ECON 202 STUDY GUIDE
Fixing up old houses requires plumbing and carpentry. Jack (who is a jack of all trades but is a master of none) is a decent carpenter and a decent plumber but is not particularly good at either. He can fix up two houses in a year if he does all of the carpentry and plumbing himself. His wage is $50,000 per year. Jack's average total cost of fixing up two old houses is ______________ George is an excellent plumber and Harriet is an excellent carpenter. George can do all of the plumbing and Harriet can do all of the carpentry to fix up eight houses per year. Each earns a wage of $50,000 per year. If George and Harriet work together and fix up eight old houses each year, their average cost is _________________ This problem tells us that one of the sources of economies of scale is _____________
50000/2houses = 25000 50000 george +50000 jack = 100000/8 houses = 12500 each specialization
The opportunity cost of buying one uint of good x ($70) is _______ units of good Y ($50) Which of the following combinations of X and Y will be represented by a point on the consumer's budget constraint? A. 4 units of X and 8 units of Y. B. 8 units of X and 4 units of Y. C. 5 units of X and 7 units of Y.
70/50 = 1.4 C. 5 units of X and 7 units of Y
Which of the following equations measures price elasticity of supply? The more elastic a supply curve is the ___________ responsive the quantity supplied is to changes in the price level The more inelastic a supply curve is the _______ responsive the quantity supplied is to changes in the price level Something is elastic if it is horizontal/vertical Something is inelastic if it is horizontal/vertical
Percentage change in quantity supplied/ Percentage change in price more less horizontal vertical
When only the demand for housing increases, the equilibrium price and quantity in the market will Assume you don't know by how much each curve shifts. When both curves shift, the equilibrium price of housing will _______________ and the equilibrium quantity of housing will ___________
increase be indeterminate; increase
How will the invisible hand move corn prices in response to each of the following: A flood that destroys a great deal of the corn crop. This will ___________ corn prices by shifting the supply curve for corn ____________ A fall in the price of wheat (a substitute for corn). This will _____________ corn prices by shifting the demand curve for corn _________. A change in consumer tastes away from hot dogs toward corn dogs. This will ___________ corn prices by shifting the demand curve for corn ____________. A decrease in the number of demanders in the corn market. This will ____________ corn prices by shifting the demand curve for corn __________.
increase; leftward decrease; leftward increase; rightward decrease; leftward
When you deposit money into a bank, you are ___________ the bank. This moves your spending from _______________ . The interest rates on loans tend to be __________ the interest rates on investments Suppose that in your senior year you find that you need to take out a student loan for the first time. You borrow $5,000 from a bank that gives you the option to make no payments now but to pay the entire amount back plus interest in 20 years. If the interest rate is 12 percent, then the amount of money due after 20 years is _____________
lending to; now to later higher $48231 Amount due= (1+0.12)^20 x (5000) = $48231
What is the difference between the industry demand curve for a typical good and the demand curve for an individual firm in themarket, assuming the market is in perfect competition? Using your graph, the slope of the industry demand curve demonstrates ________
the realistic assumption that the Law of Demand holds for the good under consideration.
Suppose one firm accounts for 55 percent of the global market share for a product, while 147 other firms account for the remaining 45 percent of the market. With such a large number of buyers and sellers, is this market likely to be competitive?
No, even though there are many firms in the market, there is one firm large enough to influence the market price.
The greater your discount weight, the more your current decisions are driven by the future consequences of those decisions. Do you agree? Explain.
Yes, a larger discount rate results in a larger weight on the utils you receive from future events.Thus, you will consider future consequences more when making decisions.
Manny earns $1,800. Books are $60 and Clothing is $45 Slope? Vertical and Horizontal intercepts? Manny earns $1,800. Books are $90 and Clothing is $45 Slope? Vertical and Horizontal intercepts? Manny earns $1,200. Books are $60 and Clothing is $30 Slope? Vertical and Horizontal intercepts? Compare the budget constraints you drew above to answer this question.
-1.33; 40; 30 -2; 40; 20 -2; 40; 20 The budget constraints are equivalent
The "Rule of 70" is a simple way to estimate how long it will take something to double in value: divide 70 by the annual percentage growth rate; the number you calculate is the doubling time, in years. Forexample, 70/4 = 17.5; thus it takes about 17.5 years for a bank account to double in value, assuming 4 percent interest. Based on this method, the doubling time given an interest rate of 7 percent is ________ years
10; 70/7 = 10
Suppose there are three goods: A, B, and C. The price of good A is $5, the price of good B is $10, and the price of good C is $20. The total budget of the consumer is $75. The total benefit from different quantities of each good is shown in the table below. The optimal choice for the consumer is: __________ units of good A, _________ untis of good B, _________ units of good C
5; 3; 1; $ 5 units of good (A) + 3 units of good (B) + 1 unit of good (C) = $ total benefits from A,B, and C
How does a consumer's budget set differ from his budget constraint? For a consumer with a given level of income, the combinations of goods for the budget constraint will be ____________ than for the budget set. For a consumer with a given level of income, the combinations of goods for the budget set will be___________ then for the budget constraint.
