Economics1exam-qs.docx

E`Chapter 1 In economics the central problem is: scarcity Indicate below what is NOT a factor of production. A bank loan. Macroeconomics deals with: economic aggregates. Microeconomics is not concerned with the behaviour of: aggregate demand. The study of inflation is part of: macroeconomics. Aggregate supply is the total amount: of goods and services produced in an economy. The total demand for goods and services in an economy is known as: aggregate demand. Inflation is: an increase in the overall price level. A recession is: a period during which aggregate output declines. Unemployment means that: at the going wage rate, there are people who want to work but cannot find work. If marginal benefit is greater than marginal cost, a rational choice involves: more of the activity. A student chooses to study because the marginal benefit is greater than the ________ cost. marginal The concept of opportunity cost: suggests a major increase in public health-care spending means an expansion in other areas will be harder to achieve. Opportunity cost is that which we forgot, or give up, when we make a choice or a decision. A graph showing all the combinations of goods and services that can be produced if all of society's resources are used efficiently is a: production possibility curve. Periods of less than full employment correspond to: points inside the production possibility curve. The circular flow of goods and incomes shows the relationship between: firms and households. In a free market system, the amount of goods and services that any one household gets depends upon its: income and wealth. In a planned or command economy, all the economic decisions are taken by the: government.

Which one of the following is a normative statement? Inequality in the distribution of income is a more serious problem than unemployment.

Chapter 2 The 'law of demand' implies that: as prices fall, quantity demanded increases. The Setrite Corporation produces chairs. An economist working for the firm predicts that 'if people's incomes rise next year, then the demand for our chairs will increase, ceteris paribus.' The accuracy of the economist's prediction depends on whether the chairs Setrite produce: are normal goods What effect is working when the price of a good falls and consumers tend to buy it instead of other goods? The substitution effect. The quantity demanded of Pepsi has decreased. The best explanation for this is that: the price of Pepsi increased. Demand curves are derived while holding constant: income, tastes, and the price of other goods. When the decrease in the price of one good causes the demand for another good to decrease, the goods are: substitutes. Suppose the demand for good Z goes up when the price of good Y goes down. We can say that goods Z and Y are: complements.

If the demand for coffee decreases as income decreases, coffee is: a normal good. Which of the following will NOT cause a shift in the demand curve for compact discs? A change in the price of compact discs. Which of the following is consistent with the law of supply? As the price of calculators rise, the quantity supplied of calculators increases, ceteris paribus The price of computer chips used in the manufacture of personal computers has fallen. This will lead to __________ personal computers. an increase in the supply of When excess demand occurs in an unregulated market, there is a tendency for:

price to rise. Market equilibrium exists when _____________ at the prevailing price. quantity demanded equals quantity supplied A movement along the demand curve to the left may be caused by: a decrease in supply. The price elasticity of demand is the: ratio of the percentage change in quantity demanded to the percentage change in price. The price of apples falls by 5% and quantity demanded increases by 6%. This means that demand is: elastic. The price of burgers increases by 22% and the quantity of burgers demanded falls by 25%. This indicates that demand for burgers is: elastic. If the cross-price elasticity of demand between two goods is negative, then the two goods are: complements. If the quantity demanded of beef increases by 5% when the price of chicken increases by 20%, the cross-price elasticity of demand between beef and chicken is: 0.25. When the market operates without interference, price increases will distribute what is available to those who are willing and able to pay the most. This process is known as: price rationing.

Chapter 3 A price ceiling is: a maximum price usually set by government, that sellers may charge for a good. Economists say that there has to be some form of rationing whenever: there is excess demand. It is necessary to ration a good whenever: demand exceeds supply. In a free market system, rationing occurs when there are increases in: price. If the market price is below the equilibrium price: quantity demanded will be greater than quantity supplied

If a government were to fix a minimum wage for adult workers, economists would predict: the costs and prices of firms employing cheap labour would increase.

