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MAGROECONOffiTS
MS-E1:
FUNDAMENTALSOF ECONOMICS
. The fundamerital econornic problem is SCARCI.I'Y; the fact that human wants cannot be fully satisfied
with availableresourcesreflectsthe definitionol scarcity.
. Becausethe available resourcesare never enough to satisfy human wants, choicesare necessary.
. .Economicsis the scienceof choice; it is the social sciencethat studies the choices people, businesses,
governments,and societiesmake as they cope with scarcity.
. All societies, regardless.df their political or economic system, are subject to scarcity; consequently,
economicsis usefulfor understandinghuman behaviorin all nations.
DIVISIONS OF ECONOiNICS
. The traditional domain of economicsis divided belween MICROECO?{OMIC5, tfie economicsOf individual
action,and :CONOMICS. the economicsof the entire nation.
is the study of choicesthat individualsand businessesmake, the way these choices
that governmentsexert on these choices.
MACROECONOMICS is the study of the effects on the national economy and the global economy of the
choicesthat individuals,businesses,and governmentsmake.
Both micro'and macro economic analysis examine the factors that influence people{s decisions, but
macroeconomicsrequires additional step of 'adding up" the effiectsof individual behavior to see what
happenson a larger scale as a result of the decisionsof many individuals.

BASIC ECOIIOTTIICQUESTIONS
a explores three basic questions;
Micr:oeconqmics
1) WHAT'goodsand servicesare pmduied and in what quantities?
GOODSand SERVICESare the objects that people value ahd protrice to sati'sfy wants.
2) HOW are the goads ahd sentices produced?
The resources that businesses use to produce goods and services are calbd FACTORSOF
PRODUCTIOIII. There are four categories:
> IAND: the "gifts df nature'such is land, mfnerals, and water.

>CAPITAL:the tools, instrurrrents,machines, buildings, and'oth€r constructionsthat businesses


now use to produf&Loo-ds and serviqqi
> EtSfffREl{Rfl,9iIP: th€ trnn}an rirsource thrfi orgnnizes *aftf,. fftf afid capftal
3) FORWrfiM dire tfa gods aid rervicesprodmdl
To c&m incomel peopte selt thc servkec of $G factors of production they own. Land earns
RENT; labor earns WAGES;eapital earrx II{TEREST;and entreprcmeurshipearns PROftT.

thd it frec{y ctlal&rbte from nature

r€sonrces and capitat are exampfes. e.


Macroeconomicr expbre three bask questrons:
1) Whst Mermines ttr" standatd of living?
The STAIID*RD Of UVlttG is the bvel of conournption that pdopfe enjoy, on the average, pnd is
meiwfiH! $y ar4ge income B€r pcrso{t.
2) What &rmilrer tte cost of livtng?
, The COSTOf LMNG is the am*rnt of money it takes to buy goods and services that a typical
' fbnrily ccnsutnes. A rising cost of living. is calhd INFLATION. A falling cost of living is calted
DEFLATIO}.I.
3) Why M @ur.xrnomy fluctuate?
Th€ pqdsdic brt lnngular up.cnd-down rnovertlent in productbn and jobs is calted the
BU5trNES6€YCLE. fircr€ dre stages in one complete business cycle:

underused; potential national income will exceed actrrd.-f


ndional income
> DEPRESSIOI'I -,is a major, long-lastir{ downsizingin the economy; cbnditionsare similar to that
of a recession, but more severeiand lest easily adjusted; it is a prolonged form of recession.
RealGDP

Time
one businesscycle
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MACROECONOMICS

ECONOMIC
WAY OFTHINKIHG
. Economists refer tCI the satisfactioh that people receive from consuming some good or service as
UTILITY.
. A utility-maximizingindividualwill act wheneverthe utility (benefit) from a proposedcourse of action
exceedsthe qost of taking it, This is calied RATIONALECONOMICTHINKING.
. The difference between benefits and costs of an economic decision or action is the net gain to the
individual* his or her INCFNTIVEto act.
r An economicchoiceinvolvesa TR,ADEOFF, that is, sornethingis given up to get somethingelse.
. The OPPORTUNITY COST of a choice is tfie highest-valued plternative foregone, not all alternatives
foregone; all tradeoffsinvolvean opportunitycost.
. Choicesare rnade in small steps; this means choicesare rnade at a MARGIN:

ECONOMICS:A SOGIAL SCIENCE


r EconomisF distinguish between:
' > POSITIVESTATEMENTS : statements about what iE. These can be shown to be true or false
through observation and measurement.
> NOR"MATIVE STATEMINTS* stat€rnents about what ought to be, These are rnatters of opinion.
. Econornic science is a collection of positive staternents thdt, 6r€ consistent with the real world"
Econornicsciencs uses three steps to proEress:
> Obsenration and rneasurernent - economists observe and record econornic data.
t Mode! building * an f;CONOMICMODELis a description of some aspect of the economic world
that includesonly those features of the world that are needed for the purpos€ at hand.
> .Testing * a rnodel is tested to deterrnine how welt its predictions correspofid with the real world.
An ECONOMIC THEORYis a ggneralizationthat summarizeswhat we think we understandabout
econornicchorcesthat peopti'make and the performanceof industries and entire economi€s.
. When developir+gmodels and theories, ec{rnornistsuse th€ fdsa sf CETfRIS PARIBUS,which is l-atiil'for
"other thinEsrbeingegual,'l to focus on the effect of one particular factor.
r Ir1developinglofthe.oriesand models, two failaciesare pos$ible:
),' FALLACYOF COMPOSTTION- the assertion that what is true for a patt rnust be true for the
whole or what is true for the whole must be true for eadr of the parts.

before the second.

PRODUCTIOT{POST'IBILITY FROITITIER(PPF }
. The concept oi ppf b based on notion,that production rs lirnited by the arnognt of resourcesavailable.
. The PPF$hows the maximam cornbinations of oritpr.S (good$ arrd services) that can be produced with
given resourcesand tecf,mology.
Soda (in bottles]
50 productioh:Po6sibilityFrontier (PPF)
A
40

30
20
10
0
i" '10 " " 20 " 30' '40 ""-5O Coffee(in cups)
a Productionpoints tnsi& and on the PPF6re attainable. Pointsbeyondthe PPFare not attainable,

Moving between production points on the PPFinvolves trade-off becausesornething must be lost to get
rytoreof something else. The opportunity cost of obtaining 30 mpre cups of coffee by rnoving from point
A to point B is 20 bottles of sodas.As,ntoreand more cups of coffeeare produced,the opportunitycost
of a cup of coffee - the bottl€s of soda that must be'sacrificed - increases.
When resourcesare not equally productive in producinggoods and services,the PPFhas increasing
opportunitycosts and tends to bowoutward (asillustrated in the graph above).
FCONOMIC GROWTH occurs when the PFF shifts outward. The TECHNOLOGICALC||ANGF (ths
development of new goods or new ways to produce gc,ods)and CAPITALACCUMULATION (the Erowth of
capitalstock) shift the PPFoutWardand are the rnain causesof economicgrowth"
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MACROECONOMICS

GROSS DOMESTIC PRODUCT-


. GROSSDOMESTICpnOOUCf (GDP) is the market'value of'all the finalgoods and servicesproduced
within a country, whether these are produced by the citizens of that country or by foreigners.
r A FINAL GOOD is an item that is bought by its final user while an INTERTffDIATEGOOD is an item
producdd by one firm, bought by another and used as a component of the final good, Intermediate
goods are not directlyincludedin measuringGDP.
. Two principalmethodsof calculatingGDP:
'p EXPENDITURE Approach - adds up all expendituresto purchase final goods and services by
hoiseho;ld (consumers), businesses and the govemment.

