansionary monetary policy (When the government increases its own spending, aggregate demand shifts to the right).
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To increase the money supply the Fed can:
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c. Reduces the reserve requirement, reduces the discount rate, or buy bonds. (By reducing the reserve requirement, reducing the discount rate and buying bonds the Fed does what is needed to increase the money supply allowing consumers access to more loans).
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If the Fed wants to increase bank reserves, it can:
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a. Buy bonds. (If the Fed offers to pay high prices for bonds, people will sell some of their bonds to the Fed. They will deposit the proceeds into their bank accounts).
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If the Fed buys more bonds from the public, then the money supply will:
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b. Increase and the aggregate demand curve will shift to the right (If the Fed buys at a high price for bonds, consumers will have more money to spend on output).
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The maximum output that can be produced from a set of inputs is measured by:
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a. the production function. -A production function gives the maximum amount of output with a given amount of inputs.
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If the first, second, third and forth worker employed by the firm add 15, 21, 12, & 8 units of total product respectively, we can conclude that:
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c. after the second worker marginal product declines. -At first marginal physical product increases but eventually the law of diminishing returns will cause marginal physical product to decline.
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Ceteris paribus, THE LAW OF DIMINISHING RETURNS states that beyond some point the:
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c. Marginal physical product of a variable input declines as more of it is used. -By varying one factor while holding all other factors of production constant less and less additional output will be produced.
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Assume a restraunt hires an additional chef who is as qualified as the current chefs. As a result, the level of output increases but by a smaller amount than when the previous additional chef was hired. Which of the following best explains this occurence?
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a. the chefs are working with a fixed amount of space and equipment and they get in each other’s way. -since the other factors of production are fixed, they must be used with more of the variable input which means that while the total output will increase each chef will yield less output.
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The most desirable rate of output is the one that:
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b. Maximizes total profit. -Profit maximized when the difference between total revenue and total costs is greatest.
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Cost of production that do not change with the rate of output are:
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c. fixed costs -Fixed costs in the short run are constant and do not vary with output.
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When producing jeans, which of the following is not a variable cost in the short run?
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c. Rent of the factory -Factory rent would not normally be related to production volume and would be defines as fixed costs.
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Average total cost is defined as:
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a. total cost divided by the quantity produced. -Average total cost is found at any point of the total cost curve by dividing total cost by units of output.
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The average total cost curve is:
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b. U-shaped -The average total costs curve falls at first because both the average variable cost curve and the average fixed cost curve are falling since the average variable cost curve will start to rise beyond some point in production volume (because of the law of diminishing returns), average total cost curve will also rise.
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The selection of the short-run rate of output is the:
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a. production decision -in the short run a producer can only make changes to variable factors of production.
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The main difference to an economist between “short-run” and “long-run” is that:
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c. in the long- run all resources are variable where as in the short-run at least one resource is fixed. -in the long-run capital investment decisions are considered while in the short run the emphasis is on making production decisions.
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During the long run:
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b. the firm can build or lease any size factory -unlike the short-run where only variable factors can be changed, the long run assumes that all factors of production can be changed.
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Economic costs are greater than accounting costs:
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a. only if implicit costs are greater than zero. -since implicit costs are cost in which no monetary payment is made, they would not be counted in accounting costs but would be included in economic costs.
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Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600. What are the daily implicit costs for the firm described above?
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a. $70 -implicit costs are the monetary income that a firm sacrifices when it uses a resource that it owns.
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Total Revenue is:
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The price of a product times the quantity sold in a given time. P x Q
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Price elasticity of demand
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The amount by which price will change if quantity demanded changed is measured by
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Utility is
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The pleasure or satisfaction obtained from goods and services
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Total utility is maximized when marginal utility is
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maximized
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The largest portion of the average U.S. consumer dollar is spent on
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Housing
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The maximum output that can be produced from a set of inputs is measured by
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The production function
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What is most likely a fixed cost?
