Econ Principles (E.1-5)

Tennis rackets are on sale at Academy. Which of the following should be true? Select ALL correct answers.

• Quantity demanded of pickleball paddles will decrease.

• Quantity demanded of tennis balls will increase.

• Quantity demanded of pickleballs will increase.

• Quantity supplied of tennis balls will decrease.

Answer explanation

The quantity of tennis rackets demanded will increase due to the sale, as will demand for complementary goods, like tennis balls. Demand for substitute goods will drop as consumers may favor the similar but cheaper good.

Which economic problem is addressed by antitrust laws?

• Tragedy of the Commons

• Monopolization

• Inequality

• Factor Immobility

Answer explanation

Antitrust laws are intended to control the combination of large companies to protect and encourage competition in markets.

Which of the following is NOT an example of a macroeconomic problem?

• A low-income family is zoned to a low-performing school.

• Inflation

• Widespread unemployment

• Shortage of workers skilled in high-tech manufacturing

Answer explanation

Inflation, unemployment, and skilled worker shortages are examples of macroeconomic problems, which are broad trends which affect whole economies. The situation faced by a single family is a microeconomic issue.

Which of the following interventions can be seen to contribute to the problem of moral hazard?

• Antitrust laws

• Interest rate adjustments

• Subsidized flood insurance

• Environmental protection laws

Answer explanation

A moral hazard is created when the incentive to act carefully or wisely is removed, as some other party will face the consequences of one's poor choices. Bailouts and insurance contribute to moral hazard.

Which of the following policies would Adam Smith be most likely to support?

• Minimum wage laws

• Rent control

• Price gouging bans

• Free trade agreements

Answer explanation

In "the Wealth of Nations", Smith advocated for free markets, in which all parties are guided by self-interest to do business with whomever it is most profitable. Free trade agreements remove tariffs, quotas, and other government interventions which distort the market by artificially adding costs.

Which of the following policies would John Maynard Keynes be most likely to support?

• State ownership of power and water utilities

• Minimum wage laws

• Free trade agreements

• Increase infrastructure spending

Answer explanation

Keynes was critical of the type of command economy and state-ownership he witnessed in the Soviet Union. He likely took no issue with minimum wage laws or free trade agreements, but he is best known for advocating aggressive government spending on infrastructure and other works to increate employment and thus, aggregate demand.

Which of the following goods would experience the largest decrease in quantity demanded during a short recession?

• Used cars

• New luxury sports cars

• All new cars

Answer explanation

During a recession, aggregate demand decreases. Normal goods, such as new cars, will see less demand as part of this. Veblen goods (and other luxury goods), consumed by the wealthiest people, will see less of a drop in demand as these buyers are likely to see less of a drop in expendable income than low-income buyers. Inferior goods, which include used cars, are likely to see increased demand as they are purchased in place of new cars.

Which of the following is not integral to Smith's argument in "The Wealth of Nations"?

• egalitarianism

• self-interest

• comparative advantage

• free choice

Answer explanation

Smith argued people naturally focus on doing what they do best (comparative advantage) and trade with others to obtain, as cheaply as possible, what they produce. Economic efficiency and productivity would be maximized when, in a free market, all could freely choose the best uses of their capital and time based on what is best for them (self-interest). While Smith believed it was morally right for the workers to have a decent standard of living, equality was not central to his theory.

Assuming demand for a good, and thus its price, quickly increased, which of the following would be the result of inelasticity of supply?

• Price would decrease

• Supply would rapidly increase

• A shortage would occur

• A surplus would occur

Answer explanation

Price elasticity of supply is the degree to which supply can respond to changes in price. If a good is highly elastic, when price increases, supply will increase to settle at a new equilibrium. If it is inelastic, suppliers cannot/will not respond to the increased price. Therefore, if demand has increased and supply does not, there will be a shortage.

Which of the following is NOT part of Adam Smith's concept of the function of the "Invisible Hand"?

• The number of people shopping for cars fluctuates with the health of the economy.

• Manufacturers produce more cars in order to meet increased demand.

• Manufacturers hire more workers in order to increase capacity.

• Federal regulators ensure that workers in manufacturing plants are paid fair wages.

Answer explanation

Smith's "Invisible Hand" theory depends on consumers and producers making free choices which, in the aggregate, cause the market to maintain equilibrium without government intervention. Smith would say that workers and employers should be free to agree to the wage that feels fair to them without government interference.