A budget set refers to all of the possible bundles of goods and services a consumer canpurchase, while a budget constraint is limited to the bundles he can purchase using all of his income. lower higher
Which of the following statements regarding risk is not true? A. It means some of the costs and benefits are not fixed in advance. B. It affects economic value. C. It occurs when all of the costs are predictable. D. Both good and bad choices involve risks. Which of the following statements are true regarding future rewards and risky rewards? A. A current reward is worth more than a future reward. B. The economic tools used to value them use weights. C. The value of a future reward is obtained by multiplying the reward by a positive factor that is less than 1. D. The value of a risky reward is obtained by multiplying the reward by a positive factor that is less than 1.
C. It occurs when all of the costs are predictable A, B, C
In a command economy, a planning agency sets prices for various inputs and final goods. In a marketeconomy, supply and demand decide the prices of various goods. In both cases, there is a set of prices operating in the economy. Then why are market economies considered more efficient than planned economies? A. The prices set by central planners tend to be inflexible, responding to changing conditions only when planners recognize that circumstances are changing and then figure out the significance of the underlying change. B. The prices set by central planners reflect their very incomplete knowledge regarding the multitude of factors that determine the interests and decisions of economic agents. C. The price mechanism utilized by market economies reflects all that is collectively known and thus ensures that economic agents make trades that are in their best interest and maximize social surplus. D. All of the above.
D. All of the above
There are four consumers willing to pay the following amounts for an electric car: Consumer 1: $60,000 Consumer 2: $50,000 Consumer 3: $70,000 Consumer 4: $20,000 There are four firms that can produce electric cars. Each can produce one car at the following costs: Firm A: $20,000 Firm B: $70,000 Firm C: $40,000 Firm D: $50,000 Each firm can produce at most one car. Suppose the market for electric cars is competitive. Why is the equilibrium price in this market $50,000? A. At this price, three consumers are willing to buy an electric car and three firms are willing to sell an electric car. B. At this price, the quantity demanded (three cars) equals the quantity supplied (three cars). C. At $50,000, three consumers have reservation values equal to or above $50,000 and three firms have reservation values equal to or below $50,000. D. All of the above. Which firms will produce an electric car if the price is $50,000? Which consumers will buy an electric car when the price is $50,000? Complete the following table by calculating consumer surplus, producer surplus, and social surplus when the market price is $50,000. (Enter your responses to the nearest dollar.) Consumer Surplus = Producer Surplus = Social Surplus =
D. All of the Above A, C, D 1, 3, 2 $30,000 $40,000 $70,000
Average Fixed, Variable, and Total Cost is the Total Fixed, Variable, and Total Cost divided by the quantity The graph on the right shows the cost curves for a random firm competing in a perfectly competitive market. Given the shape of the curves, we know that curve A represents __________, curve B represents__________, and curve C represents _________.
MC; ATC; AVC
Consider a perfectly competitive market as shown in the given graph. Suppose the initial price of a product is$1.40 per unit. At this price, the marginal revenue (MR) curve faced by a firm is If the market price increases from $1.40 to $2.70 perunit, the firm would ____________ production from 272 to 350 If the market price decreases from $1.40 to $0.80 per unit, the firm would produce 200 units because at this price ____________ Which of the following statements in not true
MR 1 increase MR2=MC The short-run supply curve of a firm is the portion of its marginal cost (MC) curve that lies below AVC.
Sofia, a political science student, thinks that the government should intervene to revive declining industries like video stores and print newspapers. The government, she reasons, can resolve the coordination problem of getting the agents in these markets to trade. Do you agree with her? Explain your answer.
No, these industries are declining not because of coordination problems but, rather, because of falling demand.
Richa wants to purchase 6 fluorescent light bulbs at a price of $30 per bulb. When the price of fluorescent light bulbs rises to $36, she purchases 5 bulbs. Which of the following could be the reason for Richa's change in the quantitypurchased? Which of the following is not a possible reason for a change in the demand curve of Zee decorative light fixture, from DD toDD'? (Y intersect stays the same, but the X intersect shifts right)
The opportunity cost of fluorescent light bulbs increases The change in the rate of sales tax.
Kat is willing to pay $750 for 20 bottles of grape wine. The market price of 10 bottles of grape wine is $330. Because of an increase in the price of grapes, the price of grape wine increases to $360 for 10 bottles. Kat's consuper surplus has ___________ by $_______ because of an increase in the price of grapes 750/20 = 37.5 330/10 = 33 37.5/33 =4.5 360/10 = 36 37.5-36 = 1.5 4.5-1.5 = $3 Quantity Demanded - