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Short answer questions in economics

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Questions (also attached):

1) What is economics?
2) What types of things are considered in economics? What is not?
3) What role does economics play in your personal decisions?
4) What are the advantages of a market versus a command economy?

1. What is the difference between the shift of and a movement along the demand curve?
2. What is the difference between the shift of and a movement along the supply curve?
3. How do shortages and surpluses develop?
4. What types of shortages and surpluses affect you either personally or in your work environment?

2. Answer the following questions:
a. What causes the changes in supply and demand?
b. How do shifts in supply and demand affect your decision making?
c. List four key points in the study of economics.

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Use has been made of material at these sites in answering the questions*:
www.econ.brown.edu/fac/Louis_Putterman/ courses/ec151/Chapter_05.pdf
www.investopedia.com/university/ economics/economics3.asp

1) What is economics?

Economics is the science that studies how people and societies make decisions that allow them to get the most out of their limited resources.
Economics is the study of making choices. We as individuals and as a society experience scarcity (of raw materials, of goods and services, of time, and so on) in relationship to our ever-growing needs and wants.
Various definitions of economics exist. Some are reproduced below:
Marshall defined economics as
"a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man."
(At the turn of the twentieth century, Alfred Marshall's Principles of Economics was the most influential textbook in economics.)
Adam Smith (1723-1790) is generally held to be the founder of modern Economics. Smith saw economics as:
'...an inquiry into the nature and causes of the wealth of nations.'
(From A. Smith, An Enquiry into the Nature and Causes of the Wealth of Nations, 1776.)
In the nineteenth century John Stuart Mill (1806 -73) described economics as,
'...the practical science of the production and distribution of wealth'. (From J. S. Mill, The Principles of Political Economy, 1848.)
The standard definition according to most textbooks is something like this:
"Economics is the social science which examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants."

2) What types of things are considered in economics? What is not?

Economics is the study of how people choose to allocate scarce resources to satisfy their unlimited wants. Economics considers how choices are made in the presence of scarcity. These choices are what to produce, how to produce and for whom to produce.
Economics studies the theories used to explain the behavior of consumers and firms, and also the operation of markets (such as the market for gold, or Microsoft shares). At the macro-economic level, Economics studies how the whole economy works. What causes unemployment? How can it be cured? Should we protect our industries against foreign competition? Should Britain join the Euro system and abandon the £?

Economics studies humans. It does not inquire into either the functioning of non-human environment, or non-human values associated with it. Economics does not study the origin of human 'ends' or 'wants'. Economics is meaningless if means (resources) are not scarce. Economics does not study the source of tastes or preferences --they are given. This means that one's taste for cars as opposed to one's taste for serving others is inexplicable, simply a datum. Economics does not attempt to decide whether our choice of ends to pursue is wise. It does not tell us that we are wrong if we value a certain amount of leisure more than some amount of money. It does not view humans as being only worried about monetary gain. There is nothing "noneconomical" about someone giving away a fortune, or turning down a high-paying job to become a monk.

3) What role does economics play in your personal decisions?

Economics examines how we make choices: a new car or college tuition? more hospitals or more highways? more free time or more income from work? It gives us a way of understanding how to make best use of natural resources, machinery, and people's work efforts.
Economics helps us examine trade-offs between various goals and anticipate the outcomes of changes in governmental policies, company practices, or composition of the population, and so on. Almost all issues of public and private policy involve economics and so do our own individual choices.

4) What are the advantages of a market versus a command economy?
A command economy is an economy that is planned and controlled by a central administration, as in the former Soviet Union.
Advantages of a market versus a command economy:
1. better provision of incentives : The profit motive in market economy is the most reliable way to increase output, cut costs, innovate, and meet unmet wants. In contrast in command economies, public-mindedness is an insufficient incentive, so promotions and raises are offered to managers who meet the goals of government planning; although these might help managers achieve quantitative goals, they do not encourage them to cut costs, innovate, and meet unmet needs.
2. Market economy better uses local information and conveys global information more cheaply (in prices): In a market economy, local decision makers use their information without having to convey it up a decision hierarchy; the global information they need is transmitted to them through the price system; prices are an automatic byproduct of exchanges in markets. The information does not have travel to a central bureau in a market economy unlike in command economy.

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Solution Summary

Short answer questions in economics on the topics of economics, market economy, command economy,supply and demand etc.

