Economics Midterm Study Guide

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1/45 Questions

Economics
- Studies human behavior when scarcity exists and choices must be made
- Provides the only reasonable explanation of how people make decisions
- Is better at showing the way things ought to be than the other social sciences are
- Is the only social science that can explain the existence and behavior of public institutions

About This Quiz

This Economics Midterm Study Guide explores fundamental economic concepts including scarcity, macroeconomics, and microeconomics. It delves into models, opportunity costs, and production possibilities, equipping learners with essential skills to analyze economic events effectively.

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2.

Macroeconomics is best described as the study of
- The behavior of large firms in the marketplace
- The economic behavior of individual decision makers
- The behavior of the economy as a whole
- The actions and reactions of the rest of the world
Correct Answer

A. The behavior of the economy as a whole

Explanation

Macroeconomics is the study of the behavior of the economy as a whole. It focuses on analyzing and understanding the aggregate economic variables such as national income, unemployment rate, inflation, and economic growth. Macroeconomists study the interrelationships between different sectors of the economy, such as consumption, investment, government spending, and international trade, to gain insights into the overall functioning and performance of the economy. By examining these broad economic trends and patterns, macroeconomics helps in formulating policies to stabilize the economy, promote growth, and improve overall welfare.

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3.

Which of the following is the best example of a microeconomic topic?
- The impact of aggregate demand on recession.
- The reasons for the increase in the price of a soft drink.
- The effect that money supply has on the interest rate.
- The tradeoff between inflation and unemployment.
Correct Answer

A. The reasons for the increase in the price of a soft drink.

Explanation

The best example of a microeconomic topic is the reasons for the increase in the price of a soft drink. This is because it focuses on a specific product (soft drink) and analyzes the factors that affect its price, such as supply and demand, production costs, and market competition. Microeconomics studies individual markets and how individual economic agents (consumers and firms) make decisions, which aligns with the topic of the increase in the price of a specific product.

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1
4.

A model is defined as a:
- Description of all variables affecting a situation.
- Positive analysis of all variables affecting an event.
- Simplified description of reality to understand and predict an economic event.
- Prediction based on historical evidence.
Correct Answer

A. Simplified description of reality to understand and predict an economic event.

Explanation

A model is a simplified description of reality that helps us understand and predict an economic event. It is not a comprehensive description of all variables affecting a situation, nor is it a positive analysis or a prediction based solely on historical evidence. Instead, a model provides a simplified representation of the key variables and relationships that are relevant to the economic event being studied. By focusing on these essential elements, a model allows us to gain insights and make predictions about real-world economic phenomena.

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5.

Opportunity cost is defined
- Only in terms of money spent
- As the sum of the values of all alternatives not chosen
- As the value of the best alternative not chosen
- As the difference between the benefits of your choice and the costs of your choice
Correct Answer

A. As the value of the best alternative not chosen

Explanation

Opportunity cost is defined as the value of the best alternative not chosen. This means that when making a decision, the opportunity cost is the value or benefit that is given up by choosing one option over another. It takes into consideration the potential gains or benefits that could have been obtained from the alternative option that was not chosen. In other words, it quantifies the value of what is forgone when a particular choice is made.

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6.

If all resources are used efficiently to produce goods and services, a nation will find itself producing
- Inside its production possibilities frontier
- Somewhere on and along its production possibilities frontier
- Outside of its production possibilities frontier
- More of one product with no decrease in the production of any other product
Correct Answer

A. Somewhere on and along its production possibilities frontier

Explanation

If all resources are used efficiently to produce goods and services, a nation will find itself producing somewhere on and along its production possibilities frontier. This means that the nation is utilizing its resources optimally and producing at the maximum level possible given its available resources and technology. It is neither producing below its potential (inside the frontier) nor exceeding its potential (outside the frontier). It is producing a combination of goods and services that lies on the frontier, indicating efficient allocation of resources.

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7.

