ECON 200 - Exam 1: Sexton Ch. 1-4

Darla is surprised to find that the quality of in-flight service remains much the same despite a steep hike in air-fares recently. What could be wrong in her assumption that a higher price naturally translates into better quality?

The fact that two variables might be related does not necessarily mean that one causes the other to occur. Darla could be ignoring other variables involved in this scenario. Increase in fares might have been necessitated by factors such as increase in aviation fuel prices, margin pressures etc.

Why is prediction in social sciences like economics more difficult than in physical sciences?

The major reason for the difference is that the social scientists are concerned with human behavior. Human behavior is more variable and often less readily predictable than the behavior of experiments observed in a laboratory.​

Can activities like driving faster than the speed limit or driving without wearing a seat belt be considered rational behavior? Why or why not?

These activities would be considered rational if the perceived benefits are greater than the perceived costs. The decision to act in a certain way can be rational even if the actions turns out to be something that the individual later regrets.

"The president of the world's biggest polluter (the United States) needs to do more than propose well-intentioned but insufficient measures that amount to using a squirt gun to quell a raging fire." Is this a positive or a normative economic statement? Explain your answer.

This statement is normative. The key is the phrase "the president... needs to do more." This is a value judgment on the speaker's part.

Draw a picture of a production possibilities curve. Identify each axis as measuring either guns or butter. Select and label Point A, which is beyond the economy's ability to produce; Point B, which represents an inefficient level of production; Point C, an efficient combination of output in which more guns are produced than units of butter; and Point D, an efficient production point in which more units of butter are produced than guns. Be sure to label each clearly.​

A. Above the curve B. Below the curve C. Higher on the curve D. Lower on the curve

Real World Micro, Article 1.1: Of the assumptions listed, which seem reasonable and which do not? Explain. Which objections to these assumptions do you think are strong? Explain. (Focus on one or two.)

1) People Face Trade Offs (There is no such thing as free lunch). 2) Opportunity Cost (The cost of something is what you give up). 3) Rational People think at the Margin. 4) People Respond to Incentives. 5) Trade Can Make Anyone Better Off.

Define what a market is and provide three examples of where a market can be found.

A market is the process of buyers and sellers exchanging goods and services. Examples are abundant: bookstores, corner grocery markets, stock markets such as the New York Stock Exchange, barbershops, roadside markets, online auction markets, etc.

What are the factors that can cause a shift in the production possibilities curve?

Advancement in technology, improvements in labor productivity, or new sources of natural resources could lead to outward shifts of the production possibilities curve.​​

How can market failure occur in the market for hybrid automobiles? What could the government try to do to improve the situation?

An unregulated market could produce too few hybrid autos since these cars produce benefits for someone other than the buyers and sellers. As such, the government could provide a subsidy or tax credit to those consumers who purchase hybrid or other fuel efficient autos in an effort to promote more purchases and usage of fuel efficient vehicles.

Assume that Colombia can produce 1,000 pounds of coffee in one day or produce 200 pounds of bananas in one day. In addition, assume that Ecuador can produce 300 pounds of coffee in one day or produce 100 pounds of bananas in one day. Which country has the comparative advantage in coffee and which has the comparative advantage in bananas? Determine a pattern of trade regarding these countries and these goods that would benefit both countries

Colombia has the comparative advantage in coffee because its opportunity cost of one pound of coffee is only 0.2 (Bananas/Coffee=200/100) pounds of bananas while Ecuador's is 0.33 (bananas/coffee=100/300) pounds of bananas. Ecuador has the comparative advantage in bananas because its opportunity cost of one pound of bananas is only 3 pounds (coffee/bananas = 300/100) of coffee while Colombia's is 5 pounds (bananas/coffee = 1000/200) of bananas. If Ecuador traded one pound of bananas to Colombia for between three and five pounds of coffee, both countries could enjoy greater consumption and be better off..

How can we measure the opportunity cost of producing a good? Using a bowed outward production possibilities curve between ice cream and hammers, identify graphically the opportunity cost of obtaining an additional hammer.​

Diagrams will vary. A correct diagram should look something like the following: The opportunity cost of a hammer is the quantity of ice cream that must be sacrificed in order to produce an additional hammer. For example, moving from Point A to Point B in the above diagram, we can see that 3 gallons of ice cream are sacrificed in order to produce one additional hammer​.

