What are the effects of scarcity quizlet?

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3. Macroeconomics

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What is the economic problem? Why does scarcity affect everyone?

The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited. Scarcity affects everyone because resources are limited. Even wealth societies (and people) are limited in time, land, capital, and labor. Every society must decide what to produce, how to produce it, and who will get it. These are basic questions that every society must face.

Because of the quantity and quality of its resources, the U.S. has an absolute advantage in the production of many goods and services. Does this imply that the U.S. cannot benefit from trading with a developing country that has less productive ability? Why or why not?

The U.S. can benefit from trading with less productive countries as long as it produces the goods for which it has a comparative advantage and trades to receive the goods for which it does not.

Output per Hour
Martha Stewart
Gift Baskets 20 (.55) 16 (.66)
Potholders 36(1.8) 24 (1.5)
What is the opportunity cost of a potholder for Martha?
What is the opportunity cost of a potholder for Stewart?
Who has a comparative advantage in producing potholders?
Who has comparative advantage in producing gift baskets?

.55 Gift baskets
.66 Gift baskets
Martha
Stewart

SCENARIO 1: Assume a desert island economy in which labor is the only scarce resource and labor can be used to gather food (coconuts) or to build huts. There are six equally productive individuals on the island. Each inhabitant can gather 25 coconuts in one day or build one hut in one day.

Draw the production possibilities frontier of the trade-off between coconuts and huts.

Compute the opportunity cost of building two more huts in one day.

Assume that in one day, two huts were built and 75 coconuts were gathered. What does this situation depict?

What would have to occur for three huts to be produced along with 100 coconuts?

First we start off by calculating what the opportunity cost is of building all 6 huts. We can set this up as an algebraic expression 6H = 150C. Therefore 1H = 25C and 2H = 50C or 50 coconuts.

The situation depicts the inefficient use of resources as the production point represents one that is inside the production possibilities frontier.

Population growth or technological improvement would have to occur.

Please answer the following questions with respect to the followings scenario: A price ceiling on bread.
a. will there be more bread or less bread on sale?
b. will the quality change?
c. will the opportunity cost of finding bread change?
d. Will people have to break the law to buy bread?

a. Consumers will want to buy more because the price is lower (the law of demand), but producers will manufacture less (the law of supply). The net result will be a shortage.
b. Because the price is capped, producers will use cheaper ingredients, and many expensive brands and varieties will no longer be profitable to produce. Quality will decrease.
c. The opportunity cost of finding bread will increase. There will be lines and shortages.
d. Because bread will be difficult to find - an underground market for bread could form.

Please answer the following questions with respect to the followings scenario: A price floor on milk.
a. will the quantity of milk for sale change?
b. will dairy farmers be better off?

a. Consumers will purchase less milk because the price is higher (law of demand), but producers will manufacture more because the price in the market is artificially high (the law of supply). The net result will be a surplus of milk.
b. Most likely they will not be better off - it will be difficult for them to sell off their surplus

The type of non-price rationing that most closely approaches the market outcome is
A) favored customer rationing.
B) first-come, first-served basis or queuing.
C) coupon rationing with coupons that can be resold. In this scenario, it will look similar to a market-based system. Price and willingness to pay asserts itself in this example.
D) coupon rationing with coupons that cannot be resold.

C) coupon rationing with coupons that can be resold. In this scenario, it will look similar to a market-based system. Price and willingness to pay asserts itself in this example.

SCENARIO 1: Consider the market for generic soda, a product that only has "soda" on its label. We know that demand for generic soda falls when income increases, demand rises when the price of other soda increases, and that demand rises when the price of potato chips falls.

Refer to Scenario 1. Graph and explain the effect on equilibrium price and quantity on an increase in income. What type of good is "soda"?

Graph and explain the effect on equilibrium price and quantity of an increase in the price of premium soda (ex: Pepsi). How are the goods related?

Graph and explain the effect on equilibrium price and quantity of soda due to an increase in the price of potato chips. How are the goods related?

