Microeconomics True/False Questions

This statement is true because a country's production possibilities curve represents the maximum amount of goods or services it can produce with its current resources and technology. In order to shift the curve and increase production, the country would need to acquire new resources, improve its technology, or become more efficient in utilizing its existing resources. Without these changes, the country would not be able to produce more of a particular good or service in the long term.

Market demand represents the total quantity of a good or service that consumers are willing and able to purchase at various price levels. It is determined by horizontally adding up the individual demand curves of all consumers in the market. This means that market demand takes into account the preferences and purchasing power of all potential buyers, providing a comprehensive picture of the overall demand for the product. Therefore, the statement that market demand represents a horizontal summation of all demand curves is true.

The statement is true because the government program mentioned in the question is providing free medical care to a specific group of individuals (low-income mothers with small children). This program is intervening in the market by redistributing resources to ensure that these individuals have access to healthcare services, regardless of their ability to pay. The program is aimed at addressing equity concerns by ensuring that those who may not be able to afford medical care can still receive necessary treatment.

In a competitive market, the forces of supply and demand determine prices. When spring arrives and winter gear is still available, the demand for these items decreases significantly. As a result, the retailer faces excess inventory and needs to sell off the remaining winter gear. To attract buyers and clear their inventory, the retailer would lower the prices of coats, mittens, and other winter gear. This is because lower prices would incentivize consumers to purchase these items even though they are no longer in high demand. Therefore, the statement that a competitive market would react to this situation by forcing the prices for winter gear lower is true.

In competitive markets, firms have a strong incentive to use their resources efficiently in order to maximize their profits and gain a competitive advantage. This is because in a competitive market, there are many other firms offering similar products or services, and customers have the freedom to choose among them. Therefore, if a firm is not making efficient use of its resources, it may lose customers to competitors who can offer better quality or lower prices. By using resources efficiently, firms can reduce costs, increase productivity, and ultimately improve their profitability in the market.

The given scenario describes a company that disposed of its chemical waste by spraying it on the ground, resulting in environmental pollution. The Environmental Protection Agency (EPA) now needs to spend millions of dollars to clean up the site. This situation exemplifies an externality, as the company's actions imposed negative costs on society (pollution and cleanup expenses) without considering or accounting for them.

A market economy is usually an efficient method of organizing economic activity because it allows for competition, which drives innovation and efficiency. In a market economy, prices are determined by supply and demand, which helps allocate resources efficiently. Additionally, market economies provide individuals with the freedom to make their own economic decisions, which encourages entrepreneurship and productivity. Overall, the decentralized nature of a market economy allows for efficient allocation of resources and fosters economic growth.

Trade allows businesses to specialize in the production of goods and services that they are most efficient at producing. By focusing on their strengths, businesses can maximize their productivity and output. They can then trade with other businesses to obtain goods and services that they are less efficient at producing. This specialization and trade lead to increased efficiency, higher productivity, and ultimately, benefits for all parties involved.

The principle of comparative advantage states that countries should specialize in producing goods and services that they can produce more efficiently and at a lower opportunity cost than other countries. This principle suggests that countries can benefit from trading with each other, as they can focus on producing the goods and services in which they have a comparative advantage. Therefore, the statement that the principle of comparative advantage is the basis for most arguments in favor of free trade is true.

If the government sets the farm commodity loan price above the market equilibrium price, it means that the loan price is higher than what the market is willing to pay. This will lead to surpluses because farmers will be incentivized to produce more since they can sell their commodities at a higher price through the loan program. However, since the market equilibrium price is lower, there will be less demand for these commodities, resulting in surpluses. Therefore, the statement is true.

The average total cost is the sum of the average fixed cost and the average variable cost. In this case, the average fixed cost is 1.1 cents and the average total cost is 2.8 cents. Therefore, the average variable cost can be calculated by subtracting the average fixed cost from the average total cost, which gives us 2.8 - 1.1 = 1.7 cents per CD. Hence, the statement "Adams' average variable costs must be 1.7 cent per CD" is true.