Farmer Fred could grow wheat and barley. He could grow 75 bushels of wheat or 125 bushels of barley using the same resources on an acre of his land. The price of wheat is $2.00 per bushel and the price of barley $ 0.80. Show the benefits to Fred from specialization. What should he specialize in?

Farmer Fred could make $150 if he grew only wheat and just $100 if he grew only barley. By specializing in wheat production he will be better off. Even though he can produce more bushels of barley than he can bushels of wheat, his opportunity cost of producing wheat (the $100 income sacrificed. is lower than the opportunity cost of producing barley ($150 in sacrificed income).

The circular flow model indicates that income flows from households to firms through product markets and back from firms to households through factor markets. Is the total amount spent by all households equal to the total income that flows back to all households? Why or why not? Is the amount spent by each individual household equal to the amount that flows back to that specific household? Why or why not?

In our circular flow model, the total amount of spending for all households will be equal to the total amount of income. (The impact of issues such as taxes, exports, and imports could be added later.) However, the total amount spent by any one household is not necessarily equal to the amount of income which that specific household receives. Household income is determined by the value of the factors of production that the household owns rather than the amount of consumption by the household.​

Why do people commonly switch channels on their TVs when the final credits of a movie they were watching on it are being displayed?

Individuals will only pursue an activity if expected marginal benefits are greater than the expected marginal costs. If you perceive the marginal benefits of watching something else to be greater than watching the credit line of the movie, you may choose to switch channels.

The face value of a ticket to the Super Bowl was approximately $1,200 in 2011. The game is very popular and there are a number of fans who are not able to get tickets to this game. At the same time, many fans claim that prices are too high and that the NFL should lower the face value of the ticket prices. Would a decrease in ticket prices move the market towards equilibrium? Would it eliminate the shortage of tickets? Why or why not?

Lowering the ticket prices would not move the market towards equilibrium. The fact that there is a greater quantity demanded than quantity supplied indicates that the face value is currently below the equilibrium price. Lowering the face value would cause a more severe shortage as more consumers would want to purchase tickets at the lower price, increasing the quantity demanded. At the same time the quantity supplied would likely remain the same given the size of the stadium.​

What might cause the marginal value, and thus the price, of oranges to rise? You will be given some options, and you choose and explain.

Marginal value is the value gained from either consuming or producing an additional unit of a good or service. Two main causes are cost-push and demand-pull. Cost-push occurs when supply cost forces prices higher, and demand-pull occurs when the demand from consumers pushes prices up. Example of Cost-Push: The store doesn't have many oranges, but consumers still demand oranges. Example of Demand-Pull: The store has many oranges, but the producers don't want to sell out. What may cause an increase of marginal value: 1) Marketing, 2) New technology, 3) Over-expansion of money supply (credit/loans), 4) Monopoly, 5) Natural disaster, and 6) Government regulation.

(Competitive) Markets tend toward equilibrium and, as a result, will tend to eliminate shortages and surpluses. Why?

Markets tend toward equilibrium because when a shortage exists, consumers who are unhappy about not being able to purchase the products or services they want will tend to bid the prices higher, moving the market toward equilibrium. If a surplus exists, suppliers are unhappy about not being able to sell the quantity of goods or services they wish, and will tend to lower prices in order to persuade consumers to purchase more goods and services.​

As the price of DVD players has fallen over the last two years, more DVD players have been sold by consumer electronics firms. Is this a violation of the law of supply?

No. Very likely the reduction in price is due to an increase in supply (not an increase in quantity supplied). As DVD technology has progressed, DVD players have become standardized and more efficiently mass-produced, leading to an increase in supply. What has likely been observed is a rightward shift of the supply curve, not a movement along the supply curve.

Normative vs Positive-why might economists disagree over positive analysis?

Normative is based on opinions, like what they think "should ought to be" or "what needs to be." Positive is based on facts and cannot be approved or disapproved. Economists might disagree over positive analysis because economists using positive analysis are not thinking outside of the box and looking at other options. They are just seeing what is and what has been.

Production Possibility Frontier/Curve - what might cause growth, or what might cause contraction. Illustrate the effect using a PPF/PPC diagram.