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Property insurance
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Marginal physical product is
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The additional output from using one more unit of labor
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The law of diminishing returns implies that at some output level
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Marginal costs must rise
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Marginal cost is
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The change in total cost from producing one additional unit of output, the change in total variable cost from producing one additional unit of output, and eventually rises with greater output because of declining marginal physical product
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Factors of production
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Land, labor, capital, and entrepreneurship
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In the long run, the firm
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can change the scale of operations
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Explicity costs
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Are the sum of actual monetary payments made for resources used to produce a good
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The long run refers to
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a period of time long enough for all inputs to be varied
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When a firm makes a investment decision, it views all inputs as
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Variable over the long run
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Which of the following is U-shaped?
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Average total cost curve
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The reason the ATC curve has an upturn is because of
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rising marginal costs
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Which of the following is a short-run choice?
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the product decision
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Ceteris paribus, the law of diminishing returns states that the
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Marginal physical product of a variable input declines as more of it is used
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The law of diminishing returns indicates that the marginal physical product of a factor declines as more
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of the factor is used, holding other inputs constant
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The limits to the production of any good are reflected in the
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production function
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Total revenue minus total cost equals
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profit
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A production function is significant because it reveals the
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Maximum output that can be obtained from alternative combinations of inputs
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The sum of fixed cost and variable cost at any rate of output is equal to
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Total cost
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The distinction between short-run and long-run supply decisions is based on
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Whether or not there are any fixed inputs
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A product function describes
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the maximum amount of output attainable from a given combination of factor inputs
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An improvement in technology
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shifts the short-run production function upward
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In the short run an increase in fixed cost
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causes no change to a firm;s profit-maximizing output since it has no effect on marginal cost and reduces short-run profit but has no effect on short-run output
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Compared to account costs, economics costs are:
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more inclusive
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As output increases, fixed costs
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do not change and variable costs increase
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As output increases, variable costs
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increase
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In the long run
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there are no fixed costs
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As more inputs are added, at first the short0run production function
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increases rapidly
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If the price is greater than marginal cost but not average total cost, then
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Eventually the firm will go out of business
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Economic cost is
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the value of all resources used to produce a good or service
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Average total cost is
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total cost divided by the quantity produced
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if a firm increases output, total costs will rise because of a change in
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variable costs
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The demand for ________ goods increases when the price of a related product goes up
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substitute
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The second largest portion of the average U.S consumer dollar is spent on:
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transportation
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Elasticity refers to
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responsiveness
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According to the law of diminishing marginal utility:
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as one consumes more of a good, marginal utility declines but total utility continues to increase so long as marginal utility is positive
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To increase total revenue
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Prices should be decreased when the demand is elastic and increased when the demand is inelastic
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Inelastic means
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People will buy the goods no matter what the price because they need it, it is a necessity. For example, gas.
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Elastic means
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People will buy the goods depending on the price
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If the demand for a good is elastic, when price increases, total revenue will
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decrease
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Determinants of price elasticity are:
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the availability of substitutes, the price of the good relative to income, necessities versus luxuries
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Characteristics of a good with an elastic demand:
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The coefficient of price elasticity of demand is greater than one, the good has many substitutes, the good is a luxury
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Utility is maximized by consuming more of a good until the marginal utility is
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zero
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A relatively elastic good tends to be a ____ or is a good with ___ substitutes
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luxury, many
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Total utility refers to
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the amount of utility obtained from the entire consumption of a good
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The law of diminishing marginal utility helps to explain the
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downward sloping demand curve
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A price cut will increase the total revenue a firm receives, ceteris paribus, only if the demand for its product is
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elastic
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The amount by which price will change if quantity demanded changes is measured by
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price elasticity of demand
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The law of demand explains why people
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are willing to buy more of a good as price falls
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A market shortage is
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Caused by a price ceiling