Gross Domestic Product (GDP) equals the
- Total output of all goods and services
- Market value of final goods and services produced in a nation in a given year
- Value added to the economy by intermediate goods and services minus original cost
- Production by the rest of the world
Correct Answer

A. Market value of final goods and services produced in a nation in a given year

Explanation

The correct answer is "market value of final goods and services produced in a nation in a given year." GDP is a measure of the total value of all final goods and services produced within a country's borders in a specific time period, typically a year. It includes the market value of all goods and services, excluding intermediate goods and services, and takes into account both the production by domestic firms and the rest of the world.

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8.

Which of the following items is included in the calculation of GDP?
- Purchase of 100 shares of General Motors stock.
- Purchase of a used car.
- Purchase of an intermediate good.
- None of the above would be included.
Correct Answer

A. None of the above would be included.

Explanation

The purchase of 100 shares of General Motors stock is not included in the calculation of GDP because it is considered a financial transaction and not a direct contribution to the production of goods and services. The purchase of a used car is also not included as it is considered a second-hand transaction and does not contribute to current production. The purchase of an intermediate good is also not included as it is a component used in the production process and not a final good or service. Therefore, none of the above would be included in the calculation of GDP.

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9.

All final goods and services that make up GDP can be expressed in the form:
- GDP = C + I - G + X + M.
- GDP = C + I + G + X + M.
- GDP = C + I + G + X - M.
- GDP = C + I + X - M.
Correct Answer

A. GDP = C + I + G + X - M.

Explanation

The correct answer is GDP = C + I + G + X - M. This equation represents the components of GDP, which include consumption (C), investment (I), government spending (G), exports (X), and imports (M). The equation subtracts imports from the equation to account for the fact that imports represent goods and services produced in other countries and should not be included in the calculation of a country's GDP.

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10.

If real GDP increased by 3 percent, then
- The price level has increased by 3 percent
- Real output/production has increased by 3 percent
- The increase might have been caused by an increase in the price level or output, but we cannot tell for sure
- Government spending increased by 3 percent
Correct Answer

A. Real output/production has increased by 3 percent

Explanation

If real GDP increased by 3 percent, it means that the total value of goods and services produced in the economy has increased by 3 percent. This indicates that the output or production of the economy has increased. However, it does not necessarily mean that the increase was solely caused by an increase in the price level or output. It could have been influenced by various factors, such as changes in government spending or other economic variables.

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11.

National income account (billions of dollars) Personal consumption expenditures (C) $500 Government expenditures (G) 50 Gross private domestic investment (I) 300 Exports (X) 50 Imports (M) 100 As shown in the above exhibit, GDP as calculated by the expenditure approach is
- $500 billion.
- $800 billion.
- $1000 billion.
- $900 billion.
Correct Answer

A. $800 billion.

Explanation

The correct answer is $800 billion because GDP is calculated by adding up all the components of expenditure, which are personal consumption expenditures (C), government expenditures (G), gross private domestic investment (I), exports (X), and subtracting imports (M). In this case, C is $500 billion, G is $50 billion, I is $300 billion, X is $50 billion, and M is $100 billion. Therefore, the calculation would be $500 billion + $50 billion + $300 billion + $50 billion - $100 billion, which equals $800 billion.

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1
12.

In order to demand a good, the buyer must
- Want the good very much
- Be both willing and able to pay for it
- Think that the good has significant utility
- Be aware of the opportunity costs
Correct Answer

A. Be both willing and able to pay for it

Explanation

To demand a good, the buyer must be both willing and able to pay for it. This means that the buyer must have the desire or preference for the good and also possess the financial capability to purchase it. Simply wanting the good very much or thinking that it has significant utility is not enough to create demand if the buyer does not have the means to pay for it. Additionally, being aware of the opportunity costs is important in decision-making but not a prerequisite for demanding a good.

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13.

Which of the following is not true regarding a change in quantity demanded?
- A change in quantity demanded is shown by a movement along a given demand curve.
- The demand curve shifts whenever the quantity demanded changes.
- Quantity demanded is the single response to a price change.
- The lower the price of a product, other things constant, the higher the quantity demanded.
Correct Answer

A. The demand curve shifts whenever the quantity demanded changes.

Explanation

A change in quantity demanded is shown by a movement along a given demand curve, not by a shift in the demand curve itself. When the price of a product changes, the quantity demanded changes along the existing demand curve. A shift in the demand curve occurs when there is a change in factors other than price that affect the quantity demanded at every price level. Therefore, the statement "The demand curve shifts whenever the quantity demanded changes" is not true.

