Microeconomics Final Exam

Economics is best defined as the study of ________.

• how to run a business most profitably

• how society manages its scarce resources

• how to predict inflation, unemployment, and stock prices

• the ability of free markets to reach desirable outcomes, despite the self-interest of market participants

The circular flow diagram illustrates that, in markets for GOODS & SERVICES,

• households are sellers, and firms are buyers

• households are buyers, and firms are sellers

• households and firms are both buyers

• households and firms are both sellers

The circular flow diagram illustrates that, in markets for FACTORS OF PRODUCTION

• households are sellers, and firms are buyers

• households are buyers, and firms are sellers

• households and firms are both buyers

• households and firms are both sellers

An economy produces hot dogs and hamburgers. If a discovery of new technology made hot dog production more efficient, it would:

• expand the production possibilities frontier

• contract the production possibilities frontier

• move the economy along the production possibilities frontier

• move the economy inside the production possibilities fronteir

In an hour, Mateo can wash 3 cars or mow 2 lawns, and Tyler can wash 5 cars or mow 4 lawns. Who has the ABSOLUTE advantage in car washing, and who has the absolute advantage in lawn mowing?

• Mateo in washing, Tyler in mowing

• Tyler in washing, Mateo in mowing

• Mateo in washing and mowing

• Tyler in washing and mowing

Once again, in an hour, Mateo can wash 3 cars or mow 2 lawns, and Tyler can wash 5 cars or mow 4 lawns. Who has the ABSOLUTE advantage in car washing, and who has the absolute advantage in lawn mowing?

• Mateo in washing, Tyler in mowing

• Tyler in washing, Mateo in mowing

• Mateo in washing and mowing

• Tyler in washing and mowing

Answer explanation

Mateo has a lower opportunity cost for washing (costs him 2/3 lawns vs Tyler's 4/5 lawns).

Tyler has a lower opportunity cost for mowing (costs him 5/4 lawns instead of Mateo's 3/2 lawns).

Two goods for which an increase in the price of one leads to an increase in the quantity demanded for the other are:

• Compliments

• Substitutes

• Inferior goods

• Normal goods

Two goods for which an increase in the price of one leads to a decrease in the demand for the other are:

• Compliments

• Substitutes

• Inferior goods

• Normal goods

If the economy goes into a recession and incomes fall, what happens in the markets for normal goods?

• Prices and quantities both rise

• Prices and quantities both fall

• Prices rise and quantities fall

• Prices fall and quantities rise

Answer explanation

When incomes fall due to a recession, the demand curve for normal goods shifts to the left (a decrease in demand), as consumers can no longer afford as much.

This shift reflects a lower quantity demanded at each price level, thus quantities and prices both fall.

A decrease in the supply of a good will decrease the total revenue producers receive if:

• The demand curve is inelastic

• The demand curve is elastic

• The supply curve is inelastic

• The supply curve is elastic

Answer explanation

A decrease in supply reduces total revenue (p x q) if the demand curve is ELASTIC because the quantity sold drops significantly, even though the price increases.