Exam 1

Question 1

Economics is the study of how individuals and societies choose to use scarce resources to produce goods and services to help meet the wants and needs of society.

Answer 1

T

Question 2

Economic resources include labor, capital, human capital, natural resources, and money.

Answer 2

F

Question 3

If a resource is limited in supply, it is scarce in the economic sense.

Answer 3

F

Question 4

Needs are limited, but wants can be unlimited.

Answer 4

T

Question 5

Choice is necessary because economic resources are scarce.

Answer 5

T

Question 6

The “Opportunity Cost” of using a resource in one way is the value of the best alternative use of the resource.

Answer 6

T

Question 7

Economists have discovered that most people are not rational, and do not think at the margin.

Answer 7

F

Question 8

If an organization is to be successful in achieving its goals, it must create incentives that are compatible with its goals.

Answer 8

T

Question 9

Individuals who trade with each other both gain from trade, and countries trading with each other both gain from trade.

Answer 9

T

Question 10

When two nations trade with each other, everyone in both nations will gain from that trade.

Answer 10

F

Question 11

Markets are usually a good way to organize economic activity.

Answer 11

T

Question 12

Government might be able to improve the market outcome if there are market failures.

Answer 12

T

Question 13

Market failures include monopoly, externalities, public goods, and inflation.

Answer 13

F

Question 14

The wealth of a nation is determined primarily by the productivity of its labor.

Answer 14

T

Question 15

The hypothesis that we now call The Law of Demand is a deductive consequence of the assumption of self-interest and the existence of scarcity.

Answer 15

T

Question 16

If income of buyers increases, demand for the product will also increase, other things equal.

Answer 16

F

Question 17

If the government prints too much money, there will be inflation.

Answer 17

T

Question 18

There is a long-run tradeoff between inflation and unemployment, but not a short-run tradeoff.

Answer 18

F

Question 19

The modern Scientific Method uses primarily inductive logic.

Answer 19

F

Question 20

In order to be useful, assumptions must be true statements about the world.

Answer 20

F

Question 21

Normative economics is economic science, and positive economics is economic policy.

Answer 21

F

Question 22

People always act in their economic self-interest.

Answer 22

F

Question 23

Economists use assumptions because the economic world is too complex to understand it simply by looking at it.

Answer 23

T

Question 24

In the Scientific Method, when a hypothesis is tested using empirical data, it is either accepted or rejected.

Answer 24

F

Question 25

Adam Smith used the principle of Absolute Advantage to explain trade patterns, but David Ricardo used the principle of Comparative Advantage.

Answer 25

T

Question 26

An individual or nation can gain from trade without specialization, and they can gain more by specializing first and then trading, but they cannot gain from specialization unless they trade.

Answer 26

T

Question 27

Determinants of demand include price, income, tastes and preferences, prices of related goods, expectations, supply, and number of buyers in the market.

Answer 27

F

Question 28

Consumer surplus

Answer 28

Consumer Surplus is the difference between the price that consumers pay and the price that they are willing to pay. On a supply and demand curve, it is the area between the equilibrium price and the demand curve. For example, if you would pay 76p for a cup of tea, but can buy it for 50p – your consumer surplus is 26p

Question 29

Producer surplus

Answer 29

Producer surplus is a measure of producer welfare. It is measured as the difference between what producers are willing and able to supply a good for and the price they actually receive.

Question 30

Total surplus

Answer 30

Total Surplus = Willingness to Pay Price - Actual Purchase Price + Actual Selling Price - Economic Cost. Total Surplus = Willingness to Pay Price – Economic Cost. Economic costs refer to not only the seller's cost of materials and labor, but also the opportunity cost of the seller's time and effort.

Question 31

Deadweight loss

Answer 31

A deadweight loss is a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.