Outward or inward shifts in the PPF can be caused mainly by changes in the total amount of available production factors or by advancements in technology. If the total amount of production factors like labor or capital increases, then the economy can produce more goods at any point along the frontier. Conversely, during times of high unemployment and limited money supply, the frontier will retreat inwards and the total amount of goods that can be produced will decrease. If new technologies are developed that enable goods to be produced with fewer production factors, the economy's capital will essentially experience a rise in purchasing power parity. Thus, the economy will be able to produce more at any point along the frontier, meaning that the frontier has effectively shifted outwards. Inward shifts in the PPF that are linked to regressions in technology could theoretically occur, but as technology has proven to generally continually improve over time, such a scenario is unlikely to materialize in real life.

Supply and demand curve shifts - impact on equilibrium price and quantity.

Upward shifts in the supply and demand curves affect the equilibrium price and quantity. If the supply curve shifts upward, meaning supply decreases but demand holds steady, the equilibrium price increases but the quantity falls.

​In a congressional debate about agricultural price supports, senators, members of congress, and other experts made the following four statements. Which of these is a normative statement? a. "Price supports are important because America should preserve the small family farm." b. "Without price supports, the price of wheat and corn will fall by over twenty percent." c. "The decline in commodity prices caused by the removal of price supports will result in fewer, larger farms." d. "The decline in commodity prices caused by the removal of price supports will reduce the number of tractors sold in the United States."

a. "Price supports are important because America should preserve the small family farm."

The opportunity cost of going to college includes: a. both tuition and the value of the student's time. b. ​tuition, but not the value of the student's time, which is a non-monetary cost. c. neither tuition nor the value of the student's time, since obtaining a college degree makes one's income higher in the future. d. neither tuition nor the value of the student's time, at least at state-supported universities and colleges.

a. both tuition and the value of the student's time.

​Trade a. can make every participating nation better off. b. makes some participating nations better off and others worse off. c. makes a participating nation better off only if the nation cannot produce that good itself. d. ​helps developed countries and hurts developing countries.

a. can make every participating nation better off.

Marginal thinking is best demonstrated by:​ a. choosing to spend one more hour studying economics because you think the improvement in your score on the next quiz will be worth the sacrifice of time. b. deciding to never purchase a coat made with animal skins or furs. c. acquiring all the information relevant to a choice before making that choice. d. ​measuring all of the costs of a meal against all of the benefits when deciding whether to order a second milkshake.

a. choosing to spend one more hour studying economics because you think the improvement in your score on the next quiz will be worth the sacrifice of time.

When quantity demanded decreases at every possible price, the demand curve a. shifts to the left. b. shifts to the right. c. there is a movement along the given demand curve. d. none of the above.

a. shifts to the left.

The problem of scarcity: a. exists because resources are limited relative to wants. b. exists because resources are unlimited relative to wants. c. can be eliminated through appropriate government intervention into markets. d. ​does not exist in communist societies.

a. ​exists because resources are limited relative to wants.

Which of the following is the correct way to describe equilibrium in a market? a. At equilibrium, demand equals supply. b. At equilibrium, quantity demanded equals quantity supplied. c. ​At equilibrium, market forces no longer apply. d. ​At equilibrium, the "fairest" price for output is achieved.

b. At equilibrium, quantity demanded equals quantity supplied.

Specialization: a. leads to greater self-sufficiency. b. can lead to an increase in overall production. c. is always the result of an inefficient use of resources. d. helps workers to develop skills by working on a large number of tasks.

b. can lead to an increase in overall production.

​The central question in economics is how to: a. ​regulate the supply of money. b. ​make the best use of scarce resources to satisfy our unlimited wants. c. ​reduce the wants of individuals, businesses and government. d. find more resources to satisfy everyone's wants.​

b. make the best use of scarce resources to satisfy our unlimited wants.

Along a supply curve: a. ​supply changes as price changes. b. quantity supplied changes as price changes. c. supply changes as technology changes. d. quantity supplied changes as technology changes.

b. quantity supplied changes as price changes.

Scarcity means that: a. ​human desires are limited. b. resources are insufficient to satisfy all human desires. c. ​choices are unnecessary. d. ​all but the very wealthy must face choices.

b. resources are insufficient to satisfy all human desires.

Dean bakes his famous apple pies and sells them at the local farmer's market. If the price of apples increases, the a. ​supply curve for Dean's pies will increase. b. supply curve for Dean's pies will decrease. c. demand curve for Dean's pies will increase. d. demand curve for Dean's pies will decrease.

b. supply curve for Dean's pies will decrease.