As income increases, demand for generic "soda" and the equilibrium price and quantity both fall. Generic soda is an inferior good.

As the price for premium soda (ex. Pepsi) increases, the demand for generic soda rises, and the equilibrium price and quantity both rise. These goods are substitutes.

As the price of potato chips increases, the demand for generic soda and the equilibrium price and quantity both fall. The goods are complements.

The world price of rice is $12 per bushel and the U.S. can buy all of the rice that it wants at that price. The government places a tax on imported rice of $2 per bushel. Show the effect of this tax on the graph above. What will happen to the amount of rice the U.S. imports?

The tax will increase the world price of rice to $14. Thus, the U.S. will import less rice.

In the summer of 2008, the price of regular gasoline in U.S. soared to over $4 per gallon. Then, in the fall of that year, the U.S. economy fell into a deep recession that significantly reduced consumers' income. Did the supply or demand curve shift in this circumstance? What happened to the equilibrium price of gasoline? For this part of the question, assume no other changes in the market for gasoline.

The reduction in consumer income led to a leftward shift in the demand curve for gasoline. This caused the equilibrium of gasoline to fall. In fact, the price of gasoline at the end of 2008 had fallen to under $2 per gallon.

By the summer of 2014, the price of regular gasoline in the United States was hovering around $3.50 per gallon. But innovation in oil extraction technology, such as fracking, reduced the price of crude oil significantly (crude oil the primary input in oil production). Did the supply or demand curve shift in this circumstance? What happened to the equilibrium price of gasoline? For this part of the question, assume no other changes in the market for gasoline.

The significant drop in the cost of production led to an increase, or a rightward shift in the supply curve for gasoline. This increase in supply led to a decrease in price. In fact, by early 2015, the price of gasoline fell to under $2 a gallon.

You have decided that you want to attend a halloween party as Sponge Bob. You estimate that it will cost $40 to assemble your costume. After spending $40 on the costume, you realize that the additional pieces you need will cost you $10 more. The marginal cost of completing the costume is:
A) $10.
B) $30.
C) $40.
D) $50.

A) $10.

An efficient market is a market:
A) that deals in unlimited resources.
B) in which long-term profits are guaranteed.
C) in which profit opportunities are eliminated almost instantaneously.
D) there are no opportunity costs.

C) in which profit opportunities are eliminated almost instantaneously.

Which of the following is an example of a normative question?
A) How will an increase in the price of gasoline affect taxi drivers?
B) What fraction of an income-tax cut will be spent on consumer goods?
C) Should the government provide free prescription drugs to senior citizens?
D) How will an increase in the minimum wage affect teenaged workers?

C) Should the government provide free prescription drugs to senior citizens?

Normative economics focuses on the value of economic fairness, or what the economy "should be" or "ought to be."

Gerald noted that whenever he ate sushi for lunch, the New York Yankees would win that evening. Based on this observation, he developed the "sushi-a-day-keeps-the-Yankees-in-play" theory of winning. It is most likely true that Gerald:

A) showed good reasoning for the reason the Yankees would win.
B) committed the ceteris paribus error.
C) committed the fallacy of composition.
D) was too quick to conclude that correlation implies causation.

D) was too quick to conclude that correlation implies causation

You have noticed that there is an increase in the number of homeless people in your city and at the same time you observe that there are a number of vacant apartments. You believe that if landlords were required to rent their apartments for less than they are currently charging, the government could reduce the number of homeless people. This policy recommendation would be motivated by concerns over:
A) economic growth.
B) stability.
C) efficiency.
D) equity.

D) equity.

The situation in an economy in which the apportionment of resources or goods among the people is considered fair

Isabel Cris
Composing Music 8 16
Writing Song Lyrics 4 2

Which of the following statements is true?
A) Isabel has a comparative advantage in both composing music and writing song lyrics.
B) Cris has a comparative advantage in both composing music and writing song lyrics.
C) Isabel has a comparative advantage in composing music and Cris has a comparative advantage in writing song lyrics.
D) Cris has a comparative advantage in composing music and Isabel has a comparative advantage in writing song lyrics.