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14.

A demand curve usually has a
- Negative slope because price and quantity demanded are inversely related
- Zero slope because price and quantity demanded are not related
- Positive slope because price and quantity demanded are positively related
- Infinite slope because price and quantity demanded are not related
Correct Answer

A. Negative slope because price and quantity demanded are inversely related

Explanation

The demand curve usually has a negative slope because price and quantity demanded are inversely related. This means that as the price of a good or service increases, the quantity demanded by consumers decreases, and vice versa. This is a fundamental principle of economics known as the law of demand. When the price is high, consumers are less willing or able to purchase the good, resulting in a lower quantity demanded. Conversely, when the price is low, consumers are more willing or able to purchase the good, resulting in a higher quantity demanded.

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15.

If the price of peanut butter increases, other things constant, demand for jelly will
- Increase because the goods are substitutes
- Decrease because the goods are substitutes
- Decrease because the goods are complements
- Increase because the goods are complements
Correct Answer

A. Decrease because the goods are complements

Explanation

If the price of peanut butter increases, the demand for jelly will decrease because the goods are complements. Complementary goods are those that are typically consumed together, such as peanut butter and jelly. When the price of one complementary good increases, consumers are less likely to purchase the other good, resulting in a decrease in demand. In this case, as peanut butter becomes more expensive, people may be less inclined to buy it, leading to a decrease in the demand for jelly.

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16.

An improvement in a firm's technology that reduces its production costs will result in a (an):
- Rightward shift of the supply curve.
- Increase in supply.
- Increase in quantity supplied at any given price.
- All of the above are true.
Correct Answer

A. All of the above are true.

Explanation

An improvement in a firm's technology that reduces its production costs will result in a rightward shift of the supply curve because it allows the firm to produce more output at every price level. This increase in production capacity will lead to an increase in supply as the firm is now able to offer a greater quantity of goods or services in the market. Additionally, the reduction in production costs will also result in an increase in quantity supplied at any given price, as the firm can now afford to produce and supply more units of the product. Therefore, all of the above statements are true.

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17.

Economists emphasize the importance of equilibrium in markets because
- Trading in markets can only occur at the equilibrium price and quantity
- The behavior of buyers and sellers will automatically guide the market toward the equilibrium price and quantity
- It represents a compromise between sellers hoping for low prices and buyers searching for high prices
- It is the only price-quantity combination that guarantees that the poorest members of society can purchase the good or service
Correct Answer

A. The behavior of buyers and sellers will automatically guide the market toward the equilibrium price and quantity

Explanation

Economists emphasize the importance of equilibrium in markets because the behavior of buyers and sellers will automatically guide the market toward the equilibrium price and quantity. This means that when there is an imbalance between the quantity demanded and the quantity supplied, market forces will adjust prices and quantities until they reach a point where demand equals supply. This ensures that resources are allocated efficiently and that there is no excess or shortage in the market. It also allows for a fair and competitive market where prices are determined by supply and demand rather than external interventions.

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18.

If the tea harvest is very good in a particular year, the supply of tea will be
- Higher, its price will be lower, and demand for coffee will go up
- Higher, its price will be higher, and demand for coffee will go up
- Higher, its price will be higher, and demand for coffee will go down
- Higher, its price will be lower, and demand for coffee will go down
Correct Answer

A. Higher, its price will be lower, and demand for coffee will go down

Explanation

If the tea harvest is very good in a particular year, the supply of tea will be higher. When the supply of tea is higher, its price tends to be lower due to the increased availability of the product. Additionally, when the price of tea is lower, the demand for coffee is likely to go down as consumers may opt for the cheaper alternative of tea instead of coffee. Therefore, the correct answer is "higher, its price will be lower, and demand for coffee will go down."

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19.