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Economics problems- 35 Multiple choice questions on economics

Please see the attached file for full problem description.

1. In the long run, a firm is said to be experiencing increasing returns to scale if a 10 percent increase in inputs results in :
A. an increase in output from 100 to 120.
B. a decrease in output from 100 to 90.
C. an increase in output from 100 to 105.
D. a decrease in output from 100 to 85.

2. MC increases because
a. MC naturally increases as firm nears capacity.
b. labor is paid overtime wages when volume increases.
c. in the short run, MC always increases.
d. the law of diminishing returns takes effect.

3. Which of the following relationships help determine the optimal amount of variable input (labor) in the short run?
a. Marginal Product = Marginal Cost
b. Average Product = Marginal Product
c. Marginal Product = 0
d. Marginal Revenue Product = Marginal Labor Cost

4. A company can ship its product by train but there is a chance that product may be damaged while in transit. The dollar cost and the probability of damage and no-damage are as follows:
Dollar cost of shipping Probability
Damage $5000 .5
No damage $4000 .5
The expected value of the cost of shipping by train is
a. $5400
b. $5000
c. $4500
d. $5200
e. $4040

5. The main difference between the price-quantity graph of a perfectly competitive firm and a monopoly is

a. that the competitive firm's demand curve is horizontal, while that of the monopoly is downward sloping.
b. that a monopoly always earns an economic profit while a competitive company always earns only normal profit.
c. that a monopoly maximizes its profit when marginal revenue is greater than marginal cost.
d. that a monopoly does not incur increasing marginal cost.

6. Which of the following cost relationships is not true?
A. AFC = AC - MC
C. the change in TVC/the change in Q = MC
D. the change in TC/the change in Q = MC

7. Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run?
A. P < MC
C. P = MC < AC
C. P < AVC
D. P = MR

8. The demand curve which assumes that competitors will follow price decreases but not price increases is called
A. an industry demand curve.
B. an inelastic demand curve.
C. a kinked demand curve.
D. a competitive demand curve.

9. The existence of a kinked demand curve under oligopoly conditions may result in
A. price flexibility.
B. price rigidity.
C. competitive pricing.
D. none of the above.

10. If firms are earning economic profit in a monopolistically competitive market, which of the following is most likely to happen in the long run?
A. some firms will leave the market
B. firms will join together to keep others from entering
C new firms will enter the market, thereby eliminating the economic profit
D. firms will continue to earn economic profit

11. A monopoly will usually produce
A. where its demand curve is inelastic.
B. where its demand curve is elastic.
C. where its demand curve is either elastic or inelastic.
D. only when its demand curve is perfectly inelastic.

12. Which of the following indicate when Stage I ends and Stage II begins in the short run production?
A. When AP = 0
B. When MP = 0
C. When MP = AP
D. When MP starts to diminish

13. Which of the following statements best represents a difference between short-run and long-run cost?
A. Less than one year is considered the short run; more than one year the long run.
B. there are no fixed costs in the long run.
C. in the short run labor must always be considered the variable input and capital the fixed input.
D. all of the above are true.

14. The following information is to be used in answering the questions below.

Company A sells its product for $4 per unit, has variable costs per unit of $2.50, and its fixed cost is $50,000 per period.

Company B sells a product similar to A's for $3.80 per unit, has variable costs per unit of $1.80, and its fixed cost is $80,000 per period.

If production reaches 70,000 units per period, then
A. A's profit will be higher than B's.
B. B's profit will be higher than A's.
C. both will earn the same profit.
D. cannot tell which will make the higher profit.

15. Which of the following relationships is correct?
A. A. When marginal product starts to decrease, marginal cost starts to decrease.
B. When marginal cost starts to increase, average cost starts to increase.
C. When marginal cost starts to increase, average variable cost starts to increase.
D. When marginal product starts to decrease, marginal cost starts to increase.

16. Average fixed cost is:
A. AC minus AVC.
B. TC divided by Q.
C. AVC minus MC.
D. TC minus TVC.

17. The four-firm concentration ratio:
A. indicates the total profitability among the top four firms in an industry.
B. is an indicator of the degree of monopolistic competition.
C. indicates the presence and intensity of an oligopoly market.
D. is used by the government as a basis for anti-trust cases.