Economists use the term 'Black Markets' for situations where: goods are sold at prices above legal or official prices. An example of an indirect tax is: VAT. VAT is a good example of which kind of tax? Ad valorem. The government is considering placing a tax on cigarettes to raise revenue to finance health-care benefits. The demand for cigarettes is price inelastic. Which of the following statements is TRUE? The tax on cigarettes may not raise as much revenue as anticipated in the years to come because the demand for cigarettes is likely to become more elastic over time. Tax incidence is the: ultimate distribution of a tax's burden Tax shifting: occurs when households can alter their behaviour and do something to avoid paying a tax. Where a tax can be shifted, the incidence depends on: elasticities of demand and supply. Income elasticity of demand is the % change in the quantity demanded divided by the % change in income. In the UK, which of the following foods has the highest income elasticity of demand? Fresh fish. Arguments used to justify EU support for farmers include: both the first and third option. Arguments used against EU support for farmers include that: poor farmers receive very little of the support. In the EU, the threshold price is used to calculate the size of: the variable import levy. Farmers in developing countries suffer from the EU support for EU farmers in 2 ways: smaller markets and lower prices.

Set-aside is an EU policy which pays farmers to: not use some of their land. The MacSharry reforms of the EU farm support policy in 1992 included: cuts in intervention prices.

Chapter 4 Constrained choice is relevant for households: making both spending and labour-supply decisions. Economists use the term utility to mean: the satisfaction a consumer obtains from a good or service. Economists use the term marginal utility to mean: additional satisfaction gained by the consumption of one more unit of a good. The law of diminishing marginal utility states that: the satisfaction from each additional unit of a good consumed will decrease. By consumer surplus, economists mean: the difference between the maximum amount a person is willing to pay for a good and its market price. The equation for Anna's demand curve for CDs is Q = 20 - .5P. If the price of a CD is £18, consumer surplus will be: £121. The price of an ice cream cone is £1.50 and you buy three ice cream cones per week. If the price of an ice cream cone falls to £1.25 and you still buy three ice cream cones per week, which of the following is TRUE? The marginal utility of the fourth ice cream cone per week must be worth less than £1.25 to you. Economists have used the idea of diminishing marginal utility to explain why: Diminishing marginal utility explains both the demand curve's negative slope, and its curvature. A consumer will buy more units of a good if the value of the good's: marginal utility is greater than price.

The diamond-water paradox can be explained by suggesting that the price of a product is determined by: marginal utility. A utility-maximising consumer changes their spending for goods X and Y so that: MUX/MUY = PX/PY The MUX/MUY is ten and the PX/PY is eight, so the consumer should buy: more X and less Y. Economists define an indifference curve as the set of points: which yield the same total utility. Which of the following is a property of an indifference curve? It is convex to the origin. The limits imposed on household choices by income, wealth, and product prices are the: budget constraint. Jane has £500 a week to spend on food and clothing. The price of food is £10 and the price of clothing is £25. Which of the following pairs of food and clothing are in Jane's choice set? 10 units of clothing and 25 units of food. If a household's money income is doubled: the budget constraint will shift out parallel to the old one. The curve that is traced out when we keep indifference curves and the budget line constant and change the price of good X is: the price-consumption curve for X.

The curve that is traced out when we keep indifference curves constant and move the budget line parallel to its original position is: the income-consumption curve.

If the income and substitution effects of a price increase work in the same direction, the good whose price has changed is a: normal good.

Chapter 5 Profit-maximising firms want to maximize the difference between: total revenue and total cost. Which statement is FALSE? Fixed costs are zero if the firm is producing nothing. Which of the following is most likely to be a variable cost for a firm?

The payroll taxes that are paid on employee wages. The costs that depend on output in the short run are: both total variable costs and total costs. The short run, as economists use the phrase, is characterised by: at least one fixed factor of production and firms neither leaving nor entering the industry. Diminishing marginal returns implies: increasing marginal costs. Which of the following is a correct statement about the relationship between average product (AP) and marginal product (MP)? If AP exceeds MP, then AP is falling. If the total product of two workers is 80 and the total product of 3 workers is 90, then the average product of the third worker is _____ and the marginal product of the third worker is _______. 30; 10 Engineers for The All-Terrain Bike Company have determined that a 15% increase in all inputs will cause a 15% increase in output. Assuming that input prices remain constant, you correctly deduce that such a change will cause _________ as output increases. average costs to remain constant Suppose Handel's Ice Cream experiences economies of scale up to a certain point and diseconomies of scale beyond that point. Its long-run average cost curve is most likely to be: U-shaped. Most empirical studies show that firms' cost curves: slope down to the right and then level off. A graph showing all the combinations of capital and labour that can be used to produce a given amount of output is: an isoquant. The rate at which a firm can substitute capital for labour and hold output constant is the: marginal rate of factor substitution. A graph showing all the combinations of capital and labour available for a given total cost is the: isocost line. The formula for average fixed costs is: TFC/q The formula for average variable cost (AVC) is: TVC/q Marginal revenue is: the added revenue that a firm takes in when it increases output by one additional unit.