Which of the following statements are true?
- Total utility is the satisfaction from the entire consumption of a good.
- Utility measures the satisfaction obtained from a good.
- Marginal utility is the additional satisfaction from consuming the last unit of a good.
- All of the above are true.
Correct Answer

A. All of the above are true.

Explanation

Total utility refers to the overall satisfaction derived from consuming a good, taking into account all units consumed. Utility, on the other hand, is a measure of the satisfaction obtained from consuming a good. Marginal utility represents the additional satisfaction gained from consuming one more unit of a good. Therefore, all of the statements mentioned in the options are true as they accurately describe the concepts of total utility, utility, and marginal utility.

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20.

When the additional satisfaction from a good declines as more of it is consumed, this illustrates the law of
- Declining demand
- Diminishing marginal utility
- Increasing opportunity costs
- Exceptional marginal utility
Correct Answer

A. Diminishing marginal utility

Explanation

Diminishing marginal utility refers to the concept that as more of a good is consumed, the additional satisfaction or utility derived from each additional unit of the good decreases. In other words, the more we consume of a particular good, the less value or satisfaction we derive from each additional unit. This is a fundamental principle in economics and helps explain why individuals tend to consume less of a good as they already have enough to satisfy their needs and wants.

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21.

If Stimpson University increases tuition in order to increase its revenue, it will:
- Be successful if demand is elastic.
- Be successful if demand is inelastic.
- Be successful if supply is elastic.
- Be successful if supply is inelastic.
Correct Answer

A. Be successful if demand is inelastic.

Explanation

If Stimpson University increases tuition in order to increase its revenue, it will be successful if demand is inelastic. This means that even if the tuition is increased, the demand for education at Stimpson University will not significantly decrease. Inelastic demand implies that the consumers are not very responsive to changes in price, so even if the tuition is raised, the students will still be willing to pay for their education at Stimpson University. This will result in an increase in revenue for the university.

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22.

If the quantity of concert tickets sold decreases by 10 percent when the price increases by 5 percent, the price elasticity of demand over this range of the demand curve is:
- Price elastic.
- Price inelastic.
- Unit elastic.
- None of the above
Correct Answer

A. Price elastic.

Explanation

The given information states that when the price of concert tickets increases by 5 percent, the quantity of tickets sold decreases by 10 percent. This indicates a relatively larger decrease in quantity compared to the increase in price, suggesting that the demand for concert tickets is responsive to changes in price. Therefore, the price elasticity of demand over this range of the demand curve is price elastic.

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23.

The short run is a period of time:
- In which the availability of at least one resource is fixed.
- That is long enough to permit changes in the all the firm’s resources.
- In which production occurs within one year.
- In which production occurs within six months.
Correct Answer

A. In which the availability of at least one resource is fixed.

Explanation

The short run is a period of time in which the availability of at least one resource is fixed. This means that during the short run, the firm cannot change the quantity of this fixed resource. However, the firm can still make adjustments to other variable resources, such as labor or raw materials. This distinction between fixed and variable resources is important because it affects the firm's ability to adjust its production levels and costs in response to changes in demand or market conditions.

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24.

Marginal physical product is
- Equal to the average output of a worker
- The additional utility a consumer gets from the last unit of a product
- The additional output from using one more unit of labor
- Equal to the total product of labor
Correct Answer

A. The additional output from using one more unit of labor

Explanation

The correct answer is "The additional output from using one more unit of labor." Marginal physical product refers to the change in output resulting from the use of an additional unit of labor. It measures the increase in production that occurs when one more unit of labor is added to the production process. This concept is important in determining the optimal level of labor input and maximizing productivity.

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25.

____ is the situation in which the marginal product of labor is declining as more labor is hired.
- Law of demand
- Diminishing supply
- Diminishing marginal returns
- Returns to scale
Correct Answer

A. Diminishing marginal returns

Explanation

Diminishing marginal returns is the situation in which the marginal product of labor is declining as more labor is hired. This means that as additional units of labor are added, the increase in output becomes smaller and smaller. This occurs because there is a limited amount of other inputs, such as capital or land, which restricts the effectiveness of each additional unit of labor. As a result, the productivity of each worker decreases, leading to diminishing marginal returns.

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26.