S DP *C+ttGr(X -M)
Where:
C - Consumptionexpenditures(total househotdspendingon consumptiongoods ard s€rvices)
;.I - Investment(firm's purchaseof plants,equipment,buildings,and additionto inventories)
G - Government purchases(government spendingon goods and services)
(X - M) * Net exports (exports minus imports -.'foreigh' purchases)
-'foreign'sales
profits and proprietors' incorne.
. . GDP is m€asured either in current prices (nominal GDP)or in prices of a.given year (real GDP):
> NOIVIINALGDP - the value of final goods and services produced by a domestic economy for a year
at current market prices.

prices. Price level adJustmenteliminates the effects of inflation on the measure:


. When all the econorny'sresourcesare fully erndoyed, the value of production is calfed POTENTIAL GDP.
. ECONOMICGROWTHis an increasein realGDP while RECESSION is a period of negative GDPgnowth.
. GROSS 'I{ATIOITALPRODUCT(GNP) is the total and final output of land, labor, capital, and
entrepreneurihl ability produced,by the country's cltizens, produced whether inside the country or
elsewhereabroad.

INFLATIOI{ and UI{E}IPLOYIIENT


. INFLATION,existswhen there is a sustained increasein the price level. The PRICf LEVELis the averegrc
level of priecs, ., / ,, , a , ,::g;l*t*r11.
. pRlct tnDEX (pil), and the GDp DEFLAToR
The coNsurtlrR PRIcf If{DEX(cPt), tfie PRODUCrR aru
frequentlyusedmeasuresof the pribebvel:
(CP[ m,. - (CPl r..r
Inflati6rt Rate = '
"..') --,.) x 100
CPI last vear
goods at the wholesale level, spqifically finishedgoods,
'
intertiretfiate goods, arH crude materials.
> GOF Defrator - measures the changes in Brice for g9g{s and sewices included.in GDP.
GspDenatori?Flf*r$f x roo
-
Primary causesof inflation:
> DElrlAtfO.HJLL INfLATIOil - happens when there is excess or too rnuch demand for certain goods
*nd servicesthat dre not met by a correspondingincreasein the supply of thos€ goods and services
(i.e., exceSsdemmd propels Brlcesto go up, which resufts to inflation).
> COST'PUSfi INFLATIOIII- happens when there B a general increase in the cost of production that
may be due to higrherwages (wage-pusfi theory) df increase in the coSt of raw miterials and other
inputs (swply-sttock theory)
There is an inverse relatiomhip between inflation and unemployment:

The PHI{LIPS CURVEshows a relationship between the inflation rat€ and the unemployment ratll.
The TABORFORCEequals the sum of emploved plus unemptoyedworkers.
=
rUfl€mploymentRate X100
Peopleare unemployed bdcauseof frictional, structural, oi cyclicalcauses:
> FRICTIONALUNEMPLOYMENT - occurs.becauseindividualsare forced or voluntarily change jobs;
new entrants into the workforce also fall into this category.
> STRUCTURAL UNEMPLOYMENT - occurs due to changesin demand for products, or technological
advancescausingnot as many individualswith a particularskill to be needed; this can be reduced
by retrainingprograms

increasesduring RECESSION and decreasesduring EXPANSION


FULLEMPLOYMENT occurswhen the,reis.n-ocyclicalunemployment.
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MACROECONOMICS

FISCAL POLICY vis-d-vis MONETARYPOLICY


. A countryusesFISCAL-and MONETARY policiesto effectivelycounterinflationor rnflationary
tendencies.
. FISCALPOLICYis governmentacti'ons,such as taxes, subsidies,and governmentspending,designedto
achieveeconomicaoals.Examplesare:

'/ An increasein deficit,either due to an increasein governmentspendingor to a decreasein


taxes, is ca|Ieda FISCALEXPANSION.
. r' An increasein taxes to reducea deficit is calledFISCALCONTRACTION.
Taxes are levied by a government based on two general principles: (1) ability to pay {progressive
'' incometax), and {2) derived benefit (e.9., gasolinetaxes used to pay for roads).The followingare the
major types of taxes:

> , PROPERfY
TAX. Pr-opertytaxes are levied basedon wealth (i.e., based on the value of property).

as regressive because low-income individuals pay the same percentage rate as high-income
indiyiduats.

through production and distribution process. Ultimately, the tax is paid by tire final cbnsumer. The
VAT is thought to encouragesavingsbecauseit taxes consurhptioninsteadof edrnings.
. If a government collects more in taxes than'it spends, it has a BUDGETSURPLUS;if a government
spends more than it collects in taxes, if has a BUDGFTDEFICIT,
' Changinginterest rates and the amount of money in the economy is called MONETARY pOLICy;these
actions;done to counter inflation,are underthe control of the BANGKOSENTRALNGPILIPINAS(ASP):

> When economy is in rapid exparrsion^BSPmight increase interest rates to slow real GDPgrowth and
prevent inflationfrom increasing,
. MON€Yis a liquidasset becauseit exchangeseasily Forother assets:
> Ml - the most liquid (e.g., currency,demand deposi6, current accountsand traveler'schecks)

market depositaccounts,small-denomination
time deposits.
. Threemain functionsof money:
1) MEDIUMOF EXCHANGE (without money, barter is necessarv)
2) ttNIT OF ACCOUNTlpiices ari! measuredin mone!)
3) STOREOF VALUE(money'canbe stored and exchangedat a later date * example: bank deposit)
ECONOTIIIC THEORIES
. CLASSICAL ECONOMIC TFTEORY - this theory holds that market equilibrium'willeventuatlyresult in full
employm€rrt over the long run without governrnent intervention.' This theory doco not support the u6e
of fiscalpolicy to ttimulate the economy.
. KEYNESIA|Y THFORY'' this theory holds that the economy does not nec€ssarily move towards full
ernploymeflt dn its own. It fsc.useson the use of fiscal policy (e"g., reduction in taxes and government
' sfending) to sfimulate the economy.
. MONETARISTTI{EORY - this th€ory holds that fiscal policy is too crude a tool.for control of the
..ecQnolny.It focuseson the use of monetary policy to controf economicarowth,
. St"lPPLY-$OfTHEORY-- fhis theory holds th*t bolstering an etonornytlUility to suppty nrore goods is
the most effective way to stimu{ate growth. A decrease in taxe$ (especiatty foli b,usinessesand
individualswith high income) increasesemployment,savings,and investmen$.
'. NEO KEYNESIANTHEORY- this theory combines Keynesian,andmonetary thcories. It focuses on using
a combination of fiscal and monetarf policy to stirnulate the econornyand controt infiation.