A firm in a perfectly competitive industry is producing 50 units, its profitmaximising quantity. Industry price is £2 and total fixed costs and total variable costs are £25 and £40, respectively. The firm's economic profit is: £35. Maximum profit can be shown on a diagram using: the AC and AR curves. A firm will shut down in the short run if: variable costs exceed revenues.

Chapter 6 If you were running a firm in a perfectly competitive industry, you would be spending your time making decisions on: how much of each input to use. Market power is: a firm's ability to raise price without losing all demand for its product. When ______ substitutes exist, a monopolist has ______ power to raise price. more; less If a firm has some degree of market power, then output price: becomes a decision variable for the firm. Relative to a competitively organised industry, a monopoly: produces less output, charges higher prices and earns economic profits. The cosmetics industry is not considered by economists to be a good example of perfect competition because: firms spend a large amount of money on advertising The short run, as economists use the phrase, is characterised by: at least one fixed factor of production and firms neither leaving nor entering the industry If firms can neither enter nor leave an industry, the relevant time period is the: short run. In the long run: there are no fixed factors of production. A normal rate of profit: is the rate that is just sufficient to keep owners or investors satisfied. If the ABC Typing Service is earning a rate of return greater than the return necessary for the business to continue operations, then: the firm is earning an economic profit. Economic profits are: anything greater than the normal opportunity cost of investing. The normal rate of profit for relatively risk-free firms will be _________ the interest rate on risk-free government bonds. approximately equal to

The slope of the marginal revenue curve is: twice as steep as the demand curve. In a monopoly, marginal revenue is: lower than price for all units other than the first. Suppose we know that a monopolist is maximising its profits. Which of the following is a correct inference? The monopolist has: equated marginal revenue and marginal cost. An industry that realises such large economies of scale in producing its product that single-firm production of that good or service is most efficient is called: a natural monopoly. From society's point of view, society would be better off if a monopolist: produced more and charged a lower price. A market is defined as perfectly contestable if: entry to it and exit from it are both costless. In contestable markets, large oligopolistic firms end up behaving like: monopolistically competitive firms.

Chapter 7 Monopolistic competition differs from perfect competition primarily because: in monopolistic competition, firms can differentiate their products. In monopolistic competition, firms achieve some degree of market power: by producing differentiated products. A monopolistically competitive firm that is incurring a loss will produce as long as the price that the firm charges is sufficient to cover: variable costs. A firm in a monopolistically competitive industry: must lower price to sell more output. The long-run equilibrium outcomes in monopolistic competition and perfect competition are similar because in both market structures: firms will only earn a normal profit. Which of the following statements best describes the outcome under monopolistic competition? It is not efficient because too little output is produced and the output that is produced is produced at a cost above minimum average total cost.

Which of the following statements best describes the outcome under monopolistic competition? In monopolistic competition, there are too many firms and each firm produces a slightly different product at a scale that is less than optimal. A form of industry structure characterised by a few firms, each large enough to influence market price is: oligopoly. When one firm in the breakfast cereal market started an advertising campaign that stressed the nutritional value of its cereals, all other cereal manufacturers started similar advertising campaigns. This suggests that the breakfast cereal market is: oligopolistic. An industry that has a relatively small number of firms that dominate the market is called: a concentrated industry.

Assume that firms in an oligopoly are currently colluding to set price and output to maximise total industry profit. If the oligopolists are forced to stop colluding, the price charged by the oligopolists will _______ and the total output produced will _________. decrease; increase A price- and quantity-fixing agreement is known as: collusion. A group of firms that gets together to make price and output decisions is called: a cartel. In which of the following circumstances would a cartel be most likely to work? The market for copper, where there are very few producers and the product is standardised. An oligopoly with a dominant price leader will produce a level of output: between that which would prevail under competition and that which a monopolist would choose in the same industry. The kinked demand curve model of oligopoly assumes that the elasticity of demand: in response to a price increase is more elastic than the elasticity of demand in response to a price decrease. A major weakness of the kinked demand curve model of oligopoly is that: it fails to explain how a firm arrived at its price and output decision initially. A market is defined as perfectly contestable if: entry to it and exit from it are both costless. Which of the following statements is FALSE? For a market to be contestable, the product must be produced with a labour intensive technology.