The new regulation by the Environmental Protection Agency will increase the cost of production for coal miners. This increase in production costs will likely lead to a decrease in the quantity of coal supplied in the market. As a result, the supply curve for coal will shift to the left, indicating a decrease in supply. Therefore, the statement "The new regulation impacts the market by causing the supply curve for coal to shift to the left" is true.

Based on the information provided in the table, it can be inferred that Country A has a comparative advantage in the production of butter. This means that Country A can produce butter at a lower opportunity cost compared to other countries. It implies that Country A is more efficient in producing butter and can potentially produce it at a lower cost or with higher quality compared to other countries.

Economic modeling requires making accurate assumptions in order to accurately predict and analyze economic outcomes. These assumptions serve as the foundation for the model and any errors or incorrect assumptions can lead to inaccurate results. Therefore, it is crucial to make the correct assumptions when constructing economic models.

In the short run, businesses that are already operating in the market have the advantage of being able to respond quickly to changes in market prices. They can increase or decrease their supply of products based on market demand and price incentives. This is because they already have the necessary infrastructure, resources, and knowledge in place to adjust their production levels. On the other hand, new businesses entering the market would take time to set up their operations and may not be able to respond as quickly. Therefore, the statement is true.

The announcement of a 15% price increase in concrete will lead to an increase in the cost of construction materials for contractors. As a result, contractors may reduce their demand for concrete, leading to a decrease in the supply of new housing. This decrease in supply will cause the supply curve for new housing to shift to the left, indicating a decrease in the quantity of new housing supplied. Therefore, the statement "the effect of the price increase would be to move the supply curve for new housing to the left" is true.

The statement "A cut in income tax rates spurs growth in the economy" is an example of a positive economic statement because it is a factual statement that can be tested and proven true or false. It is not based on opinions or value judgments, but rather on observable economic outcomes.

The explanation for the given answer is that market supply is indeed a horizontal summation of the supply curves for all producers. This means that the total supply in the market is determined by adding up the quantities supplied by each individual producer at various prices. It assumes that all producers are willing and able to supply their product to the market. This concept is based on the idea that in a competitive market, producers have no control over the price and can only adjust their quantity supplied. Therefore, the market supply curve is a horizontal summation of the individual supply curves.

The given statement is true because milk has limited substitutes available in the market. This means that consumers have fewer options to switch to if the price of milk increases. As a result, even if the price of milk increases, the demand for milk is unlikely to decrease significantly. This indicates that the demand for milk is price inelastic, meaning that changes in price have a relatively small impact on the quantity demanded.

A firm with an average total cost higher than the current market price will not be able to cover its costs and make a profit. This means that the firm will face losses in the long run. In a competitive market, where there are many other firms offering similar products or services, customers have many alternatives to choose from. As a result, the firm will struggle to attract customers and generate enough revenue to sustain its operations. Eventually, the firm will be forced to exit the market as it cannot compete effectively and continue to operate at a loss.

This statement is an example of a normative economic statement because it expresses a value judgment about what the government should do in response to a specific situation. It is not a statement of fact or a description of how the economy actually works. Normative statements involve opinions and subjective judgments rather than objective analysis. In this case, the statement expresses a belief that the government should intervene and provide financial support to farmers during droughts, which is a subjective viewpoint.

As the time period increases, consumers have more opportunities to adjust their consumption patterns and find substitutes for a product. This increased flexibility makes consumers more responsive to changes in price, resulting in a higher price elasticity of demand. Therefore, most products will become more elastic in their price elasticity of demand as the time period increases.

Adding production workers while maintaining the same number of supervisory staff allows for a larger workforce to be managed by the same level of supervision. This can result in increased efficiency and productivity, as the supervisory staff can effectively oversee a larger number of workers. This is an example of an economy of scale, where the cost per unit decreases as production volume increases.

Pork and beef are not necessarily substitute meat products. The relationship between the two meats depends on various factors such as consumer preferences, cultural differences, and availability. While some consumers may consider pork and beef interchangeable, others may have a preference for one over the other. Therefore, it cannot be assumed that an increase in beef prices will always lead to a decrease in pork demand.