Marginal cost is the:
- Total cost divided by the quantity produced
- Cost of production that remains constant when the rate of output changes
- Market value of all resources used to produce a good or service
- Increase in the total cost because of a one unit increase in production
Correct Answer

A. Increase in the total cost because of a one unit increase in production

Explanation

The correct answer is "Increase in the total cost because of a one unit increase in production." Marginal cost refers to the additional cost incurred when producing one additional unit of a good or service. It represents the change in total cost divided by the change in quantity produced. In this case, the answer correctly describes the concept of marginal cost by stating that it is the increase in total cost that occurs as a result of producing one additional unit.

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27.

Which of the following is not necessarily a characteristic of perfect competition?
- Low prices
- A large number of buyers and sellers
- A homogeneous/identical product
- Easy entry and exit
Correct Answer

A. Low prices

Explanation

Perfect competition is a market structure where there are a large number of buyers and sellers, selling identical products, with easy entry and exit into the market. While low prices are often associated with perfect competition due to the presence of many sellers competing for customers, it is not necessarily a characteristic of perfect competition. Prices can vary depending on various factors such as production costs, demand, and market conditions. Therefore, low prices may or may not be present in a perfectly competitive market.

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28.

Suppose the market for hot pretzels in New York City is perfectly competitive. What is true of demand in this market?
- The demand curve facing each seller is horizontal.
- The demand curve facing each seller is vertical.
- The demand curve facing each seller is downward sloping
- The demand curve facing each seller is upward sloping
Correct Answer

A. The demand curve facing each seller is horizontal.

Explanation

In a perfectly competitive market, each seller is a price taker, meaning they have no control over the price of the product. The market price is determined by the intersection of the market supply and demand. Since the market for hot pretzels in New York City is perfectly competitive, each seller faces a perfectly elastic demand curve, which is horizontal. This means that sellers can sell as much as they want at the market price, but they cannot charge a higher price without losing all their customers to other sellers.

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29.

A perfectly competitive firm is a price taker because:
- It has no control over the selling price of its product
- It has strong market power
- Market demand curve is downward sloping
- Its products are differentiated
Correct Answer

A. It has no control over the selling price of its product

Explanation

A perfectly competitive firm is a price taker because it has no control over the selling price of its product. In a perfectly competitive market, there are numerous buyers and sellers, and no individual firm has enough market power to influence the price. The firm can only accept the prevailing market price determined by the forces of supply and demand. Therefore, the firm must accept the price set by the market and adjust its quantity supplied accordingly. This lack of control over the selling price is a defining characteristic of a perfectly competitive market.

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30.

The golden rule of profit maximization states that any firm maximizes profit by producing where
- Price equals average revenue
- Price equals marginal revenue
- Price equals total revenue
- Marginal cost equals marginal revenue
Correct Answer

A. Marginal cost equals marginal revenue

Explanation

The correct answer is "marginal cost equals marginal revenue." This means that a firm maximizes its profit by producing the quantity of goods where the additional cost of producing one more unit (marginal cost) is equal to the additional revenue earned from selling one more unit (marginal revenue). At this point, the firm is neither overproducing nor underproducing, resulting in the highest level of profit.

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31.

A firm is currently operating where the MC of the last unit produced = $64, and the MR of this unit = $70, i.e. MR > MC. What would you advise this firm to do?
- Shut down.
- Increase output.
- Stay at current output.
- Decrease output
Correct Answer

A. Increase output.

Explanation

The firm should increase output because the marginal revenue (MR) of the last unit produced is greater than the marginal cost (MC) of that unit. This means that the firm is earning more revenue from selling the additional unit than it costs to produce it. By increasing output, the firm can continue to earn additional revenue and potentially increase its profits.

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32.

A monopolist is
- One of a large number of small firms producing a homogeneous good
- One of a small number of large firms producing a differentiated good
- One of a small number of large firms producing a homogeneous good
- A single seller of a product with no close substitutes
Correct Answer

A. A single seller of a product with no close substitutes

Explanation

A monopolist is a single seller of a product with no close substitutes. This means that the monopolist has exclusive control over the production and sale of a particular product or service, with no direct competition. As there are no close substitutes available, consumers have no choice but to purchase the product from the monopolist, giving the monopolist significant market power. This can lead to higher prices and reduced consumer welfare, as the monopolist can dictate terms and exploit their market dominance.

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33.

