Practice Exam 1 – Flashcards
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Inefficiency exists in an economy when a good is
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not being consumed by buyers who value it most highly.
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In a market economy, economic activity is guided by
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self-interest and prices.
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Which of the following is not possible?
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Demand is unit elastic, and a decrease in price causes an increase in revenue.
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Externalities are
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side effects passed on to a party other than the buyers and sellers in the market.
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When demand is elastic, a decrease in price will cause
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an increase in total revenue.
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Total surplus
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All of the above are correct.
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A perfectly inelastic demand implies that buyers
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purchase the same amount as before when the price rises or falls.
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When a tax is placed on the buyers of a product, buyers pay
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more and sellers receive less than they did before the tax.
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Consumer surplus is equal to the
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Value to buyers - Amount paid by buyers.
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Which of the following would cause price to decrease?
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a surplus of the good
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Whether a good is a luxury or necessity depends on the
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preferences of the buyer.
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When the price of a good is higher than the equilibrium price,
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sellers desire to produce and sell more than buyers wish to purchase.
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If a price ceiling is not binding, then
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the equilibrium price is below the price ceiling.
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As we move downward and to the right along a linear, downward-sloping demand curve,
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slope remains constant but elasticity changes.
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A surplus results when a
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binding price floor is imposed on a market.
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In the circular-flow diagram,
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households are sellers in the markets for the factors of production.
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The flatter the demand curve through a given point, the
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greater the price elasticity of demand at that point.
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What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce them?
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The equilibrium price would decrease, and the equilibrium quantity would increase.
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Which of the following is not a determinant of the price elasticity of demand for a good?
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the steepness or flatness of the supply curve for the good
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Moving downward and to the right along a linear demand curve, we know that total revenue
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first increases, then decreases.
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When government imposes a price ceiling or a price floor on a market,
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price no longer serves as a rationing device.
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In a given market, how are the equilibrium price and the market-clearing price related?
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They are the same price.
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The price elasticity of demand measures how much
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quantity demanded responds to a change in price.
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The greater the price elasticity of demand, the
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greater the responsiveness of quantity demanded to a change in price.
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We can say that the allocation of resources is efficient if
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total surplus is maximized.
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Which of the following events must cause equilibrium price to rise?
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demand increases and supply decreases
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Price controls are usually enacted
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when policymakers believe that the market price of a good or service is unfair to buyers or sellers.
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Efficiency
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refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society.
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When demand is perfectly inelastic, the price elasticity of demand
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is zero, and the demand curve is vertical.
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When the government implements programs such as progressive income tax rates, which of the following is likely to occur?
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equality is increased and efficiency is decreased.
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In a market economy, supply and demand determine
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both the quantity of each good produced and the price at which it is sold.
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Normative statements are
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prescriptive, whereas positive statements are descriptive.
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What would happen to the equilibrium price and quantity of lattés if the cost of producing steamed milk, which is used to make lattés, rises?
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The equilibrium price would increase, and the equilibrium quantity would decrease.
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A decrease in supply will cause the largest increase in price when
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both supply and demand are inelastic.
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Total surplus is
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the total value of the good to buyers minus the cost to sellers of providing the good.
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Producer surplus measures the
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benefits to sellers of participating in a market.
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If the government removes a binding price floor from a market, then the price paid by buyers will
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decrease, and the quantity sold in the market will increase.
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A tax on the buyers of sofas
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decreases the size of the sofa market.
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If a surplus exists in a market, then we know that the actual price is
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above the equilibrium price, and quantity supplied is greater than quantity demanded.
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Price ceilings and price floors that are binding
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cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price.
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A seller s willingness to sell is
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All of the above are correct.
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To say that a price floor is binding is to say that the price floor
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causes quantity supplied to exceed quantity demanded.
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An increase in quantity demanded
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results in a movement downward and to the right along a demand curve.
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The phenomenon of scarcity stems from the fact that
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resources are limited.
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When the government imposes taxes on buyers or sellers of a good, society
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loses some of the benefits of market efficiency.
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If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a
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5 percent increase in the quantity demanded.
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When a supply curve is relatively flat,
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supply is relatively elastic.
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The smaller the price elasticity of demand, the
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steeper the demand curve will be through a given point.
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A surplus exists in a market if
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the current price is above its equilibrium price.
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Which of the following will cause no change in producer surplus?
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the imposition of a nonbinding price ceiling in the market.
