Exam #1 Part 1 Review PDF

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Exam 1 part 1 review - with topics and main ideas...

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Use the study plan to start studying!!

Exam I will be on Saturday, October 24, from 10:00 a.m.-12:00 p.m., online, with webcam monitoring with ProctorU. It is your responsibility to have a functional computer with a webcam and microphone. Please review, study and learn microeconomics, you must know the material prior to the exam. There will be remote proctoring of the exams using ProctorU. You must study for the exam, it is a closed book exam. When you take the exam you are on the NJIT Honor Code of academic integrity: anyone cheating will fail the course and be sent to the Dean of Students. After the exam please do not discuss it with anyone. The exam will cover microeconomic theory. The relevant seven chapters from the textbook are: 1, 2, 3, 4, 7, 8, and 9. The exam will consist of multiple choice and true and false questions; a calculator is not needed. When you take the exam you are on the NJIT Honor Code, anyone cheating will fail the course and be sent to the Dean of Students. An effective and efficient modus operandi to prepare for the exam is to review the text book chapters, PowerPoint slides, and homework assignments as well as the self-study quizzes. In addition, you have access to tutorial videos on all the topics under study; you will find the videos in the Chapter Resources folder. You must study for the exam: it is a closed book exam! You may not refer to any materials during the exam. Students will not be able to access other assignments or questions while taking the exam. If you attempt to do so all questions and assignments and the exam will be blocked. You will be denied further access to the exam! If you have any questions on the course material, please post them to the Discussion Board or you may see me during office hours. And if you are burning the midnight oil on the eve of the exam and a question requires an immediate answer send me an email. I would like to emphasize again, you will be taking the exam using remote webcam monitoring with ProctorU. The exam is a closed book exam: the only source of information you may use during an exam is your intellect. The exam may not be downloaded or otherwise copied, it must be taken online question by question. If you have a conflict with another course or exam you should only contact me and do it immediately–the conflict will be resolved quickly. I wish everyone success on the exam: the higher the grades, the better.

Chapter 1: Economic Incentives 1. When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives, ● A.the policies are likely to be more successful than policies that cost firms more, but they do not recognize economic incentives. ● B. pollution is likely to increase. ● C. the policies are futile because where the environment is concerned, it has been repeatedly shown that firms do not respond to economic incentives. ● D. the policies are consistent with economic incentives. Economists emphasize that consumers and firms consistently respond to economic incentives. When a consumer or a firm responds to economic incentives, they choose more over less. If everything else is equal, consumers and firms choose the option that provides the most money. So, ceteris paribus, (everything else equal) people choose the option that returns the highest net monetary benefits. 2. Economics is the study of the choices people make to attain their goals, given their scarce resources. 3. Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when a. A. marginal cost is zero. b. B. marginal benefit equals marginal cost. c. C. marginal benefit is maximized. d. D. marginal benefit is greater than marginal cost. Economists use the word marginal to mean an extra or additional benefit or cost of a decision. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost —in symbols, where MB = MC. Marginal analysis involves comparing marginal benefits and marginal costs.

1. A market is a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. 2. Microsoft charges a price of $599 for a copy of Windows 7. Is this pricing decision rational? a. A. We cannot assume that this pricing decision was rational because we do not have enough information to make an assumption. b. B. Microsoft's choice was rational: the price will maximize profit. c. C. Microsoft's choice cannot be rational: the price is clearly more than most people are willing and able to pay. d. D. When we assume the managers at Microsoft have used all available information and have weighed all known benefits and costs, we are assuming rationality. Rationality is the assumption economists make that consumers and firms use all available information as they act to achieve their goals. Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs.

3. One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls a. A.scarcity. b. B.the market. c. C. economics. d. D. rationality. 4. Societies organize their economies in two main ways to answer the three questions of what, how, and who. A society can have a centrally planned economy in which the government decides how economic resources will be allocated. Or a society can have a market economy in which the decisions of households and firms interacting in markets allocate economic resources. a. Centrally planned economy An economy in which the government decides how economic resources will be allocated. b. Market economy An economy in which the decisions of households and firms interacting in markets allocate economic resources. c. Mixed economy An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