D) Cris has a comparative advantage in composing music and Isabel has a comparative advantage in writing song lyrics.

Saving is an example of:
A) exchanging capital for cash.
B) exchanging scarce resources for unlimited resources.
C) trading present benefits for future benefits.
D) trading future benefits for present benefits.

C) trading present benefits for future benefits.

Because resources are not equally well suited to producing all goods:
A) as more of a good is produced the inputs used to produce that good will increase in price.
B) the opportunity costs of producing a good will increase as more of that good is produced.
C) the opportunity costs of producing a good will decrease as more of that good is produced.
D) as more of a good is produced the quality of that good declines and therefore the costs of production increase.

B) the opportunity costs of producing a good will increase as more of that good is produced.

The gap between rich and poor countries has __________ over time because poor countries find it difficult to devote resources to __________ production.
A) increased; capital
B) decreased; capital
C) remained constant; capital
D)remained constant; capital and consumer goods

A) increased; capital

The law of __________ implies that as prices fall, __________.
A) demand; demand increases
B) demand; demand falls
C) demand; quantity demanded increases
D) supply; supply increases

C) demand; quantity demanded increases

The price of pizza rises suddenly and you discover that you and your friends eat less pizza. This is due to the:
A) law of supply.
B) income and substitution effects.
C) increase in demand.
D) increase in hamburger quality.

B) income and substitution effects.

If Harry is scalping tickets for a Chicago Bears game, he will be successful:
A) when prices are too high.
B) only when there is excess supply.
C) any time the Chicago Bears are popular.
D) when the price set by the Bears is less than the market equilibrium price.

D) when the price set by the Bears is less than the market equilibrium price.

The government setting rental rates for apartments at a maximum of $400 would be an example of an effective:
A) price floor.
B) price ceiling.
C) market equilibrium.
D) price surplus.

B) price ceiling.

The government setting rental rates for apartments at a minimum of $600 would be an example of an effective:
A) price floor.
B) price ceiling.
C) market equilibrium.
D) price shortage.

A) price floor.

In the market for apartments, the quantity demanded will be greater than the quantity supplied if the government imposes an effective:
A) price floor.
B) price ceiling.
C) market equilibrium price.
D) price surplus.

B) price ceiling.

A nonprice rationing system such as queuing must be used to ration the available supply of apartments if the government will not allow landlords to charge more than __________ for an apartment.
A) $400
B) $500
C) $600
D) $700

A) $400

Landlords will have an excess supply of apartments if the government will not allow landlords to charge less than __________ for an apartment.
A) $600
B) $500
C) $400
D) none of the above

A) $600

Equilibrium world price of apples is 30-cents-per-apple. If a 10-cent-per-apple tax is levied on imported apples, the United States will
A. import 2 million apples per day
B. import 4 million apples per day
C. import 6 million apples per day
D. import 8 million apples per day

A. import 2 million apples per day

Assume that initially there is free trade. If the United States allowed drilling for more oil in the Gulf of Mexico, it could:
A) reduce U.S. oil imports without a tax.
B) decrease the demand for domestic oil.
C) reduce the supply of domestic oil.
D) all of the above

A) reduce U.S. oil imports without a tax

If the most someone is willing to pay for an airline ticket to Las Vegas is $300 and the market price of the ticket is $200, then this buyer will get consumer surplus of:
A) $100.
B) $200.
C) $300.
D) $500.

A) $100.

The market price of a bowling ball is $125 and the full cost of producing it is $35, then a bowling ball producing firm gets producer surplus of:
A) $35.
B) $90.
C) $125.
D) $160.

B) $90

The demand for teachers increased in the spring of 2005, but the starting wages paid to teachers was still the same at the end of 2005. This is an example of a:
A) price control.
B) flexible price.
C) sticky price.
D) highly regulated market.

C) sticky price.