In contestable markets, large oligopolistic firms end up behaving like: monopolistically competitive firms.

Chapter 8 The traditional profit-maximising theory of the firm has been criticised by some economists because: Both the first and second option. A firm may be unable to maximise profits because it: does not know its MC and MR. has too little information. Public limited companies may not maximise their profits because: shareholders have little control over managers. Williamson suggests that managers might NOT try to achieve: maximum profits. The divorce of ownership and control tends to occur in: public limited companies. The divorce of ownership and control causes a problem usually referred to by economists as: principal-agent problem. If firms 'satisfice' this means that: objectives such as profit are not maximised. A sales maximising firm will produce where: sales revenue is maximised. Sales maximisation is likely to take place in markets that are: oligopolistic. Growth maximisation is the same as: maximising the growth of sales revenue. The merger of a fibre producer and a clothing firm would be a ____________ merger. vertical The merger of two clothing firms would be a ____________ merger horizontal The merger of a clothing firm and a software producer would be a ____________ merger. conglomerate Identify below those who are not stakeholders in a company. None of the above (costumers employees owners)

Fear of take-overs will lead firms to maximise: profits. Which of the following is NOT a common reason for a merger? To increase competition. Behavioural theories of the firm concentrate on the _______________ interests of _________________. conflicting; different parts of the firm When firms build in 'organisational slack', they do this in order to: cope with unforeseen changes. minimise conflict within the firm. Galbraith's idea that firms are controlled by a 'technostructure' supports______________ theories. Williamson's Firms that engage in satisficing behaviour are likely to be: like other firms in their industry.

Chapter 9 Constrained choice is relevant for households: making both spending and labour-supply decisions The idea that the demand for car workers stems from the demand for cars is: derived demand. Assuming leisure is a normal good, if the income effect is greater than the substitution effect, a wage increase: will decrease labour supply. The substitution effect of higher wages suggests that as the wage rate increases: leisure becomes more expensive and households buy less of it. Assuming that leisure is a normal good, if an individual's labour supply curve is backward bending then the: income effect outweighs the substitution effect. If the income effect is smaller than the substitution effect, higher net wages will: compensating differentials. New technology in the form of computer spreadsheets has increased the productivity of accountants. This will cause: the demand curve for accountants to shift to the right, since the productivity of accountants has increased.

The marginal product of a variable input is best described as: the additional output resulting from a one unit increase in the variable input. In a competitive labour market, firms will hire labour up to the point where the marginal revenue product of labour equals: the wage rate. The marginal revenue product of labour is: the additional revenue a firm earns by employing one additional unit of labour The formula for the marginal revenue product of labour (L is for labour, X is the product) is: (MPL)(PX) If output price is constant, the marginal revenue product of labour curve will have the same shape as the: marginal product of labour curve. An unemployed salesperson has been offered a job paying £500 a week. He turns that job down and continues to search for another job that pays more. The cost of this continued search is: the £500 weekly salary that he has forgone and the monetary costs incurred by continuing to search. Unemployment benefits may increase the unemployment rate because unemployment benefits: reduce the cost of job search. If labour market discrimination crowds women into a limited number of occupations so that the number of occupations available to men increases, then: both the wages and the marginal productivity of men will be higher than they otherwise would be. The stock of knowledge, skills and talents that people possess is called: human capital. The term 'rent' as it is used by economists, refers to: the return to any factor of production that is in fixed supply. Supply of land in a given use: will be upward sloping because as land becomes more valuable in one use, the amount of land made available for that use will increase.

Chapter 10 If income were distributed equally, the Lorenz curve would be: a 45-degree line between 0 and 100%.

The Gini coefficient is: a commonly used measure of the degree of inequality in an income distribution. A Gini coefficient of zero means that the: income is equally distributed. A Gini coefficient of one means that: one family has all the income and everyone else has nothing. The measure or value upon which a tax is levied is the: tax base. Horizontal equity holds that: those with equal ability to pay should bear equal tax burdens. Vertical equity holds that: those with greater ability to pay should pay more. The total amount of tax you pay divided by your total income is the: average tax rate. The marginal tax rate is: the tax rate you pay on any additional income that you earn. A tax whose burden is the same proportion of income for all households is: a proportional tax. A progressive income tax means that those with a higher income pay: a higher percentage of their income in taxes than low-income people. A tax whose burden, expressed as a percentage of income, falls as income increases is a: regressive tax. Tax incidence is the: ultimate distribution of a tax's burden. Tax shifting: occurs when households can alter their behaviour and do something to avoid paying a tax. Where a tax can be shifted, the incidence depends on: elasticities of demand and supply. An example of an indirect tax is: VAT.

