Questions Set 75: Solution

Solution

The economic perspective entails:

irrational behavior by individuals and institutions

a comparison of marginal benefits and marginal costs in decision making

short term but not long term thinking

the rejection of the scientific method

Microeconomics is concerned with

the aggregate or total levels of income, employment, and output.

a detailed examination of specific economic units that make up the economic system.

positive economics, but not normative economics

the establishing of an overall view of the operation of the economic system.

A production possibilities curve shows:

that resources are unlimited

that people prefer one of the goods more than the other

the maximum amount of two goods that can be produced assuming the full and efficient use of available resources

combinations of capital and labor necessary to produce specific levels of output

An increase in the price of a product will reduce that amount of it purchased because:

supply curves are upward sloping

the higher price means that real incomes have risen

consumers will substitute other products for the one whose price has risen

consumers substitute relatively high priced for relatively low priced products

Assume in a competitive market that price is initially above the equilibrium level. We can predict that price will:

decrease, quantity demanded will decrease, and quantity supplied will increase.

decrease and quantity demanded and quantity supplied will both decrease.

decrease, quantity demanded will increase, and quantity supplied will decrease.

increase, quantity demanded will decrease, and quantity supplied will increase

Refer to the below graph. A surplus of 160 units would be encountered if price was:

$1.60,

$1.10, that is $1.60 minus $.50

$1.00

$.50

For a linear demand curve:

demand is elastic at high prices elasticity is constant along the curve

elasticity is unity at every point along the curve

demand is elastic at low prices

elasticity is constant along the curve

0.8

1.0

1.2

2.0

10 and supply is elastic

1 and supply is unit elastic

0.25 and supply is inelastic

2.5 and supply is elastic

We would expect the cross elasticity of demand for Pepsi in relation to other soft drinks to be greater than that for soft drinks generally because:

soft drinks are normal goods

the income effect always exceeds the substitution effect

there are fewer good substitutes for soft drinks generally than for Pepsi

there are more good substitutes for soft drinks generally than for Pepsi

Marginal utility is the:

sensitivity of consumer purchases of a good to changes in the price of that good.

change in total utility obtained by consuming one more unit of a good.

change in total utility obtained by consuming another unit of a good divided by the change in the price of that good.

total utility associated with the consumption of a certain number of units of a good divided by the number of units consumed.

An increase in the quantity demanded means that:

the demand curve has shifted to the right.

given supply, the price of the product can be expected to decline.

the demand curve has shifted to the left.

price has declined and consumers therefore want to purchase more of the product.

The price elasticity of demand coefficient measures:

buyer responsiveness to price changes.

the extent to which a demand curve shifts as incomes change.

the slope of the demand curve.

how far business executives can stretch their fixed costs.

If total utility is increasing, marginal utility:

is positive, but may be either increasing or decreasing.

must also be increasing.

may be either positive or negative.

will be increasing at an increasing rate.

Where total utility is at a maximum, marginal utility is:

negative.

positive and increasing.

zero.

positive but decreasing.

Marginal utility:

is equal to total utility divided by the number of units consumed.

is equal to total utility if the demand curve is linear.

increases as more of a product is consumed.

diminishes as more of a product is consumed.

The theory of consumer behavior assumes that

consumers behave rationally, maximizing their satisfactions.

consumers have unlimited money incomes.

consumers do not know how much marginal utility they obtain from successive units of various products.

marginal utility is constant.

An increase in demand means that:

given supply, the price of the product will decline.

the demand curve has shifted to the right.

price has declined and consumers therefore want to purchase more of the product.

the demand curve has shifted to the left.

When product prices change, consumers are inclined to purchase larger amounts of the now cheaper products and less of the now more expensive products. This describes:

the cost effect

the price effect

the income effect

the substitution effect

Assumptions made in conjunction with economic theorizing:

can be unrealistic, if when they are relaxed, the outcome is essentially unchanged.

make the output of economic modeling useless.

must be avoided to the extent possible.

must be realistic and consistent with known real-world conditions if the predictions of the theory are to be useful for practical purposes.

The production possibilities curve illustrates the basic principle that:

an economy’s capacity to produce increases in proportion to its population size

more of one good can be produced without a decrease in the production of the other good while holding inputs and technology constant.

the production of more and more of one good will require larger and larger cuts in the production of the other good.

an economy will automatically seek that level of output at which all of its resources are employed.

The concept of opportunity cost:

is irrelevant if the production possibilities curve is shifting to the right.

is irrelevant in socialist economies because of central planning.

suggests that the cost of resources for any particular product is the alternative outputs foregone because these resources are not available for alternative production.

suggests that insatiable wants can be fulfilled only if the opportunity costs for fulfilling them approach zero or are negative while the society continues to pay the prevailing wage.

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase argued that the railroad’s revenues would fall because of the rate hike. It can be concluded that:

the railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt that it was inelastic.

the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt that it was elastic.

elasticity of demand was not at issue, that railroad felt they needed more revenue to continue operations.

none of the above.

If the price elasticity of demand for gasoline is .30 and there is a 10% decrease in the price of gasoline, this will cause the quantity of gasoline demanded to:

increase by 30%.

increase by 3%.

decrease by 3%.

decrease by 30%

What is elasticity of the labor market and what factors determine the elasticity of the market demand and supply of labor.

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