Which of the following is true for monopoly?
- The marginal revenue curve lies below the demand curve, i.e. P>MR.
- Marginal revenue equals price.
- Economic profits are zero in the long-run.
- The marginal revenue curve lies above the demand curve
Correct Answer

A. The marginal revenue curve lies below the demand curve, i.e. P>MR.

Explanation

In a monopoly, the marginal revenue curve lies below the demand curve, meaning that the price (P) is greater than the marginal revenue (MR). This is because in a monopoly, the monopolist is the sole producer and seller of a good or service, giving them the power to set the price. In order to sell more units, the monopolist must lower the price, which leads to a decrease in marginal revenue. Therefore, the marginal revenue curve will always be below the demand curve in a monopoly.

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34.

Compared to a perfectly competitive firm, a monopolist:
- Charges a higher price and produces a lower output
- Charges a lower price and produces a higher output
- Produces identical amounts of output at the lower price.
- Produces higher amounts of output at an identical price
Correct Answer

A. Charges a higher price and produces a lower output

Explanation

A monopolist charges a higher price and produces a lower output compared to a perfectly competitive firm because it has the ability to control the market and set prices at a level that maximizes its profits. With no competition, the monopolist can restrict the quantity supplied in order to drive up prices. This allows them to charge higher prices and produce less output, resulting in higher profits.

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35.

Monopolistic competition is identified by
- Many firms producing a similar but differentiated product.
- One firm producing a unique good.
- A few firms producing a slightly differentiated product
- Many firms selling an identical product
Correct Answer

A. Many firms producing a similar but differentiated product.

Explanation

Monopolistic competition is characterized by many firms producing a similar but differentiated product. This means that there are multiple companies in the market offering products that are similar to each other but have slight differences. These differences can be in terms of quality, features, branding, or other factors. This type of competition allows for some level of product differentiation, giving consumers a variety of options to choose from.

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36.

Oligopolistic industries consist of
- A few independent firms
- A few mutually interdependent firms
- Many interdependent firms
- Many independent firms
Correct Answer

A. A few mutually interdependent firms

Explanation

Oligopolistic industries consist of a few mutually interdependent firms. This means that the firms in the industry are not completely independent and their actions and decisions are influenced by the actions and decisions of other firms in the industry. They are aware of the interdependence and often take into consideration the reactions of their competitors when making decisions. This interdependence can lead to strategic behavior such as price fixing or collusion among the firms.

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37.

A firm hires labor in a labor market. If the wage rate is $44, the firm should hire
- All units of labor whose marginal physical product is 44
- Only units of labor whose marginal revenue product is $44
- All units of labor whose marginal revenue product is greater than or equal to $44
- All units of labor whose marginal revenue product is less than $44
Correct Answer

A. All units of labor whose marginal revenue product is greater than or equal to $44

Explanation

The firm should hire all units of labor whose marginal revenue product is greater than or equal to $44. This means that the firm should hire any additional unit of labor as long as the additional revenue generated by that unit is greater than or equal to $44. This ensures that the firm is maximizing its profits by hiring labor that contributes enough to cover its cost.

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38.

As a result of the decline in the demand for beef in the United States, the demand for cattle ranchers has
- Also decreased because the demand for cattle ranchers is a derived demand
- Increased because the demand for cattle ranchers is a derived supply
- Also decreased because the supply of cattle ranchers has increased
- Increased because the supply of cattle ranchers has increased
Correct Answer

A. Also decreased because the demand for cattle ranchers is a derived demand

Explanation

The correct answer is "also decreased because the demand for cattle ranchers is a derived demand." This means that the demand for cattle ranchers is dependent on the demand for beef. Since there has been a decline in the demand for beef, it follows that there would also be a decrease in the demand for cattle ranchers.

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39.

If the MPP of an additional unit of labor is 20 units per hour, the product price is $5 per unit, and the wage rate is $60 per hour, then, (Hint: MRP = MPP X p)
- An additional unit of labor should be employed
- An additional unit of labor should not be employed because it costs more than it is worth
- The employer should lower wages and accept less employment of labor
- Product price must be increased if profits are to be made
Correct Answer

A. An additional unit of labor should be employed

Explanation

The marginal revenue product (MRP) is calculated by multiplying the marginal physical product (MPP) by the product price. In this case, the MPP is given as 20 units per hour and the product price is $5 per unit. Since the MRP is positive (20 x $5 = $100), it means that the additional unit of labor will generate more revenue than its cost, which is the wage rate of $60 per hour. Therefore, it is economically beneficial to employ an additional unit of labor.

