Microeconomics Exam I Review
Questions (Chapters 1-6)
1. What are the three basic questions that every economy must address? (1)
- -The three basic questions that every economy must address are: what is
produced, how is it produced, and for whom is it produced.
- 2. What is the key difference between a market-oriented economy and a
command economy? (1) - -The key difference between market and
command economy is that government plays a background role in market-
oriented, while govt makes most decisions in command.
- 3. What does the phrase "division of labor" mean? (1) - -Division of labor is
the splitting up of work, the specialization, for a certain product where
different tasks are given to many people
- 4. What three reasons explain why the division of labor increases an
economy's level of production? (1) - -Three reasons are: it allows the makers
to focus on areas of advantage from natural factors and skills; it encourages
the makers to learn and invent; and it allows makers to take advantage of
economies of scale
- 5. What is globalization? How do you think it might have affected the
economy over the past decade? (1) - -Globalization is the trend where
buying/selling markets have increasingly become international. This has
made economies more interdependent.
- 6. What is the difference between microeconomics and macroeconomics?
(1) - -The difference is that micro focuses on individuals, firms and
industries, while macro focuses on overall issues and topics.
- 7. Are households primarily buyers or sellers in the goods and services
market? The labor market? The financial capital market? Are firms primarily
buyers or sellers in each of these three markets? (1) - -Households are
primarily buyers/demanders in the goods and services, sellers/suppliers in
the labor, and either of the two in the FC market. Firms are primarily
sellers/suppliers in the G&S, buyers/demanders in the labor, and either in the
FC market.
- 8. What are the four primary goals of macroeconomics? (1) - -The four
primary goals are: growth in the standard of living, low unemployment, low
inflation, and a sustainable balance of trade.
, - 1. Explain why scarcity leads to trade-offs. (2) - -Scarcity leads to trade-
offs because there isn't enough to have everything desired, so room must be
made for the more desirable good
- 2. Name the three main categories of economic trade-offs that individuals
face. (2) - -The three main categories of individual economic trade-off are
consumption, labor-leisure and intertemporal.
- 3. What determines the slope of the consumption choice budget
constraint? The labor-leisure budget constraint? The intertemporal budget
constraint? (2) - -The slope of the consumption choice budget constraint
depends on the cost of the good or service. The labor-leisure slope depends
on the income. The intertemporal slope depends on the interest rate
- 4. Explain why individuals make choices that are directly on the budget
constraint, rather than inside the budget constraint or outside it. (2) - -
Individuals make decisions directly on the budget constraint because ones
above are impossible and ones below are a waste of money.
- 5. Does the economic approach specify what choices people should make?
Why or why not? (2) - -The economic approach does not specify what
choices people should make because that depends on everyone's individual
utility.
- 6. What does it mean to "maximize utility"? (2) - -Maximizing utility means
to maximize the satisfaction of a person with a given choice.
- 7. What are the three components of the interest rate? (2) - -The three
components of interest rates are risk premiums, inflation and the time value
of money
- 8. What is the formula for how compound interest accumulates over time?
(2) - -The formula for how compound interest accumulates over time is
(present amount) x (1 + interest rate)^number of years = future amount
- 9. What is opportunity cost? (2) - -Opportunity cost is what must be given
up in order to receive the more desired good
- 10. What is the law of diminishing marginal utility? (2) - -The law of
diminishing marginal utility states that the more good or service that you
acquire, the less marginal gain will have impact on utility
- 11. What are sunk costs? (2) - -Sunk costs are costs from the past that
aren't obtainable that shouldn't affect future decisions
Questions (Chapters 1-6)
1. What are the three basic questions that every economy must address? (1)
- -The three basic questions that every economy must address are: what is
produced, how is it produced, and for whom is it produced.
- 2. What is the key difference between a market-oriented economy and a
command economy? (1) - -The key difference between market and
command economy is that government plays a background role in market-
oriented, while govt makes most decisions in command.
- 3. What does the phrase "division of labor" mean? (1) - -Division of labor is
the splitting up of work, the specialization, for a certain product where
different tasks are given to many people
- 4. What three reasons explain why the division of labor increases an
economy's level of production? (1) - -Three reasons are: it allows the makers
to focus on areas of advantage from natural factors and skills; it encourages
the makers to learn and invent; and it allows makers to take advantage of
economies of scale
- 5. What is globalization? How do you think it might have affected the
economy over the past decade? (1) - -Globalization is the trend where
buying/selling markets have increasingly become international. This has
made economies more interdependent.
- 6. What is the difference between microeconomics and macroeconomics?
(1) - -The difference is that micro focuses on individuals, firms and
industries, while macro focuses on overall issues and topics.
- 7. Are households primarily buyers or sellers in the goods and services
market? The labor market? The financial capital market? Are firms primarily
buyers or sellers in each of these three markets? (1) - -Households are
primarily buyers/demanders in the goods and services, sellers/suppliers in
the labor, and either of the two in the FC market. Firms are primarily
sellers/suppliers in the G&S, buyers/demanders in the labor, and either in the
FC market.
- 8. What are the four primary goals of macroeconomics? (1) - -The four
primary goals are: growth in the standard of living, low unemployment, low
inflation, and a sustainable balance of trade.
, - 1. Explain why scarcity leads to trade-offs. (2) - -Scarcity leads to trade-
offs because there isn't enough to have everything desired, so room must be
made for the more desirable good
- 2. Name the three main categories of economic trade-offs that individuals
face. (2) - -The three main categories of individual economic trade-off are
consumption, labor-leisure and intertemporal.
- 3. What determines the slope of the consumption choice budget
constraint? The labor-leisure budget constraint? The intertemporal budget
constraint? (2) - -The slope of the consumption choice budget constraint
depends on the cost of the good or service. The labor-leisure slope depends
on the income. The intertemporal slope depends on the interest rate
- 4. Explain why individuals make choices that are directly on the budget
constraint, rather than inside the budget constraint or outside it. (2) - -
Individuals make decisions directly on the budget constraint because ones
above are impossible and ones below are a waste of money.
- 5. Does the economic approach specify what choices people should make?
Why or why not? (2) - -The economic approach does not specify what
choices people should make because that depends on everyone's individual
utility.
- 6. What does it mean to "maximize utility"? (2) - -Maximizing utility means
to maximize the satisfaction of a person with a given choice.
- 7. What are the three components of the interest rate? (2) - -The three
components of interest rates are risk premiums, inflation and the time value
of money
- 8. What is the formula for how compound interest accumulates over time?
(2) - -The formula for how compound interest accumulates over time is
(present amount) x (1 + interest rate)^number of years = future amount
- 9. What is opportunity cost? (2) - -Opportunity cost is what must be given
up in order to receive the more desired good
- 10. What is the law of diminishing marginal utility? (2) - -The law of
diminishing marginal utility states that the more good or service that you
acquire, the less marginal gain will have impact on utility
- 11. What are sunk costs? (2) - -Sunk costs are costs from the past that
aren't obtainable that shouldn't affect future decisions