INTERNATIONALTNAOG A FORlIqil CXCHAT{qT*ATE


. Cornparative advantage is the factor that drives international trade. A country has a COMPARATIVE
ADVANTAGE in the prof,uctionof soods if the country can produce it at a lower opportunity cost than
anyrothercountry. \
. Th! value of exports minus the value of imports is calfed the BATANCEOF TRADE:

. Government'restrictq international trade to protebt domesiic industries from foreign cornpetition by


imBosingTARIFF(a tax'on an imported product) and QUOTA(a restrictionon the amount of a good that
may be importedduringa period).
. FOR'EIQNEXCHANGTdanxrr is the market in which the currency of one country is exchanqed for the
currencyof another. It'is made up of importers,exporlers,banks,foreign currencydealers/brokers"
. FOREIGNEXCHANGE RATEis the price at which one crrrrencyexchangesfor anoth'er,
, CURRENCY DEVALUATION - when a currencyfalls in value in terms of anothercurrency.
> CURRFNCY APPRECIATIO'N * when a currbncyrises in value in terms of anothercurrency.
I '''r '.lt
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MACROECONOMICS
, | ,'r,,,.
QUESTIQNS- with suggestedanswers
MUL-l'IPLE-Cl-lOIeE
' (Sources:CMA/CIA/AICPA/Various test banks)
1. Whichone of the followingwouldnotbe includedin the calculation
of the GDP?
D a. Purchasedf a new tiome 'c. A doctor'sfee
b. An automotive worker's wages d. Purchaseof common stock

2. The differencebetweenGNPand GDPis that


C a. . GDP measureswhat is producedand earned by a nation's people and property and GNP
measureswhat is producedand earned in the domestic economy
b. GDPemphasizesownershipand GNPdmphasizeslocation
c. GNP measures what is produced and earned by a nation's people and propefi and GDP
measureswhat is producedand earned in the domestic economy
'd. GDPincludesdepreciationand GNPdoes not

3. The differencebetweennominalGDPand real GDPls that'real GDP


A a. Measuresthe level of output in constantpricei, while'nominalGDPincludesprice changes
b. Measuresthe level of output including price changes, while nominal GDP hold prices
constant
c. Measuresthe price level and nominal GDP measuresthe level of output
d. Measuresthe level of output and nominal GDP measure the price level '

4. The expenditureis.apBroachto measuring GDP is the sum of expenditures in all of the following
categoriesrexcept
D a. Grossprivatedomesticinvestment
b. Personalconsumptionexpenditures /
' c. Government spendingon goods and services
d. Transfer payments by the government

5. When the addition to capital goods in an economy exceeds the capital consumptionallowance,the
economy has experienced
D a. Negativenet investment c. Positivegross investment
b. Equilibriuminvestment d. Positivenet investment

6. The income dpproach calculates GDP by cdsidering atl of the following, except
D a. Interest c. Rent
b. Wages d. Investrnent

8. During the recessionaryphased a businesscycle


C a. The purcfiasifiigpohrer9f money is likely to decline rapidly
b. The naturaf rate of prtempfoyment will increase dramatically
c. P"stentiat.nationalincg|0e wil| ex_c*eggl
agtpal natioflal income
d. Actuaf nationa{ income wilf exceed Potential national incorne

. 9. Which is nof a type of key economic indicators?


D a. Leadingindicators c. 'Lagging indkators
b. Coincidmt indicators d. Contra indlcators
Ittree_types of kW ecpngmie'indicators .',
. Leading indicators change in advance of other variables (e.g., capital goods purchases)
. Coincident indicators change at the same time as other variables change (e.g., consumer confidence,
inflation,ongoingunemployment)
. Lagging indicators change after the other variabled change (e.9., unemployment figures are lagging
indicators of recession).
10. Which of'the follswinj rnay provide a teading indicator of a fufure increasein gross domestic product?
D a. A reductionin the money supply
b. A decreasein the issuanceof buildingpermits
c. An increasein,the timelinessof deliveryby vendors
d, An increasein the averagehours worked per weeli of production, workers
11. Some economicindicatorslead the economyinto a recoveryor recession,and some lag it. An example
of a lagging indicator is
A a. Chronicunemployment . c. Consumerexpectations
b. Housingstarts d. Ordersfor consumerand producergrowth
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MACROECONOMICS *

LL . The primary reasonfor allowinglegal immigrationinto industrialnationsis the immigrailts'potential


a. R€ductionof trade deficit c. Contributionto economic gfowth
b. Fuffillment
of a trade agreement d. Fulfillmentof a politicalagreement

T' 13. If the economyis at full employrnent,


D a. The entire populationis employed
b. The entire labor force is employed
c. The only unemployrnentis frictionalurremploymentplus discouragedworkers
qgtentialGDt
d. .Reai_qP-gg!,eg
=
14. The iate of unemploymentcaused by changesin thq compositionof unemploymentopportunitiesover
time is referred to as the
a. Frictionalunemploymentrate c/ Structural unemployment rate
b. Cyclicalunemploymentrate d. Full-employmentrate

15. A country has an increasing.r ' secondary anrJdecliningslandardizedtest scores


in -:@l-d1ojg$s
might be expectedto experiencean ancrease
unefiployment
a,, Cyclicaf c. Frictionalunemployment
b/ Strufiural unemployment d. Productivity rates

16. Whichof the following measuresof unemploynlent woulcl be ollgg$.jglgda.0f€ to management when
trying redict the future
a, cl /trictional unempfoyment
b. Cyclicalunemployment d. Overall unemployment

t7. The natural rate of unemployment,or total unavoidableunemployment,is equal to


n a. Cyclicalunernployrnent c. Structuralunemployment
\
b" Frictionalunemplnyment d Frictlonalplus structural urremployment

18. The unemoloyment resulting from arecestioqis calleclCr*leoit


a" >rrucrurarffi L. rrrLlruncrunempruyrnent
.b. Cyclical
unemployment d. Overallunemployment

t 19. in a competitivemarket for labor in which dernandis stable, if workerstry to increasetheir wage
a, €@ayrr|€nt.{s.gftfatl .., r.. ar,r...-.."'i:'-.,+.!.ritr*
.b^ Governrnentrnust set a maximum wage below the equilibriumwage
c. Firms in the industrymust becomesmaller
d. Productsupply must decrease
20. A period of rising inflation
' a. lncreas*s the pric€ level, which benefits those who are entitled to.J'eceive a specific
D .,
tmounts of money
b. , Enhancesthe positive relationship between price levet and purchasingpower of rnoney
c. Will not be affected by contracts that include the indexing of payments
d. Increasesthe price levef, which is negatively related to the purchasingpower of money
:
21. Whichof the followingis the best definitionof the consumerprice index (CPI)?
- a. It is a cost-of-livingindex
b. It is defined in absqlute peso
c. It is a measureof the averAgechangein prices ,
d. It compares intercity cost of living :
,
22. Whichof the followingwould tend to benefitfrom the effect'of unanticipatedinflation?
a. Borro$rers c. Savers
b., Lenders d. Fixed-incomerecipients
23. Economies often experience inflation but seldom experience long period of deflation, Which of tne
following is true about deflationary economy?.
a. Companiesare hesitant to make investrnent
b. The lower pri.lr un.ori.g* .;niu."o to-make major purchases
c. Interest rates t€nd to be high ,l
..
. d. ,ActualGDPis above potentialGDP
24. The most effectlve fiscal prograrn to help reduce demand-pul/ inflation would be to
D a. Decreasethe rate of growth of the m0ney supply
b. Increaseboth taxes and governmentspending
c, Decreasetaxes and increasggovernmentspending
d. Increasetaxes and decreasegovernmentspencJrng
dq,a;yu
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ReSA School( /ana''taru1
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MACROECONOMICS

25. If a governmentwere to use only a fiscalpolicyto stimulatethe economyfrom a recession,it would


,D a. Raiseconsumertaxes and increasegovernmentspending
b. Lower businesstaxes and governl'nentspending
c. Increasethe money supply and increasegovernmentspending
d. Lower consumertaxes and increasegovernmentspending

26. The governmentbudget deflcit is the'


C a. Total accumulationof the government'ssurplusesand deficits
b. Excessstate, locaf,and spendingover their revenues
c. Amount by whi.chthe government'sexpendituresexceedits revenuesin a given year
d. Amount by which liabilitiesexceedassetson the government'sbalancesheet
27. fhe most liquid form of money is
A a. M1 c. M3
b. M2 . d. Gold
28. The money supply in a nation:seconomywill decreasefollowing
C a. Open-marketpurchasesby the nation'scentral bank
'b. A decreasein the discount rate
c. An increasein the reserve ratio
d. A decreasein the margin requirement

29. The BSP'sreserveratio is


A a. The specified percentage,ofa commercial bank's deposit-liabilitiesthat mupt be deposited
in the centralbank
b. The rate that the central bank chargesfor loansgrantedto commercialbanks
c. The ratio of excess reservesto legal reservesthat are deposited in the central bank
d. The specifiedpercentageof a cornmercialbank'sdemand depositsto total liabilities

30. The discount r€te set by BSPis the


D a. Requiredpercentageof reservesdeposited at the central bank
' b. Rate that cornmercialbanks charge for loans to each other
c. Rate tiat comrnercial banks cherge for brao to tb€ g€n€r?t g4rblic
d. Ratethat the central bank chargesfor bans to commercialbanks

31. Which of the following is a tool of rnonetary policy that a nation's central bank coutd use to stabilize thc
economyduring an inflationaryperiod?
A a. Selling governrnent securities c. Lowering bank discount rates
b. Lowering bank reserve requirements d. EncouraEinghigher tax rate
af:

32. Government borrowing to finance large deficits increasi:sthe demandfor ?endablefunds and
D a. Has no impact on interest rates c. Exerts downward pressureon interest rates
b. Increasesthe supply of lendablefunds d. ft"lts upward pressureon interest rates

33. This theory holds that economy will eventuallymove towards full employrnenton its own and will not
need fiscal or monetary policiesto stimulate the economy.
A a. Classicaleconomictheory c. Monetaristtheory
' b. Keynesiantheory d.- Neo-Keynesiantheory
34. If the central bank of a country raises interest rates sharply, the country's currency will most iikely
A a. . Increasein relativevalue
" b. Remainunchangedin value
c. 'Decreasein relative value
d.Decreasesharp|yinva|ueatfirstandthenreturntoitsinitiatva|ue

35.-Exchangerates are determinedby


C a. Eachindustrialcountry'sgovernment
b. The InternationalMonetaryFund
c. Supplyand demand in the foreign currencymarket
d. Exportersand importersbf manufacturedgoods

36. Assumingexchapgerates are allowedto Fluctuatefreely, which one of the followingfactors would likely
causea nation'scurrencyto appreciateon the foreignexchangemarket?
C a. A relativelyrapid rate of growth in incomethat stimulatesimports
b. A high rate of inflationrelationto other countries
c. A slower rate of growth in income than in other countries,which causes imports to lag
behindexports
'd. Domesticreal interest rates that are lower than real interestabroad
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MACROECONOMICS

37. Whichof the followingfactorsis ieasf liketyto affect a country'sforeign currencyexchartgerates?


D a. Interest rates in the country , c. Inflation in the country
b, Politicalstability in the country d, Tax rate in the country

38. Which one of the following groups would be the primary beneficiaryof a tariff? ,
B a. Domestic produceis-ofexport goods
b. Dornesticproducersof goods protected by the tariff
c. Domestic consumers of goods protected by the tariff
d, Foreign producersof goods protected by the tariff

39. Per law of comparativeadvantage,the country that has to producea specificprQductis determinedby
A a. Opportunitycost c. Economicorder quantities
b. Profit margins Tartffs

40. Whichof the followirrgmeasurescreatesthe most restrictivebarrierto exportingto a country?


C a. Tariffs c. Embargoes
b. Quotas d. Exchangecontrols

41. The two main variablesthat contributeto increasesin a naticln'sGDPare labor productivityand
D a. Definitircnof the labor force c. Quality of output
b, Inftation rate d. Total worker hours

42. Whichof the followinginstrumentsof monetarypolicyis the most importantmeansby whichthe money
supply is controlled? a

B a. Changingthe reserveratio c. Manipulation of governmentspending


b" Open-marketoperations d. Changingthe discountrate

43. The measurementof the benefit lost by usilg resourcesfor a given pwpose is
B a" Economicefficiency c. Comparativeadvantage
b. Opportunitycost d. Absoluteadvantage

44. ln:the long run, a firm may experienceincreasingreturns due to


D a. Law of dirninishingreturns c, Comparativeadvantage
b. Opportunitycosts d. Economiesof scale

45'h,microeg0npmiE5l,t.tre.dlstingtl|shin+cfrrfryteri*xof.tJrcbngru*',xt.thesupplysideisthat
D a. Only supply factors determine price and output
b. Only demandfactors determineprice and output
. c. Firrnsare not allowedto'enter or exit the industry
d. All inPutsare variable
falls. the impact upon the economyis
46. If consum€rconfid'ence
A a. A downturn
b. An upturn
c, No change
d. Consulnerconfidencedoes not have an impact upon the economy

47.An upturn in economicactivityis indicatedby following,except


ta. the
t all,of
D a. lncreaseOhousingstarts Reductionlnthe quantity of unemploymentslaims
b; Increasein personaltravel d. Reductionin the amount of luxury purchases

48. In nationalincometerms, aggregatedemandis


D a. Demandfor money by the community in a period of full employment
b, Total expenditureon capitaigoods by entrepreneursduring a period of full employment
c. Demand that is needed if a country's econornyis to operate at optimum level and the
fevel of investment is to be raised
d. Total expenditureson consumergobds'andinvestment,includinggovernmentand foreign
expenditures, duringa given period

49. For a given level of tax collections,prices,anrj interest rates, a decreasein governmentalpurchases
will resultin a (n)
ca.tncreaseinaggregatedemandc'Decreaseinaggregatedemand
b. Increasein aggregatesupply cl" Decreasein aggregatesupply
:
50. Disposable income is calculated as
D a. Grossdornesticproduct rninusthe capitalcost allowance
b. Net domesticproductminus indirectbusinesstaxes plus net incomeearnedabroad
'' c. Personalincorn€minus transfer payments
d. Personalincomeminuspersonaltaxes
ReSA * 76e ertka' Sciaql

MICROECONOMICS
MS-E2:
DEMAND
. DEMANDis the relationshipbetweenthe priceof a good and ihe guantitydemanded. It is also defined
as the scheduleof quantitiesof a good that peopleare willing to buy at differentprices.
. The eUANTITYDEMANDED of a good is the amount that consumersplan to buy during a period at a
particularPrice.
. ihe LAW bF bfURruO states that "ceferis paribus, the higher the price of a good, the smaller the
quantity demanded." Higher pricesdecreasethe quantity demandedfor two reasons:
'SUBSTITUTIONEFFECT; a higher relative price raises opportunity cost of buying a good; as a
1)
result, peoplebuy lessof the good as there could be other availablegoodswith a lower price.
2) INCOMEEFFECT - a higher relativeprice reducesthe amount of goods peoplecan afford to buy.
r A DEMANDCURVEshows the inverse,relationshipbetween the quantity demandedand price, ceteris
paribus.Demandcurves are negativelysloped.
, D€},IAI'iDCUR.VE'
Prie,r-
(Pesos) > A change in the price of product caus€s a
5 fnov€rnent along the demand cltnts, also called
4 A,CHAI,{GEI'{ QUAI{TITYDF}IA'{SED.
3
,2
IN DF$AilD. An increase in demand drives the
I demand cuive to shift rightwardr (D1 to D2).
I 2 3 4 5 Qirantity(Unifs1