5. Productive efficiency occurs when a good or service is produced at the lowest possible cost. Allocative efficiency occurs when production is in accordance with consumer preferences. a. Productive efficiency The situation in which a good or service is produced at the lowest possible cost. i. Productive: lowest possible cost (p-p) b. Allocative efficiency A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. i. Allocative: accordance with consumer preferences (a-a) 6. Equity is a. A.an exactly equal distribution of income. b. B. when poorer people's income is growing more rapidly than more wealthy people's income. c. C. the fair distribution of economic benefits. d. D. always achieved by the market. Equity is harder to define than efficiency, but it usually involves a fair distribution of economic benefits. For some people, equity involves a more equal distribution of economic benefits than would result from an emphasis on efficiency alone. 7. Firms choose how to produce the goods and services they sell. In many cases, firms face a trade-off between using more workers or using more machines. For example, a. A. many times in the past several decades, firms may have chosen between a production method in the United States that uses fewer workers and more machines and a production method in China that uses more workers and fewer machines. b. B. many times in the past several decades, firms may have chosen between a production method in the United States that uses fewer machines and more workers and a production method in China that uses more machines and fewer workers. c. C. a local service station has to choose whether to provide car repair services using more diagnostic computers to support their auto mechanics and fewer tools to support their auto mechanics or more tools to support their auto mechanics and fewer diagnostic computers to support their auto mechanics. d. D. movie studios have to choose whether to produce animated films using more highly skilled animators to draw them by hand or fewer highly skilled animators and more low-skill animators.

Many times in the past several decades, firms may have chosen between a production method in the United States that uses fewer workers and more machines and a production method in China that uses more workers and fewer machines. 8. A mixed economy is an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. 9. Opportunity cost is a. A. the idea that because of scarcity, producing more of one good or service means producing less of another good or service. b. B. the highest valued alternative that must be given up to engage in an activity. c. C. when unlimited wants exceed the limited resources available to fulfill those wants. d. D. when consumers and firms use all available information as they act to achieve their goals The opportunity cost of any activity —such as producing a good or service —is the highest-valued alternative that must be given up to engage in that activity. 10. Trade-offs force society to make choices, particularly when answering the following three fundamental questions: a. 1. What goods and services will be produced? b. 2. How will the goods and services be produced? c. 3. Who will receive the goods and services produced? 11. Consumers, firms, and government decide(s) what goods and services will be produced a. Consumers, firms, and the government face the problem of scarcity by trading off one good or service for another. Each choice made comes with an opportunity cost measured by the value of the best alternative given up. 12. In the United States, who receives the goods and services produced depends largely on how income is distributed a. In the United States, who receives the goods and services produced depends largely on how income is distributed. Individuals with the highest income have the ability to buy the most goods and services. 13. A hypothesis in an economic model is a. A. a statement that may be either correct or incorrect about an economic variable. b. B. usually about a causal relationship. c. C. tested before it can be accepted (or not rejected). d. D. all of the above. A hypothesis in an economic model is a statement that may be either correct or incorrect about an economic variable. An economic variable is something measurable that can have different values. An economic hypothesis is usually about a causal relationship. Before accepting a hypothesis, we must test it. 14. Any model is based on making assumptions because a. A. we cannot analyze an economic issue unless we reduce its complexity. b. B. models have to be simplified to be useful. c. C. both a and b. d. D. neither a nor b. Economic models make behavioral assumptions about the motives of consumers and firms. Economists assume that consumers will buy the goods and services that will maximize their well-being or their satisfaction. Similarly, economists assume that firms act to maximize their profits. These assumptions are simplifications because they do not describe the motives of every consumer and every firm. 15. Positive analysis is concerned with what is, and normative analysis is concerned with what ought to be. Economics is about positive analysis, which measures the costs and benefits of different courses of action 16. Economics is a social science because a. A. it considers human behavior —particularly decision-making behavior. b. B. it is based on studying the actions of individuals. c. C. it applies the scientific method to the study of the interactions among individuals. d. D. all of the above. Economics is a social science because it applies the scientific method to the study of the interactions among individuals. Because economics is based on studying the actions of individuals, it is a social science. As a social science, economics considers human behavior —particularly decision-making behavior —in every context, not just in the context of business 17. Macroeconomics is a. A. the study of firms as a group with special emphasis on how these firms interact with one another. b. B. the study of "large" (greater than $100,000) economic transactions in the economy. c. C. the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

d. D. the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. 18. Microeconomics is the study of a. A. "small" (less than $100,000) economic transactions in the economy. b. B. how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. c. C. the economy as a whole, including topics such as inflation, unemployment, and economic growth. d. D. firms as individual units excluding how these firms interact with one another.

19. Which of the following covers the study of topics such as inflation or unemployment? a. A. Microeconomics b. B. Macroeconomics c. C. Both microeconomics and macroeconomics give equal emphasis to these problems. d. D. None of the above. 20. Areas that form rectangles and triangles on graphs can have important economic meaning. The formula for the area of a rectangle is: Area of a rectangle = Base ×Height.