PRICE per pizza: $10 QUANTITY DEMANDED of pizzas: 1,000 units QUANTITY SUPPLIED of pizzas: 5,500 units At a price of $10, there is a ____ of ____ pizzas. a. ​shortage; 4,500 b. surplus; 4,500 c. shortage; 6,500 d. ​surplus; 6,500

b. surplus; 4,500

Jamie and Danny both attend the same college and incur the same expenses for tuition, books, and school supplies. Jamie gave up a lucrative modeling job in Paris to attend school full-time and Danny gave up a part-time job as a sales clerk in a department store. It follows that:​ a. the opportunity cost of attending college is the same for both since they are enrolled at the same academic institution. b. the opportunity cost of attending college is likely greater for Jamie than for Danny. c. the opportunity cost of attending college is likely greater for Danny than for Jamie. d. the opportunity cost is minimal for both since college graduates are paid much higher than high school graduates on average.

b. the opportunity cost of attending college is likely greater for Jamie than for Danny.

Sergei makes millions of dollars a year playing hockey. Sergei is also the best tailor in his hometown in Russia. Why is Sergei unlikely to make his own clothes?​ a. He has already made all the clothes he will need for a few years. b. ​The opportunity cost to him of making his own clothes is very high because it takes away from his lucrative hockey career. c. Sergei just can't find the material he likes in the United States. d. Sergei has a comparative advantage in tailoring clothes.

b. ​The opportunity cost to him of making his own clothes is very high because it takes away from his lucrative hockey career.

Which of the following serve as the language of the market system? a. Monetary and fiscal policies b. Volatility c. Market prices d. ​Lawsuits

c. Market prices

A leading game-console manufacturer slashes the price of its flagship product by ten percent. Holding other things such as income and preferences constant, which of the following is the most likely group behavior prediction? a. Price reduction will have no impact on purchase patterns. b. Price reduction will be associated with a reduction in quality; thereby reducing sales. c. More game consoles will be sold at lower prices. d. Group behavior cannot be predicted.

c. More game consoles will be sold at lower prices.

​The opportunity cost of an action is equal to: a. only the monetary payment the action required. b. the total time spent by all parties in carrying out the action. c. the highest valued opportunity that must be sacrificed in order to take the action. d. the value of all of the alternative actions that could have been taken.

c. the highest valued opportunity that must be sacrificed in order to take the action.

The law of demand refers to the: a. decrease in price that results as more units of a product are demanded. b. increase in price that results from an increase in demand for a good of limited supply. c. ​inverse relationship between the price of a good and the quantity demanded. d. increase in the quantity of a good made available when its price increases.

c. ​inverse relationship between the price of a good and the quantity demanded.

Which of the following is an example of a resource? a. Land b. ​Capital c. Entrepreneurship d. All of the above are resources

d. All of the above are resources

​Which of the following statements can explain why an association between Event A and Event B may not imply causality from A to B? a. The observed association may be coincidental. b. There may be a third variable that is responsible for causing both events. c. Causality may run from Event B to Event A instead of in the opposite direction. d. All of the above can explain why an association between Event A and Event B may not imply causality from A to B.

d. All of the above can explain why an association between Event A and Event B may not imply causality from A to B.

​Economists believe that people respond to incentives in predictable ways. Therefore, if the government imposed a tax on each child born, you would expect that: a. ​families would have the same number of children, but wait longer to begin having them. b. ​more children would be born, but spaced further apart. c. more children would be adopted. d. fewer children would be born.

d. fewer children would be born.

A market economy depends on market mechanisms to: a. determine the most efficient way of using resources. b. determine how large the government's budget deficit should be. c. decide how much government regulation there should be. d. provide everyone with a minimum level of income.

d. provide everyone with a minimum level of income.

Difficulty in prediction social sciences is the result of analyzing ____ but can be overcome by focusing on ____ groups. a. experiments; small groups b. experiments; large groups c. human behavior; small groups d. ​human behavior; large groups

d. ​human behavior; large groups

​Most of economic analysis assumes that most people act as if they are: a. motivated by submerged emotional needs. b. driven by magnetic forces generated by planetary movements. c. motivated primarily by concern for the well-being of others. d. motivated by self-interest.

d. ​motivated by self-interest.