. The factors that affect the demand for a roduct are the followinq:
FACTOR EFFECT on DEMAND
Priceof SUBSTITUTE goods* DIRECT.Example: if the price of pork increases,the demand for beef

Price of COMPLEMENTARY INVERSE.Example:if the price of gasolineincreases,the demand.for


goods#_
Expected future prices
there will be an increasein demand.
.Consumer
wealth/income DIRECTfor NORMALgoods. As consumerincome goes up, the demand
for roducts(normal
Consumefwealth/income INVERSEfor INFERIORgoods. Demand for inferior goods (q.9., instant
noodle, sardines) increases as consurner income decreases since
99nrt,{me_!'F_b!y_.nglg"t0f_el_qryoog!-[h9!l!9shoft of
DIR€CT.An lqlf,qasein "pgpglaliqn_r@
DI REcT. A;m tf[;Gi z" el<pa d;;-a; mand for t he-proAtia
INDETERMINATE. The effect" depends on whether the shift in taste or
nce is favorableor unfavsrableto the demandfor the product.
*SUBSTITUTEGOODSare those goods that can be used in place of another becausethey could perform
the same functudn: buttet aid margprines; pms and penclls. **COMPLEMENTARY PRODUCTSare
products that go hand in hand: whifeboardand whiteboard m,arkers;CPUand monitors.
ELASTICITYOF bEMAND (Ee), which measures the sensitivity of demand to changes in price, is
computed:
rtsD= eo in Qgad!9_Qg.mandgC
- A*--*T-% _ __Ajn_Q!'a4]l4y_Ds1nendgg.* - - A in Pric.e .l
in price AverageQuantity Jverage- Price.
J
Example: . Day 1 ) unit price was set at P 2.50 eaeh,the salesreached200 units.
DaV2 ) unit price was lowered to P 1.50 each, the sales increasedto 4O0 units.
Usingthe aboveformula (ARCmethod): Eo- (200/300) + (1.00/2.00) = 1.33
'r lf Es > 1, demand is said to be ELASTIC(sensitiveto price chiinges)
> If Eo = 1, dernandis said to be UNIT-ELASTIC/UNITARY (insensitiveto price changes)
> If Eo < 1, demand is said to be INELASTIC(not that sensitiveto price changes)
The elasticityof-demand is greater for a product when there are more SUBSTITUIESfor the goOd;a
larger proportion of income is spent on'the good, and a longer period of tirne is considered. For
example,the demandfor LUXURYgoodstends to be more elasticthan the demandfor NECESSITIES.

If demand is price-elastic,an increasein sales price results in a decr€asein TOTALREVENUE for all
producers.In the above example, demand is elastic, Eo = 1.33 (Eo > 1), the price declineof P 1.00
resultedin an increasein total'revenueP 600 (400 @ P 1.50)vs. P 500 (200 @ P 2,50)'
RCSA
MICROECONOMICS
- 74e Re+eeatScf4o( al /*cor/r4lar4tr/
*
MS.E2
r The effectof prrcechangesmay be sumnrarrzed as foilows:
?.rjfe--qh.alrS-e (s-lasticdemand) Eo :.{I (jnetestigde.ryrend)
,E?..i,-l Er: 1 (unitaryl
Increase Total revenuedecreases iotal revenueincreases Total ".
revenueis the same
Decrease Total revenueincreases Total revenrjedecreases Total revenue
An individualdemandsa particulargood becauseof the utllliiisitisilction) is the same
' received from,consumrng
it' The more goods an indiviclualconsumes,the more utility
$,e indiviclualreceives.However, the
rnarginal(additionel)utility frorn consumingeach addrtionalunit
- decreases.. This is referred to as the
LAWOF DIMINISHING MARGINNIUTITTiY.
I GoNSUMPTION decisionsdependon many factorsbut the nrainone is pERSONAL
DISposABLEINCOME. ';'il;
Personal Disposal Income is the amount of income corrsumers
have after *r'"n t"-",
government yhgl.?ej_s_olar disposabreincomegoes up, .onr-uil'"ir-uuf ilor".
' The consumer'sMARGTNAL PROPENSITY To coNsur.'ir fr',ricl o"i.i'n'es how much of each additional
il qgfgn:l disposable
q9:-o-= incomethat the consumer wiu'spend.rhe rqAe,Cirr,ei pnbpeilsrryro
SAVE(MPS)i.1Ine.g^elgeJrtage of additionalincomethat is saved. since consu*"rr.in eilre.
save money, then MpC + MpS = 100o/o. ipeno or
,
SUPPLY
' SUPPLY rs the relationship
between,the.priceof a good and the guantitysupplred.It rs also
the s:h,99{9_9fquantitiesof a good that peopleari winingbose//at definedas
differentprices.
' The QUANTITYsuPPt-lFDis the amount of a gocrclthat proclucersplan
tc; sell at particutarprice during a
given tirne period.
' The LAW oF suPPLYstates that "ceteris paribus, the higher flie price
quantitysupplied." of a good, the grreateris the
' A SUPPLYCURVEshows the positive rblatonship between the quantity
paribus.Supplycurves are positivelysloped. supptied and price, ceteris