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If the price of a good is currently below the equilibrium price, the price will increase over time because
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a surplus exists at the old price
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A market surplus occurs when
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the quantity supplied exceeds the quantity demanded at a given price
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The market supply of a particular good
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is the sum of the quantities of the good that all producers are willing and able to sell
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The complete opportunity cost of a particular good
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is the most desired goods that are given up in order to obtain the particular good
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In a market, the equilibrium price is determined v by
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the interaction of both demand and supply
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Economic interactions with others are necessary because
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resources are limited
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Ceteris paribus, the demand curve for a good will shift to the right in response to
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an increase in tastes or preferences for the good
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If the price of a good is currently above the equilibrium price,the price will decrease over time because
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a shortage exists at the old price
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A movement along the supply curve is the same as
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a change in the quantity supplied
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Surpluses are the same thing as excess
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Supply caused by price floors
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The following represent the four groups of participants in the market process
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consumers, business firms, governments, and foreigners
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A decrease in supply
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increases equilibrium price and reduces equilibrium quantity
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A rightward shift of the demand curve will ____ the equilibrium price and ___ the equilibrium quantity
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increase, increase
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Business firms ___ goods and services and ____ factors of production
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supply, demand
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When price is above equilibrium
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a surplus occurs
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Producers ___ finished goods and service in the ___ market
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sell, product
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If a market surplus existsq
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producers will compete for customers by reducing the prices
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The goals of the principal participants in a market economy are to maximize
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satisfaction, profits, and public welfare given their limited resoucers
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A price ceiling
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is the max price of a good and is represented by rent controls on apartments
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If the demand decreases, then the demand curve shifts
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left
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Which of the following would cause a decrease in the price of automobiles?
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A technological advance in automobile manufacturing.
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Which of the following does affect marginal costs?
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An increase in payroll taxes. A decrease in Social Security taxes.
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Which of the following does not affect marginal costs?
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An increase in property taxes.
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The short run is the time period:
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In which some costs are fixed.
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Which of the following represents the change in total cost that results from a 1-unit increase in production?
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Marginal cost.
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Which of the following is generally a fixed cost?
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Lease payments for plant and equipment
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Short-run profits are maximized, for a perfectly competitive firm, at the rate of output where:
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Marginal revenue is equal to marginal cost.
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If price is greater than marginal cost, a perfectly competitive firm should increase output because:
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Additional units of output will add to the firm’s profits (or reduce losses).
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If price is less than marginal cost, a perfectly competitive firm should decrease output because:
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The firm is producing units that cost more to produce than the firm receives in revenue thus reducing profits (or increasing losses).
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When a firm minimizes its losses in the short run:
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It continues to produce only if price exceeds average variable cost.
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In making an investment decision, an entrepreneur:
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Treats all costs as variable.
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Short-run supply determinants include:
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technology
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Short-run supply determinants include
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Expectations. Price of factor inputs. Taxes and subsidies.
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The supply curve is upward-sloping, i.e. it takes a higher price to induce greater production, because of:
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Increasing marginal costs.
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The marginal cost curve:
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Will be affected by changes in the price of variable inputs. Slopes upward to the right as output increases. Is the short run supply curve for a competitive firm at prices above the AVC.
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A shift of the supply curve would be caused by:
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A change in supply determinants
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Normal profit is:
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The profit which covers the full opportunity cost of the resources used by the firm. The average rate of return. The accounting profit earned when economic profit is zero.
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Economic costs and economic profits are:
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Usually greater and smaller, respectively, than their accounting counterparts.
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Economic profit
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Is less than accounting profit by the amount of implicit cost
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Accounting costs and economic costs differ because:
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Economic costs include the opportunity costs of all resources used while accounting costs include actual dollar outlays.
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Explicit costs:
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Are the sum of actual monetary payments made for resources used to produce a good
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Which of the following causes demand to be more elastic with respect to price?
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A higher ratio of price to income.
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Diminishing returns are first observed when:
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Marginal physical product begins to decline.
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Implicit costs
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Are the total value of resources used to produce a good but for which no direct payment is made.
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In defining costs, economists recognize:
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Explicit and implicit costs while accountants recognize only explicit costs.

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