Trivia Quiz On Fundamentals Of Economics

The CPI (Consumer Price Index) measures the average change in prices of goods and services over time. In this case, the CPI in year 1 is 100 and in year 2 it is 104.6. To calculate the rate of inflation, we can subtract the CPI in year 1 from the CPI in year 2 and divide it by the CPI in year 1, then multiply by 100. (104.6 - 100) / 100 * 100 = 4.6%. Therefore, the rate of inflation from year 1 to year 2 is 4.6%.

In a monopoly, the company has the power to set prices higher than the marginal cost in order to maximize profits. Since the question states that the company is earning economic profits and maximizing profit, it implies that the price of diamonds per carat will exceed both the marginal cost and average cost of diamonds. This is because the company can charge a price higher than the cost of producing an additional unit (marginal cost) and also higher than the average cost of producing all units.

An increase in exports of Boeing 767 airliners to Mexico will increase current GDP in the United States because it represents an increase in net exports. Net exports are calculated by subtracting imports from exports, and an increase in exports will lead to a higher value of net exports. Since GDP is the sum of consumption, investment, government spending, and net exports, an increase in net exports will directly contribute to an increase in GDP.

An increase in the productivity of labor will increase potential real GDP because it means that workers are able to produce more output per hour of work. This can be achieved through various means, such as technological advancements, improved training and education, or better management practices. When workers are more productive, they can produce more goods and services, leading to an increase in potential real GDP.

When there is an unanticipated increase in the rate of inflation, the purchasing power of money decreases. This means that the value of money decreases over time. If workers' nominal wages are set at the beginning of the year, they will not be adjusted to account for the increase in inflation. As a result, their real wages, which represent their purchasing power, will decrease. This means that even though their nominal wages remain the same, they will be able to buy fewer goods and services due to the increase in prices caused by inflation.

In order to maximize profits, a monopoly firm sets its price where marginal cost (MC) equals marginal revenue (MR). If the marginal cost of textbooks were equal to $100, the firm would not be maximizing profits by charging $100 per book. Instead, it would be incurring a loss or not maximizing its potential profits. Therefore, the correct answer is that the marginal cost of textbooks is less than $100.

The natural rate of unemployment represents the level of unemployment that exists when the economy is in equilibrium. If the actual unemployment rate is higher than the natural rate, it suggests the presence of cyclical unemployment, which is caused by downturns in the business cycle. In this case, the actual unemployment rate is 6.2% while the natural rate is 5.8%, indicating that there is an excess of 0.4% unemployment due to cyclical factors. Therefore, the correct answer is that cyclical unemployment is 0.4% of the labor force.

An increase in real interest rates can cause an economic contraction because it makes borrowing more expensive, which reduces investment and consumer spending. Higher interest rates discourage businesses from taking out loans to expand their operations or invest in new projects. It also discourages consumers from taking out loans for big-ticket purchases like houses or cars. As a result, both investment and consumer spending decrease, leading to a contraction in economic activity.

In a perfectly competitive industry, the minimum possible average cost of home building remains fixed at $50 per square foot in the long run. When the demand for housing increases, the price of home construction will go up in the short run due to increased demand. However, in the long run, the industry will adjust to meet the increased demand by expanding production, which will eventually bring the price back to the equilibrium price of $50 per square foot. Therefore, the correct answer is that the price of home construction will go up in the short run, but return to an equilibrium price of $50 per square foot in the long run.

In a perfectly competitive industry, economic profits are temporary as they attract new firms to enter the industry. When firms earn economic profits, it signals that there is an opportunity for other firms to also make profits. As a result, new firms are encouraged to enter the industry to take advantage of the potential profits. This entry of new firms increases competition, which eventually drives down prices and reduces economic profits. Therefore, the correct answer is that economic profits in a perfectly competitive industry will encourage new firms to enter the industry.

During the 1990-91 recession, the decrease in demand for organically grown food caused firms to leave the industry. In a perfectly competitive market, firms are price takers and cannot control the price. As a result, when the price declined, firms had no incentive to stay in the industry and continue producing. This led to a decrease in the supply of organically grown food as fewer firms were producing it. Therefore, the correct answer is that firms left the industry and the supply of organically grown food decreased.

Under oligopoly, there are only a few sellers in the industry. This means that the market is dominated by a small number of firms who have significant control over the market. Due to the limited number of sellers, each firm's actions can have a significant impact on the market and its competitors. This can lead to intense competition and strategic behavior among the few sellers, such as price wars or collusion. The presence of only a few sellers also allows for the possibility of barriers to entry, making it difficult for new firms to enter the market and compete with the existing players.

The correct answer is the recessionary GDP gap is $100 billion. This is because the full-employment real GDP is $750 billion, which means that the economy is currently producing $100 billion less than its potential. This difference between the actual GDP and the full-employment GDP is known as the recessionary GDP gap.

The existence of losses induces firms to exit an industry, as they are unable to cover their costs and make a profit. When firms exit, the supply of goods or services in the market decreases, shifting the market supply curve to the left. This decrease in supply leads to an increase in the market price, as there are fewer goods or services available to meet the demand.

Structural unemployment occurs when there is a mismatch between the skills and qualifications of job seekers and the available job opportunities in the market. This mismatch is often caused by shifts in the demand for goods and services or changes in technology, which result in certain industries or occupations becoming obsolete or declining in demand. As a result, individuals who were previously employed in those industries may struggle to find new job opportunities that match their skills and qualifications, leading to structural unemployment.