Big-ticket items like houses tend to be elastic in their price elasticity of demand because they are considered luxury goods and not necessities. This means that as the price of houses increases, the demand for them decreases significantly. People are more likely to postpone or cancel their plans to buy a house if the price is too high. On the other hand, if the price of houses decreases, the demand for them increases as more people can afford to purchase them. Therefore, the price elasticity of demand for big-ticket items like houses is high, making them elastic.

A firm making an economic profit refers to a situation where the revenue earned by the firm exceeds its total costs, including both explicit costs (such as wages, rent, and materials) and implicit costs (such as the opportunity cost of the owner's time and capital). On the other hand, an accounting profit is the difference between a firm's total revenue and its explicit costs. Since economic profit includes both explicit and implicit costs, it is always equal to or greater than accounting profit. Therefore, if a firm is making an economic profit, it must also be making an accounting profit.

The opportunity cost refers to the value of the next best alternative that is given up when making a decision. In this case, the table suggests that for Country B to produce a rifle, it would have to give up producing 18.75 pounds of butter. This indicates that the production of rifles comes at a cost of sacrificing the production of butter, making the statement true.

In industries like automobile manufacturing, setting up a new plant can be a time-consuming process that can take a year or longer. This means that the supply of products in this industry is not easily adjustable or responsive to changes in demand. Therefore, supply tends to be inelastic, meaning that it does not change significantly in response to changes in price or demand.

If a producer faces unit elastic demand for their product, it means that a change in price will result in an equal percentage change in quantity demanded. In this case, if the producer were to raise the price, the quantity demanded would decrease by the same percentage, resulting in no increase in revenue. Similarly, if the producer were to lower the price, the quantity demanded would increase by the same percentage, also resulting in no increase in revenue. Therefore, there are no market incentives for the producer to either raise or lower product prices.

The announcement of layoffs by the largest employer in town would likely lead to a decrease in consumer confidence and disposable income, causing people to be more hesitant to make large purchases such as cars. This decrease in demand would result in a leftward shift of the demand curve for cars at local car dealers. Therefore, the statement is true.

In perfect competition, there are no barriers to entry or exit for firms. This means that new firms can easily enter the market and existing firms can easily exit if they are not making profits. As a result, any economic profits made by a firm in the short run will attract new firms to enter the market, increasing competition and driving down prices. This process continues until all economic profits are competed away, resulting in zero long-run economic profits for firms in perfect competition. Therefore, the statement is true.

The statement is false because the opportunity cost of choosing the nearby job would actually be $5,000, not $30,000. The opportunity cost is the value of the next best alternative that is forgone when making a decision. In this case, the next best alternative is the job in California that pays $35,000 per year. Therefore, the opportunity cost of choosing the nearby job is the difference in salary between the two jobs, which is $5,000.

The statement is false because a tax cut for the middle class would actually increase their disposable income, which could lead to an increase in demand for expensive watches. This would shift the demand curve for expensive watches to the right, not to the left.

A luxury good is a type of product that is not considered a necessity and is often associated with higher quality, exclusivity, and higher price. Normal goods are those that see an increase in demand as consumer income increases. Since luxury goods are often associated with higher income levels and are considered to be of higher quality, it can be inferred that they would also be considered normal goods. Therefore, the statement "A luxury good would also be a normal good" is true.

In the short run, a competitive market would actually react to a shortage by increasing prices, not pressuring them lower. When there is a high demand for certain products due to a shortage, suppliers have the opportunity to increase prices and make more profit. This is because consumers are willing to pay more for the limited supply of goods. Therefore, the correct answer is false.

The statement suggests that the recent good prices for fishing tackle have encouraged new businesses to enter the market and begin production. However, the entry of new businesses into the market would actually increase the supply of fishing gear, causing the supply curve to shift to the right, not to the left. Therefore, the correct answer is false.