Nominal rigidity, also known as price-stickiness or wage-stickiness, is a situation in which a nominal price is resistant to change. Complete nominal rigidity occurs when a price is fixed in nominal terms for a relevant period of time

According to the Classical model, unemployment could not persist because __________ would __________ to eliminate the excess __________.
A) wages; rise; supply of labor
B) prices; rise; supply of goods
C) wages; fall; supply of labor
D) prices; fall; demand for goods

C) wages; fall; supply of labor

Suppose the economy suffers a high rate of inflation. According to Keynesian economists, the government should decrease employment by:
A) decreasing money supply.
B) balancing the budget.
C) not doing anything.
D) decreasing government spending.

D) decreasing government spending.

In a business cycle, a peak occurs before the beginning of a(n) ________ and a trough occurs before the beginning of a(n) ________.
A) expansion; recession
B) depression; expansion
C) trough; peak
D) recession; expansion

D) recession; expansion

The major lesson of the circular flow diagram is that total __________ must equal total __________.
A) surplus; shortage
B) wages; income
C) income; spending
D) spending; saving

C) income; spending

Funds are demanded and supplied in the:
A) money market.
B) goods and services market.
C) labor market.
D) transfer market.

A) money market.

In the circular flow diagram, ________ demand labor and ________ demand goods and services.
A) firms; firms
B)households; firms
C) firms; households
D) households; households

C) firms; households

A rancher raises alpaca. Once a year, he shears them and sells the raw wool to a processor who spins it into yarn. The yarn is then sold to a mill which produces and sells alpaca sweaters. In calculating GDP we would count:
A) the raw wool, the yarn and the sweaters.
B) only the yarn and the sweaters.
C) only the sweaters.
D) only the raw wool and the yarn.

C) only the sweaters.

The value of what Burger King produces in France is included in the U.S. ________ and in the French ________.
A) GDP; GDP
B) GNP; GNP
C) GNP; GDP
D) GDP; GNP

C) GNP; GDP

Which of the following is NOT a component of gross domestic product?
A) net exports
B) government purchases
C) purchases by consumers of used goods
D) purchases by consumers of finished goods

C) purchases by consumers of used goods

GDP minus final sales gives a measure of the:
A) GNP.
B) change in business inventories.
C) value of intermediate goods.
D) non-residential investment.

B) change in business inventories.

In 2006 final sales equal $500 billion and the change in business inventories is -$40 billion. GDP in 2006:
A) is $-40 billion.
B) is $460 billion.
C) is $500 billion.
D) is $540 billion.

B) is $460 billion.

If the economy grows at 10 percent from year 1 to year 2 and real GDP is 300 in year 1, what will real GDP be in year 2?
A) 300
B) 315
C) 330
D) 10

C) 330

Timmy started looking for another job immediately after he lost his current job. As a result the:
A) labor force decreases.
B) labor force increases.
C) unemployment rate increases.
D) unemployment rate remains constant.

C) unemployment rate increases.

The unemployment rate is calculated as:
A) (employed - labor force)/employed × 100.
B) (employed + unemployed)/labor force × 100.
C) unemployed/population × 100.
D) (unemployed)/labor force × 100.

D) (unemployed)/labor force × 100.

When an individual quits his job and decides to look for a new job immediately, the labor-force participation rate:
A) decreases.
B) increases.
C) stays the same.
D) may increase or decrease, depending on the length of time he/she stays at home.

C) stays the same.

A customer service representative in Nebraska who loses his job because the company relocated the customer service department to another country represents an example of:
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) natural unemployment.

B) structural unemployment.

An economic recession tends to ________ the demand for imports, which ________ a nation's balance of payments.
A) reduce; worsens
B) reduce; improves
C) increase; improves
D) increase; worsens

B) reduce; improves

If the price index in 2005 is 125 and the price index in 2006 is 105, the rate of inflation between 2005 and 2006 is:
A) -5%.
B) -16%
C) -19%.
D) -20%.

B) -16%

CPI(x+1)-CPIx/CPIx

The consumer price index is the index most often used to measure:
A) unemployment.
B) per capita income.
C) inflation.
D) the labor force.

C) inflation.