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40.

A minimum wage:
- Is set below the equilibrium wage.
- Causes the quantity supplied of workers to be greater than the quantity demanded
- Creates a shortage of workers.
- Is established by the intersection of labor demand and labor supply.
Correct Answer

A. Causes the quantity supplied of workers to be greater than the quantity demanded

Explanation

A minimum wage is a legally mandated wage that is set above the equilibrium wage. When the minimum wage is set above the equilibrium wage, it causes the quantity supplied of workers to be greater than the quantity demanded. This creates a surplus or a shortage of workers in the labor market, depending on the specific circumstances. The intersection of labor demand and labor supply determines the equilibrium wage, not the minimum wage.

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41.

The optimal mix of output is the:
- Combination of outputs demanded by the consumers
- Most desirable combination of output attainable with available resources, technology and social values
- Combination of outputs produced by firms
- Combination of output based on government surveys
Correct Answer

A. Most desirable combination of output attainable with available resources, technology and social values

Explanation

The optimal mix of output refers to the most desirable combination of output that can be achieved given the available resources, technology, and social values. This means that it takes into account the limitations of resources and technology, as well as the preferences and values of society. It aims to maximize efficiency and satisfaction by producing the output that is most desired and feasible in the given circumstances. This approach ensures that resources are utilized effectively and that the output meets the needs and wants of consumers while considering the broader social context.

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42.

Market failure occurs when:
- Market prices signal producers to produce the optimal mix of output.
- The economy produces at a point on the production possibilities curve.
- Producers supply the goods that earn the greatest profit.
- An imperfection in the market mechanism prevents an optimal outcome.
Correct Answer

A. An imperfection in the market mechanism prevents an optimal outcome.

Explanation

Market failure occurs when there is an imperfection in the market mechanism that prevents an optimal outcome. This means that the market is not able to efficiently allocate resources and produce the optimal mix of output. This can happen due to various reasons such as externalities, market power, information asymmetry, or public goods. In these cases, the market fails to achieve the most efficient allocation of resources and the desired outcomes, leading to a suboptimal situation.

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43.

A public good:
- Can be denied to those who do not pay for it.
- Is one in which consumption by one person does not preclude consumption by another person
- Is always produced by private firms
- Can be consumed by just one person
Correct Answer

A. Is one in which consumption by one person does not preclude consumption by another person

Explanation

A public good is a type of good that can be consumed by multiple individuals without reducing its availability for others. This means that the consumption of the good by one person does not prevent others from also consuming it. Unlike private goods, public goods are not typically produced by private firms and cannot be denied to those who do not pay for it.

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44.

The communal nature of a highway means that no one individual is motivated to pay for it because even those who do not pay for it will still benefit from using it. This is an example of:
- The free rider problem
- Government failure
- Inequity
- A natural monopoly
Correct Answer

A. The free rider problem

Explanation

The given scenario describes the free rider problem. The communal nature of the highway means that individuals who do not contribute to its maintenance and construction still benefit from using it. This creates a situation where people have an incentive to "free ride" and not pay for the highway, as they can still enjoy its benefits without incurring any costs. This leads to a lack of funding for the highway and highlights the difficulty in providing public goods when individuals can benefit without contributing.

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45.

The market produces too few public goods because:
- The link between payment and consumption is broken
- The free-rider dilemma exists
- People are reluctant to pay for what they can get for free
- All of the above
Correct Answer

A. All of the above

Explanation

The correct answer is "All of the above" because all three statements are valid explanations for why the market produces too few public goods. The link between payment and consumption being broken means that individuals may not directly benefit from paying for public goods, leading to underproduction. The free-rider dilemma refers to individuals benefiting from public goods without contributing to their provision, which reduces incentives for others to contribute. People being reluctant to pay for what they can get for free further exacerbates the underproduction of public goods.

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Economics Midterm Study Guide

Economics

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