d089 practice questions

d089 practice questions Leave the first rating Students also studied Terms in this set (97) Western Governors UniversityD 089 Save WGU - D089 Principles of Economic...263 terms Marcel_GilesPreview D089 - Module 1 Teacher 37 terms WGU_Econ_CI_Team Preview pre assessment d089 70 terms Loveysbg21610 Preview Supply, Teacher WG

• What are the three fundamental questions every

economy must answer?Give an example of a "What" question. 1. What to produce? Ex: One business wants to drill for oil, the other want to raise cattle. 2. How to produce it? Ex: Company needs to decide to use a current factory or find a new location. 3. From who to produce?10 Principles of economics?1. People face trade-offs

• The cost of something is what you give up to get it
• Rational people think at the margin
• People respond to incentives
• Trade can make everyone better off
• Markets are usually a good way to organize economic activity
• Governments can sometimes improve market outcomes
• A country's standard of living depends on its ability to produce goods and

services

• Prices rise when the government prints too much money
• Society faces a short-run trade-off between inflation and unemployment
• Identify the payment that goes to each of the four

factors of production?

• Natural resources: rent for land and buildings. 2. Labor: wages 3.Capital: interest

and dividends 4. Entrepreneur: profit

• What does the circular flow diagram depict? The circular flow model demonstrates how money moves through society.

Money flows from producers to workers as wages and flows back to producers as payment for products. In short, an economy is an endless circular flow of money.

• Why is the concept of scarcity so important in

economics?Because the number of goods and services that can be produced with them can be limited and there will never be enough resources to meet everyone's needs.

• What does an individual's budget constraint identify? all the possible combinations that you can afford within their given income.

• Identify two ways in which the budget constraint and

the PPF are similar and two ways in which they are different.They are similar because they both assume resource and technology are fixed and they both use two goods to simplify assumptions. They are different because the budget constraint is used by individuals and PPF is used by firms.

• What does the PPF look like when resources are

homogeneous?It is a straight line.

• How does an increase in labor productivity change the

PPF?It moves to the right.

• Define the term Opportunity Cost.It is what is given up when making a decision.
• What causes increasing opportunity costs?Opportunity cost increases as production increases.
• Explain the "Law of Demand" using a demand curve to

illustrate the concept.IF all else is constant, as price falls, the quantity demanded rises and as price

increases the quantity demanded falls. Ex: $6 price per pound the quantity

demanded of coffee is 30 million pounds in a month. If the price of coffee decreases from $6 to $4 per pound, US consumers increase their buying, their quantity demanded, from 30 million pounds per month to 40 million pounds per month.

• As income increases, the demand for used cars

decreases. Is a used car a normal good or an inferior good? Explain.It is a inferior good. Since the income rises, demand declines as consumers switch to a new car because it becomes more affordable.

• Does a change in the price of a good cause a change

in demand or a change in quantity demand? Explain.A change in demand.

• Explain the "Law of Supply" using a supply curve to

illustrate the concept.If the price of a good rises, the quantity supplied of that good increases. If the price falls, the quantity supplied of that good decreases.When the price of coffee is $6 per pound, the quantity supplied of coffee is 30 million pounds in a month. If the price of coffee increases from $6 to $8 per pound, the quantity that companies are willing to sell increase from 30 to 40 pounds of coffee. The quantity supplied increases because companies are able to profit more at higher prices.

• Describe and illustrate a case where there is a

decrease in supply. Be sure to identify the market being analyzed and the event leading to the decrease is supply.If Peru has a freeze and most coffee bean plants are damaged, the supply of coffee beans will decrease.

• Does a change in the price of a good cause a change

in supply or a change in quantity supplied? Explain.Quantity supplied

• Assume the market for orange juice is in equilibrium.

What will happen to the equilibrium price and quantity if a new orange picking technology is implemented?The price will decrease and the quantity will increase causing a supply shift to the right. Use a graph to illustrate your answer.

• When a local grocery store increased the price of

marshmallows by 8%, the quantity of marshmallows demanded decreased by 16%. What is the price elasticity of marshmallows?

16/8 = 8

• Demand for eggs is inelastic. If the price of eggs

increases by 10% does the quantity of eggs decrease by less than 10%, more than 10% or exactly 10%? Explain.It would be exactly or equal to 10% because it is a unit elastic, which is when the percentage change of the price of a good and the percentage change of the demand of the good is the same.

• What is a price floor? Based on the information in the

table below, what happens when a price floor is set at $4?Price floor is keeps a price from falling below a certain level . At $4 consumers want to purchase 50 units per month. Suppliers are willing to bring 100 units per month to the market. This creates a surplus of 50 units per month. Prices are not able to fall, so this surplus will persist.