A decrease in aggregate demand leads to excessive unemployment, which means there is a surplus of labor in the market. When there is a surplus of labor, employers have more bargaining power and can lower wages. As a result, nominal wages will eventually decrease. This is in line with the classical model of macroeconomic equilibrium, which suggests that the labor market will adjust to restore equilibrium in the long run.

If the marginal cost of producing lumber is currently $3 per board foot and the price of lumber is $3.27 per board foot, the firm can increase its profits by increasing its daily output. By increasing the output, the firm can take advantage of the higher price and generate more revenue. Since the marginal cost is lower than the price, producing more lumber will result in additional profits for the firm. Therefore, increasing daily output is the correct answer.

The maximum possible profit the firm can earn per day is $60. This can be determined by looking at the graph and identifying the point where the marginal cost curve intersects the marginal revenue curve. At this point, the firm is producing the quantity where marginal cost equals marginal revenue, which maximizes profit. The corresponding average cost at this quantity is $60, indicating the maximum profit that can be earned per day.

Price discrimination refers to the practice of charging different prices for the same product or service in different markets or to different customers. In the context of a local movie theater being a monopolist, price discrimination allows the theater to set different ticket prices based on factors such as location, time of day, or customer segment. By doing so, the theater can maximize its profits by extracting as much consumer surplus as possible. This strategy enables the theater to capture a larger share of the market and increase its revenue compared to a competitive firm.

In a monopoly, the demand curve for the monopolist is the industry demand curve, meaning that the monopolist is the sole provider of the product and has control over the market demand. On the other hand, in a competitive industry, the demand curve faced by the competitive firm is perfectly elastic, indicating that the firm has no control over market demand and must adjust its supply accordingly. Additionally, in a competitive industry, there is free entry and exit, allowing new firms to enter the market and existing firms to leave, while in a monopolized market, barriers to entry exist, limiting competition. Therefore, all of the above statements are correct explanations of the differences between monopoly and competition.

If equilibrium real GDP exceeds potential GDP, it means that the economy is producing more output than it is capable of sustaining in the long run. This situation is known as an inflationary GDP gap. The excess demand in the economy leads to upward pressure on prices, causing prices to increase more rapidly. As a result, the economy becomes overheated, and real GDP increases less for given increases in aggregate demand.

In a monopolistically competitive market, firms sell a differentiated product. This means that each firm offers a product that is unique or has some distinguishing features compared to the products of other firms in the market. This differentiation allows firms to have some control over the price and demand for their product, as consumers may have preferences for certain features or qualities. This differentiation also leads to competition among firms, as they strive to attract customers based on the unique aspects of their product.

In long-run competitive equilibrium, price equals both marginal cost and minimum possible average cost. This means that the price of a product is equal to the additional cost of producing one more unit (marginal cost) and the minimum average cost at which the firm can produce that unit. In this equilibrium, firms are operating efficiently and there is no incentive for them to enter or exit the market. This ensures that resources are allocated optimally and consumers are able to purchase goods at the lowest possible cost.

When a natural monopoly is broken up to enforce competition in an industry, the average cost of producing the good will increase. This is because natural monopolies often benefit from economies of scale, meaning that they can produce goods at a lower cost due to their large size and production capabilities. Breaking up the monopoly and introducing competition would result in smaller firms having to operate at a smaller scale, leading to higher average costs of production.

If real GDP in the United States rises by 3% in 2003, it indicates that the economy is experiencing an expansion phase of the business cycle. This means that overall economic activity and output are increasing. Additionally, aggregate real income will also rise by 3% in the same year, indicating that individuals and households are experiencing an increase in their overall income.

A cartel is a group of firms that collude to restrict competition and control prices in a market. In order for a cartel to succeed, several conditions must be met. These include barriers to entry, agreement on each firm's share of total output, the ability to enforce the agreement, and agreement on overall production levels. However, the ability to practice price discrimination is not necessary for a cartel to succeed. Price discrimination refers to charging different prices to different customers based on their willingness to pay. While price discrimination can be a profitable strategy for firms, it is not a requirement for a cartel to effectively control prices and restrict competition.

According to the Keynesian model, a decrease in aggregate demand leads to a recessionary GDP gap, which means that the economy is producing below its potential level of output. In order to eliminate this gap and achieve full employment, an increase in spending is necessary. This is because increased spending stimulates aggregate demand, which in turn leads to an increase in production and employment. Therefore, the correct answer is that there will be a recessionary GDP gap, which only an increase in spending can eliminate.

At the equilibrium level of real GDP, the aggregate demand and aggregate supply curves intersect. If the equilibrium level of real GDP is below potential real GDP, it means that there is a deficiency in aggregate demand, resulting in cyclical unemployment. This occurs because firms are producing less than their full capacity and are therefore not employing all available resources. Hence, the correct answer is that there will be cyclical unemployment at the equilibrium level of real GDP.

When aggregate demand shifts to the right, causing an inflationary GDP gap, it means that the demand for goods and services exceeds the economy's capacity to produce them. This leads to an increase in wages as businesses try to attract more workers to meet the higher demand. However, as wages increase, production costs also rise, causing businesses to face higher expenses. To maintain their profit margins, businesses respond by reducing the quantity of goods and services they supply, shifting aggregate supply back to the left. This helps to alleviate the inflationary pressure and bring the economy back to equilibrium.

According to the classical model, the long-run aggregate supply curve is vertical at potential real GDP. This means that in the long run, the economy will produce at its full potential output level, regardless of changes in the price level. The classical model assumes that there are no rigidities or frictions in the economy, allowing it to always operate at its maximum productive capacity. Therefore, the long-run aggregate supply curve is perfectly vertical, indicating that changes in the price level do not affect the level of output in the long run.