When considering two goods, two countries will benefit from trading the goods even if one country does not have an absolute advantage over the other in the production of both goods. This is because countries can specialize in producing the goods in which they have a comparative advantage, meaning they can produce a good at a lower opportunity cost compared to another country. By trading based on their comparative advantages, both countries can benefit from increased efficiency and access to a wider range of goods.

Economists often disagree about economic policy because economic policies are not solely based on past economic research. Economic policies also take into account current economic conditions, political considerations, and societal values, which can vary among economists. Additionally, economic research itself is not always definitive or universally agreed upon, leading to differing opinions and debates among economists. Therefore, the statement that economists seldom disagree about economic policy is false.

In competitive markets, firms do not have the ability to set their prices independently. They are price takers, meaning they have to accept the prevailing market price determined by the forces of supply and demand. If a firm tries to set a higher price, customers will simply switch to a competitor offering a lower price. Therefore, firms in competitive markets do not have the power to set their prices.

ABC Manufacturing would not be likely to enter the market if the current market price for plastic worms is 49 cents each because the total cost per worm (variable cost + fixed cost) would be 73 cents, which is higher than the market price. Therefore, ABC would not be able to make a profit and it would not be economically feasible for them to enter the market.

Producers who manufacture products with inelastic demand do not have market incentives to lower prices. Inelastic demand means that the quantity demanded does not change significantly with a change in price. Therefore, producers can keep prices high without losing many customers, resulting in higher profits.

In competitive markets, chronic shortages of goods and services are not a characteristic. Competitive markets are driven by supply and demand, and in such markets, prices tend to adjust to clear any temporary shortages. Competition encourages producers to increase their supply to meet the demand, which reduces the likelihood of chronic shortages. Therefore, the statement is false.

Bread and butter are not complementary goods, but rather substitute goods. This means that if the price for bread falls, the demand for butter will increase as consumers may choose to substitute bread with butter. Therefore, the correct answer is false.

The given statement suggests a correlation between the average worker's earnings and the productivity of the economy in Bangladesh. Since the average worker earns only $250 per year, it implies that the economy has low productivity. This is because low wages often indicate low productivity levels, as workers are not able to generate high levels of output or contribute significantly to the economy. Therefore, the answer "True" is appropriate based on the information provided.

The statement is false because most economists believe in the concept of the Phillips Curve, which suggests that there is a trade-off between inflation and unemployment in the short term. According to this theory, when inflation decreases, unemployment tends to increase, and vice versa. Therefore, if inflation goes down, most economists would expect unemployment to go up in the short term.

The statement is false because the DIRTI 5 is not an acronym for all variable costs. The acronym DIRTI 5 stands for the five categories of costs in managerial accounting, which are Direct materials, Direct labor, Factory overhead, Selling expenses, and Administrative expenses. It does not encompass all variable costs, as there may be other variable costs that do not fall under these categories.

The given statement is false because an absolute advantage in production means that a country can produce a good or service using fewer resources than another country. However, the table above does not provide any information about the production capabilities or resource allocation of Country B in comparison to other countries. Therefore, we cannot determine whether Country B has an absolute advantage in the production of rifles based on the given information.

The correct answer is False. Brown should not stop production on the 2-liter line even if the market price for bottles drops to 1.3 cents. This is because the total cost per bottle (fixed cost + variable cost) is 1.5 cents, which is still lower than the market price. Therefore, Brown can still make a profit by producing the 2-liter bottles.

It is false that it would be wise for a society to produce at a level inside the production possibilities frontier for some goods and services. The production possibilities frontier represents the maximum potential output that a society can achieve given its resources and technology. Producing inside the frontier would mean that the society is not utilizing its resources efficiently and is not maximizing its output. Therefore, it would not be wise for a society to produce at a level inside the production possibilities frontier.

In the short run, a firm in a competitive market should not shut down if it cannot pay for all its fixed and variable costs. This is because in the short run, a firm can still cover its variable costs even if it cannot cover its fixed costs. By continuing to operate, the firm can at least minimize its losses by covering its variable costs and contribute towards paying off its fixed costs. Shutting down would result in zero revenue and would not help improve the firm's financial situation. Therefore, the statement is false.