If the CPI in period 1 is 250 and the CPI in period 2 is 300, then the rate of inflation between period 1 and period 2 is:
A) 20%.
B) 25%.
C) 30%.
D) 50%.

A) 20%.

The PPI is a price index that tends to be a leading indicator of :
A) past economic performance.
B) unemployment trends.
C) future inflation rates.
D) nominal GDP.

C) future inflation rates.

The real interest rate is the difference between __________ and __________.
A) the interest rate on a loan; the inflation rate
B) nominal interest rate; depreciation
C) inflation rate; GDP deflator
D) frictional inflation rate; structural inflation rate

A) the interest rate on a loan; the inflation rate

You want to make a 10% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 4%. You should charge a nominal interest rate of:
A) 4%.
B) 6%.
C) 10%.
D) 14%.

D) 14%.

Which of the following statements is true?
A) Whether you gain or lose during a period of inflation depends on whether your income rises faster or slower than the prices of the things you buy.
B) Inflation that is higher than expected benefits creditors, and inflation that is lower than expected benefits debtors.
C) There are no costs or losses associated with anticipated inflation.
D) When unanticipated inflation occurs regularly, the degree of risk associated with investments in the economy decreases.

A) Whether you gain or lose during a period of inflation depends on whether your income rises faster or slower than the prices of the things you buy.

Discuss what is meant by the Classical belief that the economy is self-correcting.

Classical theory argued that an excess supply of labor would fairly quickly drive down wages to a new equilibrium level and as a result unemployment would be eliminated.

What might be some Keynesian prescriptions to get the economy out of an economic slump?

The government could either decrease taxes and/or increase government spending - Fiscal Policy
Or Monetary Policy - the Federal Reserve increases Money Supply to lower interest rates

Explain carefully the difference between GDP and GNP.

Gross Domestic Product is the market value of all final goods and services produced within the confines of a country regardless of the national origin of the inputs that were used to produce the goods. Gross National Product by contrast measures the market value of all final goods and services produced within a given period by factors of production owned by the country's citizens, regardless of where the output is produced.

Why aren't intermediate goods counted in GDP?

The reason is that if it weren't excluded the GDP figures would be double counting some production. That is to say that the market value of the final goods already reflects the value of the intermediate goods.

Explain what is meant by the concept of "value added" and how it can be used to calculate GDP.

Value added simply refers to the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. If you add up the "value added" at each stage of the production process, the final value is equal to GDP.

Please list some shortcomings of GDP data

GDP does not account for leisure, environment factors (as production increases, so does pollution), the underground economy, improved product quality or worsening product quality.

Please explain the difference between calculating GDP using the expenditure approach and the income approach.

expenditure approach - a method of computing GDP that measures the amount spent on all final goods during a given period.

Income approach - a method of computing GDP that measures the income received by all factors of production in producing final goods.

Identify which of the following item(s) would be included in U.S. GDP: (a) The output of a U.S.-owned family farm in Kansas (b) Food stamp payments (c) Welfare checks (d) Ebay's used goods

The output of a U.S.-owned family farm in Kansas is the only one that counts in GDP.
Transfers (e.g., food stamps and welfare checks) are not included because they do not represent the value of a productive resource. Used goods are excluded from the calculation - this would be considered double counting.

List and explain the three major types of unemployment. Which two types make up the natural rate of unemployment?

Frictional unemployment - caused by short-run job mismatch and is often voluntary. People are in search of better paying jobs. Structural unemployment - this is caused by the skills of workers suddenly becoming obsolete because of changes in technology or the structure of the economy. Cyclical unemployment - caused by the recessionary phase of the business cycle.

Frictional and Structural unemployment make up the natural rate of unemployment because there will always be labor workers seeking jobs that better match their skills and because jobs will disappear due to technology or outsourcing.

Describe the difference between the CPI and GDP Deflator

The GDP Deflator includes only domestic goods and not anything that is imported. This is different because the CPI includes anything bought by consumers including foreign goods. The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.

consumer surplus

willingness to pay- market price

producer surplus

market price- cost of production

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