Texas State Economics Chapter 6-12

Flashcard maker : Lily Taylor
How is the price elasticity of demand measured?
The price elasticity of demand is measured as
the percentage change in the quantity demanded divided by the percentage change in price
Compare the demand for sugar with demand for clothes. The demand for sugar is likely
more inelastic because sugar tends to represent a smaller fraction of a consumers budget
Suppose Wendy’s hamburgers have many close substitutes available. If so, then an increase in the price of Wendy’s hamburgers will likely
decrease the quantity of Wendy’s hamburgers demanded by a relatively small amount
Compare the demand for water with the demand for wine. The demand for water is likely
relatively more inelastic because water is a necessity
Consider the demand for cigarettes. Suppose the government increases the price of cigarettes by raising cigarette taxes. How will this affect the demand for cigarettes over time?
If the price of cigarettes increases, then the quantity of cigarettes demanded will decrease, and this effect will likely become larger (in absolute value) over time
What information must economists have to estimate the price elasticity of demand? To estimate the price elasticity of demand, economists need to know
the demand curve for a product
Which of the following is a primary determinant of the price elasticity of supply? The price elasticity of supply is affected by
the passage of time
The supply curve for a particular product will increasingly more inelastic
over a shorter period of time
One of the most important differences among health care systems in different countries is how people pay for the health care they receive. Which of the following countries has a single-payer health care system?
Canada
Health care spending in the United States is forecasted to be as much as $4.6 trillion in 202, accounting for about $1 for every $5 in the economy. Currently, health care spending is roughly $2.7 trillion. How is this cost paid for most Americans?
In the United States, the majority of people have private health insurance.
Asymmetric information is a situation in which one party to an economic transaction has less information than the other party. Two types of problems associated with asymmetric information are adverse selection and moral hazard. Which of the following is an example of moral hazard?
An example of moral hazard is those with health insurance failing to exercise
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (ACA).
The ACA provides tax credits to low-income individuals and small businesses with 25 or fewer employees
Although only 20 percent of all firms are corporations
Corporations account for the majority of revenue and profits earned by all firms
A partnership is
a firm owned jointly by two or more persons and not organized as a corporation
The owners of corporations have
limited liability
The principal-agent problem occurs when
an agent pursues his own interests rather than the interests of the principal who hired him.
All flow of funds from savers to borrowers through financial intermediates such as banks is indirect finance,
while a flow of funds from savers to firms through financial markets, such as the New York Stock Exchange is direct finance.
Changes in the values of a firms stocks and bonds offer important information for a firm’s managers.
If the price is decreasing investors are more pessimistic and are providing information that indicates the firm’s managers might want to contract the business.
An _______ is a financial security that represents partial ownership of a firm, while a ______ is a financial security that represents a promise to repay a fixed amount of funds.
stock, bond
Subtracting the value of a firm’s liabilities from the value of its assets leaves its
net worth
Economic profit is equal to a firm’s revenues minus its cost,
both explicit and implicit.
Accounting profit is
larger than economic profit.
An income statement shows a firm’s
profits, revenues, & costs
Goods and services produced domestically but sold to other countries?
Exports
Goods and services bought domestically but produced in other countries?
Imports
Taxes imposed by a government on imports of a good into a country?
Tariffs
A negative externality exist if
the marginal social cost of producing a good or service exceeds the private cost
How do property rights affect externalities and market failure?
Externalities and market failure will result from incomplete property rights
The U.S. Government has frequently used a “command-and-control” Approach in dealing with pollution. Which of the following describes this approach?
The government imposes quantitative limits on the amount of pollution firms are allowed to generate.
In England during the middle ages, each village had an area of pasture, known as a commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land sed optimally?
Grazing created a negative externality, resulting in the commons being overused.
Suppose Wendy’s hamburgers have many clsoe subsitututes available. If so, then an increase in the price of Wendy’s hamburgers will likely
decrease the quantity of Wendy’s hamburgers demanded by a relatively large amount.
Suppose the value of the price elasticity of demand is -3. What does this mean?
1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent
When demand is elastic, a fall in price causes total revenue to rise because
the increase in quantity sold is large enough to offset the lower price
Perfectly inelastic demand is represented by a demand cureve which is ______, and relatively inelastic demand is represented by a demand curve which is_____.
Vertical; downward sloping
The price elasticity of supply is equal to
the percentage change in quantity supplied divided by the percentage change in price.
Asymmetric information is a situation in which one party to an economic transaction has less information than the other party. Two types of problems associated with assymmetric information are adverse selection and moral hazard. Which of the following is an example of adverse selection?
sick people being more likely to purchase health insurance than healthy people
A(n) _____ is a financial security that represents partial ownership of a firm, while a ____ is a financial security that represents a promise to repay a fixed amount of funds.
stock, bond
Who is harmed when individual nations move from autarky to free trade?
The owners of the firms that went out of business
What role does utility play in the economic model of consumer behavior? When modeling consumer behavior, utility
reflects the satisfaction a consumer receives from consuming a particular set of goods and services.
The economic model of consumer behavor predicts that
consumers will chose to buy the combination of goods and services that make them as well of as possible from those combinations that their budgets allow them to buy.
Suppose a consumer is trying to decide how much to spend on transportation and how much to spend on all other (non-transportation) cconsumption. The ecnomic model of consumer behavior predicts that the consumer will
choose the combination of transportation and non-transportation consumption that makes her as well off as possible from among the combinations of transportation and non-transportation items she can afford.
Suppose ham is an inferiror good. How will consumers adjust their buying decisions if the price of ham changes. If the price of ham increases, then consumers will demand
more ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher.
Is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
Comparative Advantage (may change as time passes and circumstances change)
Among the main sources of comparative adavantage are the following
climate and natural resources, relative abundance of labor and capital, technology, external economies
We do not see complete specialization in the real world because
not all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products differ
A situation in which a country does not trade with other countries
Autarky
Is the ratio at which a country can trade its ecports for imports from other countries
terms of trade
By trading, countries are able to consume more than they ould without trade. This outcome is possible because
world production of both goods increases after trade, inefficiencies in resources allocation are reduced, shifting production to the more efficient country-the one with the comparative advantage-increases total production
Who is harmed when individual nations move from autakry to free trade
The owners of the firms that went out of business
One effect of tariffs and quotas
is to cost jobs outside the industries immediately affected
The primary difference between a quota and a voluntary export restraint (VER) is that
the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations
Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange.
This statement is false; the U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas
Is selling a product for a price below its cost of production
Dumping
Protectionism is the use of trade barriers to shield domestic firms from foreign competititon. Protectionism is usually justified on the basis of several arguments which include:
saving jobs, protecting industries, and protecting national security

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