• What is a price ceiling? Based on the information in the

table above, what happens when a price ceiling is set at $2?Price ceiling keeps a price from rising above a certain level. Price control that limits the maximum price that can be charged for a product or service. At the price of $2, consumers want to purchase 100 units per month. Suppliers are only willing to bring 50 units per month to the market, this creates a shortage of 50 units per month. Prices are not able to rise, so this shortage will persist.

• Why are price controls inefficient?The imposition of a price floor ceiling will prevent a market from adjusting to its

equilibrium price and quantity, thus creating an inefficient outcome.

• What is a "thin market" and how is this related to the

problem of imperfect information?A market with few buyers and few sellers. Because a relatively small number of buyers and sellers attempt to communicate enough information to agree on a price. They have greater price volatility. The balance between buyers and sellers can change quickly, altering prices substantially.

• What is "moral hazard" and how can it lead to market

inefficiency?A situation in which a person or firm is willing to take more risks because they are protected against the potential cost of risky decisions. Result of asymmetric information.

• What is "adverse selection"?the market deteriorates when buyers and sellers have access to imperfect

information, also known as asymmetric information. Provide an example where adverse selection impacts the market. It's a process by which uneven knowledge causes a decrease in the quality of either the goods provided or the type of

buyer. EX: Health insurance market sets a single price for a insurance plan and

makes it available to a pool of interested buyers. Because there is imperfect information on the seller's side about the health of any particular buyer, the plan is priced based on the average medical expenses of people in the pool.

• What techniques do firms use to reduce the problem of

imperfect information in the market?Money back guarantees, warranties, service contracts.

• What is the difference between a warranty and a

service contract?A warranty is a promise to fix or replace the good for a certain period of time. In a service contract, the buyer pays an extra amount and the seller agrees to fix anything that goes wrong for a set time period.

• Give an example of a positive externality.A person who keeps bees for his or her own enjoyment, and gardeners in the area

benefit because their flowers are pollinated.When there are positive externalities present in a market, how does the market output differ from the socially optimal level of output?Homeowners have experienced a positive externality because they received a benefit for a decision that they were not involved in making. (increase in home values).

• Give an example of a negative externality.Home values declining due to a decision homeowners were not involved in.

When there are negative externalities present in a market, how does the market output differ from the socially optimal level of output?The landfill decision was made for private benefit without regard to the homeowners investments which generates high levels of pollution that affect the economic environment and increase social costs in the local community.

• What policies can governments use to correct

negative externalities?By instituting policies such as pollution penalites, permitting civil lawsuits by private parties to recover damages, and levying environmental taxes. These regulations can help recover funds to help fix the damage caused by negative externalities.

• Give examples of an implicit cost and an explicit cost.

Explain.Explicit Costs- payments made to cover the firm's expenses and are sometimes called out of pocket payments. (Firms bills, salaries for employees, rent for its office. Implicit cost-resources already owned by the firm. (expanding factory onto land already owned, forgone wages, interest, depreciation).

• Why do economists calculate profits in a different way

from accountants?Economists want to know if the firms owners are making enough money and accountants wants to determine how much money the firm is making.

• The following equation describes costs in the short run.TC = TFC +TVC Total Cost=total variable cost + total fixed cost

Identify and describe the components of this equation.How do you know that this equation describes short run costs?Fixed costs only occur in the short run and are expenditures that do not change

with the level of production. (Ex: rent on a factory)

• Create an example to explain the concept of

diminishing marginal returns.A worker may produce 100 units per hour for 40 hours. In the 41st hour, the output of the worker may drop to 90 units per hour. The output has started to decrease.

• What is the relationship between diminishing marginal

returns and total costs in the short run?The marginal product of labor will eventually decline when additional units of labor are added to a fixed amount of capital. If marginal product of labor is positive, total product will increase.

• Gus' cookie business produces 3,000 cookies in a

month. His total variable costs are $700 and his total fixed costs are $500. What is his average total cost?700+500=1200/3000=$0.40 per cookie

• When Gus makes 4,000 cookies in a month his total

cost is $1,500. Using the information provided in questions 6, calculate the marginal cost of the 4,000th cookie.Change in total cost is $1400-$1200=$300 and divide it by the change in quantity which is 4,000-3,000 which is 1,000 so you divide the change in total cost by the change in quantinty. $300/1000=$0.30

• Explain why the long run cost of producing a specific

quantity of output will always be equal to the lowest short run cost of producing that same quantity.Because the variable cost rise equally with production increases.

• When a firm has economies of scale, what happens to

its average total costs as it increases output?The average cost decrease as output increases

• What is the profit maximizing rule?The firm maximizes profit by

producing that quantity of output where marginal revenue equals marginal cost. MR=MC