18. The following is not one of the strengths of the Cobb-Douglas production function:
A. both marginal product and returns to scale can be estimated from it.
B. it can be converted into a linear function for ease of calculation.
C. it shows a production function passing through increasing returns to constant returns and then to decreasing returns.
D. the sum of the exponents indicates whether returns to scale are increasing, constant or decreasing.

19. When a company is faced by a kinked demand curve, the marginal revenue curve
A. will be upward sloping.
B. will be horizontal.
C. will always be zero at the quantity produced.
D. will be discontinuous.

20. Which of the following is not true about the law of diminishing returns?
A It is a short run phenomenon.
B. t refers to diminishing marginal product.
C. It will have an impact on the firm's marginal cost.
D.It divides Stage I and II of the production process.
E. All of the above are true.

21. Which of the following is a reason for economies of scale?
A. fixed costs are spread out as volume increases.
B. the law of diminishing returns does not take effect.
C. input productivity increases as a result of greater specialization.
D. there is greater savings in transportation costs.

22. In finance, risk is most commonly measured by
A. the probability distribution
B. the standard deviation
C. the average deviation
D. the square root of standard deviation

23. When comparing two projects with different returns and different standard deviations, the risk measure which can be used is called the
A. variance
B. certainty equivalent
C. coefficient of correlation
D. coefficient of variation
24. The company Blue Ribbon has estimated expected cash flows for 1996 to be as follows:
Probability Cash Flow
.10 120,000
.15 140,000
.5 150,000
.15 180,000
.10 210,000
The expected value of cash flow is
A $156,ooo
B. $800,000
C. $160,000

25. If Coefficient of Output Elasticity (E) is greater than 1, it means that a 10% increase in all inputs will lead to ____________________________
A. a 20% increase of output
B. some magnitude of output either increase or decrease which is impossible to know unless we know the production function
C. atmost 10% increase in output
D. a decrease in output by 5%

26. The following production function

A. increasing returns to scale
B. constant returns to scale
C. decreasing returns to scale
D impossible to determine

27. In a perfectly competitive industry, if P (price) is greater than ATC(average total cost), in the long run:
A. firms would leave the industry to seek higher returns elsewhere
B. new firms will enter the industry resulting in lower price and elimination of excess profit
C. price will increase as the industry achieves long run equilibrium
D. none of the above

28. In which of the markets will the firm be facing the most elastic demand curve?
A. Perfect competition
B Monopoly
C. Monopolistic Competition
D. Oligopoly

29. The Herfindahl -hirschman Index provides
A. nfo regading price interaction of oligopolistic firms
B. info regarding concentration of market share by the larger companies in an industry
C. info regarding price elasticity of demand
D. info regarding cost side of oligopolistic firms

30. A monopolist's demand, revenue and cost curves are given as:
Demand: Q d = 1000 -2P
Total Cost: TC = 5000 + 50Q
Marginal Revenue: MR = 500 -Q
Marginal Cost: MC = 50
The profit maximizing output for the monopolist is:
A. 500 units
B. 450 units
C. 1000 units
D. impossible to determine

31. Given the total cost function

the fixed cost per unit produced (Average Fixed Cost) when Q = 10 is given by:
A. $1000
B. $20
C. $13
D. $100
E. none of the above


Refer to the above diagram for a monopolistically competitive firm. Long-run equilibrium output will be:
A. greater than OE.
B. OE.
C. OD.

33. Suppose the Herfindahl Indexes for industries A, B, and C are 1,200, 5,000, and 7,500 respectively. These data imply that:
A. market power is greatest in industry A.
B. market power is greatest in industry B.
C. market power is greatest in industry C.
D. industry A is more monopolistic than industry C.

34. Monopolistically competitive firms:
A. realize normal profits in the short run but losses in the long run.
B. incur persistent losses in both the short run and long run.
C. may realize either profits or losses in the short run, but realize normal profits in the long run.
D. persistently realize economic profits in both the short run and long run.

35. Given the total cost function of a firm as TC = 100 +60Q +3Q^2,

The functional form of average variable cost (AVC) is:
A. AVC = 60Q +3Q^2
B. AVC = 100/Q + 60 +3Q
C. AVC = 60 + 3Q

36. Given production function
Q = 7X2 </SUP - .2X3
the marginal production at X =10 is
A. 70
B. 80
C. 90
D. 100
E. none of the above

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