Price , SUPPLY
CURVE.
(Pesos) . A change In the prrce of product causes a
5 movement along ttre.supplycurve, also called a
4 CHANGEIN QUANTITYSUPPLIED.
3
2 . A shift rn the supply curve is calleda CHANGElN
t SUPPLY. An increasein suppty drives the supply
curve to shift rrghtwards(S, tCISz)-
7-'3 4 5 euantity(tJnrts)
h{toF;lt{+affgct rFfesuppryficr a product are the fofrowing:
? -.-T-.fle . ..' .
i-^ --- fAeIAB- - _ ". I EFFFCT on SUppt_y l
i Productlon costs i iruveRsr.As procJuction costsgr-,up, fcwer procltrcts wrll be suppleclata i
i Numbe. of $roducers
I
' I oinEci. An ^r '
increase-,n
r ' r L r c d ) e r r r ttre
L r r e number ofl producers
tlumDer o proclucers w
will
i l l ccause an
ause a n ilncrease
j
n c r e a se I
' i'rreoiilbsriiuia i; ^; ; . - : '
I sood; i li,i?-t."f-"#tfrl#'i:":1i#':#
Pric-eof substitutegoods
i:.T:j:j:::' T,f;'Tiearei
j lruveAbE.--li-otner-pioaidtu ."n be nrodr*+.rrwirh (trazr6r r6lj,p^- i
I i-i;, . I
_ proctucers
wiil produce
I goods _thos_e i
Prir:eof complementarv qoods
-l I otnrcr- A iiie in tne pii.".*ba;'Gmplenienlin-iiioouciion,n.ieisesj l
--
;., . ; __..__,. prices
rxpected'ruture
txpected ruture prices [!Vel_tfa1ogfrf!_sthe g_qppJycr,rrve
rightward. I
i DIRF_CT.If is .vno.teJ-ii-;+
i 911.:!t .it expcctecthai p.iiei wiirbe i'lishil A;.-iha-&oA; $* j
If 6 is ;l;.:..,.i, ,.^'li^i^:_-;_. -;;'--.-----..-:---.-. J
i
- *-
iru.nnoroer-_
| _
ii:'!iff#h#ftTii:."::t#H:'fj'*c;
i supplyqurverrghtward.
r,ror*,rr.,.n,,-.i
Government
I -_ sub;idies srtriii*i'IeJr.* fr," p.oouiiion cosrof go,rdil;o, tn*i.i**,-j
,_^.+t--rg-_ i tTi:I r r E . . 9supptle{
soqds g t v g l l pp!!Sg.*.
ii_e;;;;;;;;;;t
' ._-----. __and tariffs j
- ;. . . __ - _ - I r ' . r . - : YqJ
:?:i:*?,er,tt1e __s . _( b
uuP {t
r rl>J i l e o d estygll
r q ngg,_.. _.-
-iJG--proouilicn 1
i
I bovernmenttax I,TY|:S, Increase in taies
wouio ;rdG--ldi*b/ J
i supply
__i.qqcrqqgitg
I specialinfluences ! covetnmentrestnaioni, wia*,erlconriif,ons,-ano lnnoujtionso,. n.* i
|
1 | methodmay affecl irpprv or goods,rxampte:'unexpected ;r**, n-.11i
| rerms,decreasing'tne
:_ __ .-...i .gsqqtgy supp]ygf qerr?ilqrops. j
' ELASTICIW oF SUPPLY(E5), which measures the percentage
change in quantity supplierJof a product
resulting from a change in product price, is comL:uted:
-
i=_ __o_yt_,lglrjm"it--fupprieo
- :l;l;ilP";i;,e,] --*i l
I
If Es > 1, suppryis said to be [L/rsrIC (sensitrveto pricechanges) ,
- .If Es = 1, supplyis said to be
- UNIT-EI-ASTIC/uNtrnriv lrnsensriiveto pricechanges)
If Fs < 1, supply is saiclto be INELASTIC(not that sensitiveto pricecharrges)
Elasticsupply means that a percentageincreasein price will
create a larger percentagerncreasein
supply.
Page2ofBpages ,-'\
/"'* ii\,
ReSA -7/e ReaienSc44o{a( 4cru'ttarq t' .d MS.E2
MICROECONOMICS C

tou.tttffJl'#r*rrt
is a statewherein
thedemand arein batance.
andsuppty
. EQUILTBRIUM
Price
(Pesos) > . ,EQUIUBRIUIv! PRICE{P 6"90, is the price irt
1'I 1 0 which the quantitr demanded egual quantity
supplied. It is d*terrninedby the inter"section
of
5 .(* Es*JilibriumPoint the dernandcurve and the supplycurv€.
.4
2 guantity bought and soK at the equilibriurn
L 2 3 4 5 Quantity(Units) pric€.
Selsw the equilibrium pri(r., a SHORTAGf exists (i.e., guantity demanded exqeeds quantity zupplled)
and thd pnce will rlre ; above the equllibrium price, a SURPIUS exists (i.e,, quantity supptied exceedr
qumtiff dehanded) and the price wi{l falN.
a Eguilib-rfumis a MARKET-Ct€Af,IfttGsituation where neither surpluses nor shortages exist,
I A PRICECEILINGis a maximum price that seller may charge for a good while a PRICEFLOORis a
minimum price. If set below equilibrium price, a price ceiling results in shoftages; if set above
eqgilibriumprice, a price floor resultsin surpluses.
GOVERNMENT INTERVENTION may changemarket equilibriumthrough taxes and subsidies:

Another factor that causes inefficienciesin the pricing of goods in the market is the existence of
EXTERNALITIES '- damageto environmentiaused by production(e.g., pollution).

MARKET
' . A MAR.KET is any institution,mechanism,or situation which brings together the buyers and sellersof a
particularproduct.lt is a placewhere sellersand buyers meet (e.g., grocbry,internet).
he four basic MODELSare:
--;;;;*
Number of Contral Conditions
Market Type of Product
Producers over Price of Entrv
PURE virtudly Agriculturtl
I
COMPETITION Large None Very Easy
Identic6l Products
MONOPOLISTIC Retail trade, Food,
2 Many Differentiated Limited Easy
COMPETITION Gasoline,Fashion
Standardized/ Limited Appliances,Cigars,
3 OLIGOPOLY Few Hard
Differentiated or Wide Cars. Computers
PURE Government
4 One Unique Wide Blocked
MONOPOLY Franchise.Utilities

deal to buyers when quallty, price and product inforfnation are all considered. l

many gogds:itcan produceat the equilibriumprice (i.e., very low salesat a higher price).

hence, pure rnongpoliesare usually subject to GOVERNMENT REGULATION.


> Oligopoly b a comFetition among few; if left unregulated, oligopoliststend to establish CARTELthat
engage in price fixing through collusion"
> A MONOPS'CINY is a market where only one buyer exists for all sellers.

forbiddenby the government.

PRODUCTION AND COTIT


. The COSTSOF PRODUCTION changeas the firm outBut changes,in the short run and in the long run,
. In the SHOR,T RUN,at least one input is fixed (e.9., pfant depreciation).Some costs are fixed'and some
are variable
. In the LONGRUN,all inputs are variable.All costs are variable.(e.g., additionalplant can be built.)
. TOTALPRODUCT is the total quantity of the output producedin a given period,
r MARGINALPRODUCT is the change made in total product from a change in a varlableinput (e.g.,
labor). In economics,the term "marginal"is often used'to mean "additional.f'
'r AVERAGE PRODUCT is the total product per unit of input (e.g., labor). It is total product divided by the
quantity of labor employed.Anotherterm for averageproduct is PRODUCTIVIfi. .
. INCREASINGMARGINALRETURNSoccur when the marginal product of "an additionalworkbr exceeds
the mapginalproduct of the previousworker. In most productions,increasingmarginal returns occur
initially but DECREASING MARGINALRETUR"NS will occureventually.

Page3ofSpages ,4\
/./ 9-S^\'\
ReSA - 74e Rernaet'
MICROECONOMICS
S/"uot o{ &caa.*a'tct1
a.
[fs-E2
-..' ' :.i f,'

. sHoRT-RUru
Fnooucrlonl
cosrs.
COST LEGEND
TC = Total Cost
_-AYC_:-
Aygr_qse
Yq
VC = Variable Cost

_ _Alc_: q[atqgirr To_tq!_Qq_s!


- *-_-__"AQ_:__Qletlgril__eue_{lli!y_*-
___
f.Q:" QF A f.Q-4 _ v!)_, A]VS =*.9[errgg, qo_S!_
Iq!p! yetl_ab-ln
!.rt-
AVC is initially constant until inefficienciesof producing in a fixed-size facility cause variable
costs to
rige; MC initially decreasesbut begins to increasedue ts inefficiencies
The causeof inefficienciesis known as the LAW oF DIMINISHINGRETURNS. This law states that as we
try to .produce'more and more outputs virith a fixed productive capacity, marginal productivity
will
decline.
|!IG-RYN PRODUCTION COSTSare allvariable costs. As the fir.m expands by increasingptant size.
ATC tends to fall at first becauseof the economiesof scale,but as this expansioncontinues;
ATC begins
to rise because of the diseconomies'of scale-.
> ECONoMIESOF SCALE(a decline in ATC) arise becauseof labor and management
specialization,
efficient capital, and factors such as spreadingadvertising cost overln inrie"ii"g level of output.
Example: If a firm increaseslabor hours by 1o06,outputincreases by 5oo/o.Ffen@,ATC
'/ DISECONOMIFS decreases.
SCALE arise primarily rrom ine probterns of inefficie;1; '*;;;;irn'""0
-oF operations
coordinatingthe firrn's as it becomesa large-scaleproducer.
l11f4:: If a fjlm increasesinput by 600lo,output increasesby 3olo.Hence,ATCincreases.
r CONSTANTRETURNSTO SCALEare the range of output where tong-run ATt
do;; noiin*s".
Example: A firm may double its productionby doubling its productionfacility; the firm lan
bu*d
identical pr"oductionline and hire an identical number o-f workers. So when production
increases,
ATCremainsconstant.