VAT is a good example of which kind of tax? Ad valorem. Housing Benefit is a good example of: a means-tested cash benefit. The UK NHS [National Health Service] is a good example of: a benefit in kind. In UK the term 'the poverty trap' is used to describe the fact that: if poor people earn more their benefits fall, making them no better off.

Chapter 11 If PX >MCX, society gains by: producing more X. If some gain and some lose as the result of a proposed change and it can be demonstrated that the value of the gains would exceed the value of the losses, then the change is said to be: potentially efficient. The total cost to society of producing an additional unit of a good or service is the: marginal social cost. A person will continue to pursue an activity up to the point where: marginal benefit equals marginal private cost. When you consume good Q, not only do you benefit from consuming the good, but other people benefit from your consumption as well. If firms produce good Q where P = MC, firms will be producing: less than the efficient level of output. Externalities are a problem only if: decision makers do not take them into account. The government increases the minimum wage. The National Association of Fast Food Restaurants hires you to determine the impact that this higher minimum wage will have on its industry. This is an example of: partial equilibrium analysis. The statement 'everything affects everything else' reflects the principle behind: general equilibrium analysis. The conclusion that free, unregulated markets will produce an efficient outcome breaks down if:

firms are not price takers in input markets. households do not have perfect information. firms are not price takers in the output market. Imperfect competition occurs: when firms have some control over price and competition. Private goods are: rival in consumption and their benefits are excludable. The whole class of goods that will be under-produced or not produced at all in a completely unregulated market economy are referred to as: public goods. An example of a public good is: preservation of wetlands. The optimal level of provision of public goods is where society's total willingness to pay per unit is equal to the: marginal cost of producing the good. If one person's enjoyment of the benefits of a good does not interfere with another's consumption of it, the good is said to be: non-rival in consumption. Because public goods are characterised by being collectively consumed: the private sector may not provide them because they cannot exclude those who do not pay. If a large number of individuals are affected by an external benefit, private bargaining will not work because of: the free-rider problem. The Coase theorem states that: under certain conditions, private parties can arrive at the efficient solution without government involvement. The idea that when externalities are present, private parties can arrive at the efficient solution without government intervention under certain circumstances is known as: the Coase theorem. Markets fail to produce an efficient allocation of resources, but governments also fail because: the measurement of social damages and benefits is difficult and imprecise.

Chapter 12 Spending on motoring as a % of household expenditure in the UK shows that motoring is: a superior good. Between 1990 and 1999, car ownership per thousand of the population fell in: USA.

Evidence suggests that the price elasticity of demand for motoring is: inelastic. The external benefits of using cars are ___________ and the external costs are ____________. low; high Which city has the following transport policy? Car licences are very expensive, vehicle entry to the city centre is very restricted, road pricing is being introduced and modern cheap rail transport is being expanded. Singapore. In the UK, electricity industry parts are a ___________ and other parts are __________. natural monopoly; potentially competitive Supporters of antimonopoly enforcement argue that the real gain from such enforcement: is that this policy serves to deter firms from engaging in such practices as collusion, pricefixing and deceptive advertising. Antimonopoly laws are based on the proposition that: competition is the best way to achieve efficiency. A horizontal merger is a merger of: firms producing the same product. A merger in which firms at various stages in a production process combine is a: vertical merger. A merger between a paper producer and a book publisher is an example of: a vertical merger. A conglomerate merger is a merger of: firms producing unrelated products. A firm charging different buyers different prices for the same product is practising: price discrimination Sales staff are keen to sell extended warranties because: they are paid commission on each extended warranty they sell. Privatisation is the transfer of: government businesses to the private sector. Antimonopoly legislation is undertaken to _______ competition and market regulation is undertaken to ______ competition. promote; restrict De-regulation is where the government:

removes barriers to entry and minimum product quality standards. The theory of the 'second best' suggests that in the absence of perfect competition, a privatized industry should charge a price of: P = MC + Z In the UK it is now becoming possible to buy electricity from a gas company and gas from an electricity company. This is called: making markets contestable. Economists use the term 'regulatory capture' to mean a situation where the private sector firms being regulated: persuade the regulator to operate in the industry's interests.