Area of Triangle = ½ x Base x Height ●

Graphs appear not just in economics textbooks but also on Web sites and in newspaper and magazine articles that discuss events in business and economics. Why the heavy use of graphs? Because they serve two useful purposes: (1) They simplify economic ideas, and (2) they make the ideas more concrete so they can be applied to real-world problems. Economic and business issues can be complicated, but a graph can help cut through complications and highlight the key relationships needed to understand the issue. A bar graph is a diagram utilizing rectangular bars with lengths proportional to the values that they represent.

21. When we graph the relationship between two variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing so, however, can lead to incorrect conclusions. Reasons for drawing incorrect conclusions about cause and effect include a. A. an omitted variable. b. B. reverse causality. c. C. both a and b. d. D. none of the above. 22. When we graph the relationship between two variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing so, however, can lead to incorrect conclusions. One reason for drawing an incorrect conclusion is an omitted variable. An omitted variable is one that affects other variables, and its omission can lead to false conclusions about cause and effect. A related problem in determining cause and effect is known as reverse causality. The error of reverse causality occurs when we conclude that changes in variable X cause changes in variable Y when, in fact, it is actually changes in variable Y that cause changes in variable X.

2. The diagram to the right represents a demand curve for apples. The original demand curve is D1. If a factor other than price which affects demand changes, causing demand to increase, the resultant demand curve is represented by D2

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A graph showing the relationship between the price of a good and the quantity of the good demanded at each price is called a demand curve. In the above diagram, the variable on the vertical axis is the price of the good and the variable on the horizontal axis is the quantity of the good demanded. The relationship between two variables is linear when it can be represented by a straight line. Few economic relationships are actually linear. Most are curved —or nonlinear —relationships rather than a linear relationship. In practice, however, it is often useful to approximate a nonlinear relationship with a linear relationship Economists often are interested in percentage change from one period to the next. The percentage rate of change of gross domestic product (GDP) is an important macroeconomic variable. If in 2010 GDP was $11,150 billion dollars, and GDP increased to $ 11,403 billion in 2011, what is the growth rate of the U.S. economy in 2011? = 2.3%

(N-O) / O A demand curve shows a negative relationship between two variables —if price goes up, the quantity demanded of the good falls. A supply curve shows a positive relationship between two variables —if price goes up, the quantity supplied also goes up.

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Miscellaneous Chp 1 Questions ● Which of the following statements about the idea that people are rational is correct? ○ The idea assumes that consumers and firms use all available information as they act to achieve their goals ● Economists assume that the only reason people take the actions they do is in response to economic incentives ○ False ● What do economists mean by the word “marginal”? = extra or additional ● Economists believe that an activity should be continued up to the point where = the marginal benefit from the activity is equal to the marginal cost ● In a market system, how does society decide what goods and services will be produced? = Consumers, firms, and the govt determine what goods and services will be produced by the choices they make ○ An increase in the production of one good requires the reduction in the production of some other good. This is a trade-off, resulting from the scarcity of productive resources. ○ The highest valued alternative given up in order to engage in some activity is known as the = opportunity cost ■ Ex: opportunity cost of increased funding for space exploration might be giving up the opportunity to fund cancer research ● In a market system, what determines how goods and services will be produced? = Firms determine how goods and services will be produced

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Key word here is: what determines HOW goods and services will be produced: ■

How Will the Goods and Services Be Produced?

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Firms choose how to produce the goods and services they sell. In many cases, firms face a trade-off between using more workers and using more machines. For example: ● • A local service station has to choose whether to provide car repair services using more diagnostic computers and fewer auto mechanics or fewer diagnostic comput-ers and more auto mechanics. ● A movie studio has to choose whether to produce animated films using highly skilled animators to draw them by hand or using fewer animators and more computers. ● • A firm may have to choose between a production method in the United States that uses fewer workers and more machines and a production method in China that uses more workers and fewer machine In a market system, how does society decide who will receive the goods and services produced? = who receives the goods and services produced depends largely on how income is distributed ■ Who Will Receive the Goods and Services Produced? ■ In the United States, who receives the goods and services produced depends largely on how income is distributed. The higher a person’s income, the more goods and services he or she can buy. Often, people are willing to give up some of their income—and, there-fore, some of their ability to purchase goods and services—by donating to charities to increase the incomes of poorer people. Today which of the follow...