MULTrPLE- CHOI CE-qUESTIANS


(Sources:AICPA/CMA/CIA/Varioustest banks)
1. lhe law of demandstates that
a. Priceand demand are directly related,ceterisparibus
b. Priceand demand are inversely related, ceteris paribus
c. Priceand quantity demanded are directly retated, ceteris paribus
d,/ Priceand quantity demanded are in,rerselyrelated, c'eterisparibus

2. A video store's businesssales increasedby 2od/oafter the movie theater ralsed its prices from p
2o0.o0
to P 3oo.oo.Thus, relativeto movie theater admissions,videosare
a7 Substitutegoods c. Complementarygoods
b. Superior goods d. public goods
3. X and Y are substltuteproducts.If the price of productX increases,the effect on producty is
a. Price wilt increase
b. Quantity suppliedwill increase
c.z Quantitydemandedwill increase
d. Price.quantity demanded,and supplywill increase

4. Alf of thb followingare.complementarygoods, except


aa Margarineand butter
b, Razorand razor blades !
c. VCRand video cassettes
d. Camerasano ,otis;ilii;

5, If a rise in the price of gasolinedecreasesthe demandfor cars,


. a. Cars are an inferiorgood
b. Gasolineis an inferiorgood
c. Gasolineand cars are substitutesin consumption
d7 Gasolineand carsare complementsin consumption

6. A decreasein the price of a complementarygoocJwill


. a. Increasethe price paid for a substitutegood
b. Shift the supply curve of the joint commodityto left
c. Shift the demand curve of the joint commodityto t*re left
d/ Shift the demand curvBof the joint commodityto the right

Page4ofSpages
Re5A'-'-7m"ffiiiffif"s:ffi4;;laaiwmfri],''''. :"' 1* ": __"_._".._"*1_pgf[
MICROECONOMICS
' - .i
7. Whichof the followingwould causethe ciemandcurve for a commoditytdshift to the teftT
a. A rise in the population
b. A rise in averagehouseholdincome
c. A rise in the price of a substituteproduct
dr/ A rise in the price of p complementarycommodity

8. If a group'of consumersdecideto boycott a pafticularproduct,the expectedresult would be


ar' A decreasein the demandfor the product
b. An'increasein the productpriceto make up lost revenue
c. An increasein productsupply becauseof increasesavailability
d. . That demandfor the productwould become,completely inelastic

9' A decline in the price of a good causes producersto decreasethe quantity of goods supplied. .This
result illustrates
az The law of supply A changein supply
b. The law of demand d. The nature of an inferiorgood

10. A supplycurve illustratesthe relationship


between
v Priceand quantity supplied c. Priceand guantity dernanded
b. Priceand consumertastes d. Supplyand demand

11. Whjchof thd+oritiivfng1lrt'idusea shift in thejggly curve of a product?


a. Changesin consumertastes
b. Changesin the number of buyersin the market
c. Changesin the price of the procluct (1fi* Qr *t 9)
df Changesin productiontaxes

12. Whichof the followingis not likely to affect the supply of a particulargood? UG4 4f-h U A19
a. Changesin technology
bz Changesin consumerincome
c. Changesin productioncosts
d. Chanqesin governmentsubsidies

13. The equilibriummarketpriceof a good is the


a. Pricethat maximizesprofit for sellers
b. Pr:icewhere shortagesexceed zurpluses
c. Pricethat buyersare willing and able to pay
d,1 Pricewhere the quantity demandedegualsthe quantity supplied

14. An improvementin technologythat leadsto improvedworker productivilywould most likely result in


a./ A,shift to the right in the supply curve and a loweringolFthe pricd of the output I I r. 2S ..
b. A shift to the left in the supply curve and a loweringof.the prie€of tfr'c;.uffput I Y ..'
c.' A'n increasein the price of the oqtput if demand is unchanged [.'ft _
d. Wage increase | / .'-r P
-@
15. In any competitivemarket, an equal increasein both demandand supply can be expectedto always\
a. Decreaseboth price and market-clearingquantity
I ,/t( -
b. Incfease both price ah'd.market-clearingquantity
c" Increagemarket-ctearingquantity
d. Increaseprice ?a- -ao,*
'. rlo W.L^t. Vtane:
16, Priceceilings
. a. Result in persistent surpluses
b7 Createpricesbelow equilibriumprices
c. Create pdces'greaterthan eguilibrium prices
d: Are illustratedby governmentpricesupportprogramsin agriculture

17, If the governmentregulatesa productor servicein a competitivemarketby settinga maximumprice


price,whatis the long-runeffect?(dtnql
belowthe equitibrium
a. A surplus c. . A decreasein demand
b7 A shoftage d. No effect on the market

18. Whichof the followingmarket featrjresis likely to causea surplusof a particularproduct?


a. A monopoly
bt A price floor t - ts*

c. A priceceiling
d. A perfect market

Page 5 ofB pages


ReSA * 76e ReraeatSciial a{ 4ccru'ttaracc|
MICROECONOMICS
hf$E2
19. If market price is hrgherthan equitibriumprice (lt5rr)
a' A surplus exists and the equilibriumprice wili rise until it equalsthe market.price
' surplusis elinrinated and the
bl A surplugexistsand'the equilibriumprice will faj!untit it equalsthe market price
and the
surplusis eliminated
c' A shortage exists ancl the equilibriumprice will rise until it equals the market price
and
the shortageis eliminated
d' 'A
shortageexistsand the equilibriumpricewill raltrjirtiiit equatsthe market price
and the
shortageis eliminated

20. The priceelasticityof demandmeasuresthe responsiveness of the


V Quantitydemandedto a changein the price of the good
b. ' Quantitysuppliedto a chanQein the price of the good
c. Priceto a changein the quantrtydemaneledof the good
d.Pricetoachangeinthequantitysupp|iedofthegood." ,

21. The price elasticityof demand is equai to


a. Ao/oQuantity Demandedx Aoloprice c. Lo/aPricex Ago Q*antity Demanded
fu/ LYoQuantify Demanded+ Aoloprice d. AoloPrice + g9/oeuantitf Dernxlded
22. Which of the following stdtements is false?
a. When ela,sticityequals 1, demarr<Jis unit elastic ,
b/ When elasticity is more tl-fan 1, demand is inelastic
' ' " ' .i Y
c . W hen elasti c i ty i s l e s s th a n 1 , c te ma ndi s i nel asti c _
d. whenetasticitv
equars
o, oemaJ'i;p:;";,il,n"i*,i. h*l*]t*,rujl> *. '*
23. If the incomeelasticityof demandcoefficlentfora particularproductis 3.00,
the good is tikely
V A luxury good c. An infer:iorgood
b. A shortage d. A necessity
24. which of the followinghas the highestprice elasticitycoefficient?
a. Rice c. Bread
b. I nf ant m ilk d.z Skr boats

25' In the pharmaceutical industrywhere a drabeticmust have insulinno mat-terthe cost and where
is no other substitute,the diabetic'sdemandcurve is besf describedas there
a. Perfectlyelastie c, Elastic
b/ Perfectlyinelastic d. Inelastic
26. Demandfor a product tends to be price inelasticif
a. The productis considereda luxury item ;
: ' t.
b. The populationih the market areas is h[e
c. Few good complementsfor the productaie available
dt Peroplespend a large share of their incorneon the product
cao/,vq* d vI3|)
27' as the price for a:particularproduct changes,the quantity of the prorluctdemanded
changesaccording
to the following schedule:
Tpn!_g uAnlLty_d_emandSd ffl-t;g_p.
-etunif
100 P50
150 P 45..
200 P40
225 P35
230 P3.o
232 ' P25
!si10 are rflethod,the price elasticityof demandfor this product when the price decreasesfrom p 50 to
P45is
a. 0.20 c. 0.10
b. 10.00 dr 3.80
S_QI-UfION_G_U.LD_E
--.Bare?o"
tnJrormuta stated in No. 21:
r -***-* -:='-'*""'-'=---

Demlnded:
.. Avoeuantity (150- ,ooy--11;;"*;;;;ir"^
AoloPrice: (50 - 45) + [(50 + 4S)/2] = !A.S2So/o
ReSA * 7/e Retka, Sc/zoalo{ ,4ui4'4ln'tal MS.E2
MICROECONOMICS

28. In whichof the followingsituationswouldthere be inelasticdemand?


a. A4o/opilce increaseresultsin a 5oloincreasein the quantity demanded
tt A 4o/oprice increaseresultsln a 5olci
decreaseiri the quantity demanded
c A 59o price increasereisultsin a 4o/oincreasein the quantity demanded
d/ A5o/oprice increaseresultsin a 4o/odecreasein the quantity demanded

29. If the demandfor a productis inelastic, then


a. Increasing.tfre p5iceo1'theproductwill increasecompetition
bz. Increasingthe price of the productwill increasetotal revenue
c. Decreasingthe price of the productwill increasetotal revenue
d. Increasingthe price of the productwill have no effect on total revenue

30. If a prodtrct'sdemand is elasticand there is a decreasein price,the effect will be


a. No changein total revenue
b/ An increasein total revenue
c. A decreasein total revenue
d. A decreasein total revenueand the demand curve shifts to the left

31. Which type of economicmarket structure is composedof a large number of sellers,each productngan
identicalproduct,'andwith no significantbarriersto entry and exit?
C a. Monopoly c. Perfectcompetition
b. Oligopoly d. Monopolisticcompetition

32. A'market'with many independent firms, low'barriers to entry, and product differentiationis besf
classlfiedas
C a. A monopoly c. Monopolisticcompetition
b. A natural monopoly d. An oligopoly

33. Economic markets that are characterizedby monopolistic competition nave alt of the foltowing
characteristics,except
A a. One sellbr of the product
b. Economiesor diseconomiesof scale
c. Advertising
d. Heterogeneousproducts

34. Which type of eco/nomicmarket structure is characterizedby a few largq sellers of a product or service,
engaging prirnarily in nonprice cornpetition?
B a. Monopoly , c. Perfectcompetition

35. A natural monopoly exists because


D a. The ffrms Mlds patents-
b. The firm owns naturals resources
c. The govemment is the only supplier
d. Econonticand technicalconditionspermit only one efficientsupplier

36. Whichof these organizationswould more likely engagein public relationstype advertising?
D a. An aifline c. a toy manufacturer
b. A hotel chain

37. Whichof the folfowingis not a key assumptionof perfectcompetition7


D a. Firms sell a homogeneousproduct
b. .Custornersare indiff€rent about which firm they buy from

d. Eachfirm can pfice its product above the industry

38. Whichof the followingis nof a characteristicof a purely competitivemarket?


A a. Differentiatedproducts
b. A very large number of producingfirms
c. No barriers to market entry for new firms
d. Lack of control over productprice by individualfirms

39. Whichof the followingis not a likelystrategyfor a frrm in a purelycompetitivemarket?


D a. Leanmanufacturing
b. Processreengineering
c. Supplychainmanagement
.d. Developmentof a brand name
r\ U g .n L * :' . , f , ' F E iT f f iE E J W .,* :.7 ffi ' t....' ' .:,' .:' l .i .:.| 4 j r " ]..]g:]:-:-:i :..f/i ry]l i E fftrF:E z:
MICROECONOMICS

40. The distinguishingcharacteristic.ofoligciporistic


market is
D A single seller of a homogeneousproductwith no closesubstitrjtes
3'
b. A qingl,eseller of a heterogeneousproductwith no closesubstitutes
c. l_ackof entry and exit barriersih the industrv
d, Mutuarinterdependence of firm pricingancloutput decisions

41' Whichof the followingis typicallyan advantageof a monopolyfrom


the viewpointof the consumer?
a. Costsof productionmay be rowerbeciuse of quaniitiesof scare
b' Priceschargedto the publicare lowei becausethere is no need for
advertising
c. Quantitiesproducedare greater
d. Produbtsproduced are of higher quality
.
42. Patents are granted in order to encouragefirms to invest in
the researchand developmentof new
products,Patentsare an exampleof
C a. Marketconcentration
b. Vertical integratiorn
c. Entry barriers
d. Collusion

43. Becauseof the existgnceof economiesof scale,businessmay


find that
c a' As more labor is addedto a factory, increasesin output *itiai*inirr,
rn the short run
b' Eachadditionalunit of labor is less efficientthan the'pre"i"ui
,^ii-'
c' Increasingthe size of a factory will result in lower averagecosts
d. Increasingthe size of a factory will result in lower total costs

44.In the long run, a firm may experienceincreasingreturnsdue to .


^
D a. Law of diminishingreturns
, b. Opportunity costs
c. Comparativeadvantage
d. Economiesof scale

45' In microeconomics, the distinguishingcharacteristicof the supply side in the tong run
D a. Firms are not alfowedto enter or exit the industry is that
b. Only demandfactorsdeternrineprice and output
c. Only,supplyfactorsdetermineprice and output
d. All inputs a,revariable

46. Marginalrevenueis
D a. Greaterthan price in pure competition
b. Equalto piece in monopolisticcompetition
€. The c.hangein totar revenueassociatedwith increasrngprices
d' The changein totat revenueassociatedwith producin{ and selling
one rnoie unit
47. lf the mafginal profit is positive, as output increases
- a. Total profit must iilcrease
$
b. Total profit must decrefse
c. Average profit must increase
d. Average and total profit must increase

profit is to rise as output expands, then marginar profit


_ 48. If must be
C a'. Falting c. positive
0., Constant . Rising
49. The law of diministringmarginalutility states that
A
9' lvlarginalutility wilt decfineas a consumeracquiresadditionalunits of a specificprocluct
b' Totaf utility witl dectineas a consumeracquir€sadditionatrniti
' c. Decliningutilitiescausesthe demand oi-u ipecific product
Frvvvvr
curve to sropeupward
d.Consurners,wantswi||diminishwiththepassageoftime

50' As a businessowner you have determinedthat the demarrdfor your product


this assessmeit,you understandthat is inelastic.Bascd upon
a, Increasingthe price of your productwiil increasecompetition
br Increasingthe price of your productwiil increasetotar revenue
c. Decreasingthe price of your productwill increasetotal revenue
d. Increasingthe price of your productwill have no effect on
total revenue
'--_\.Ei*::.

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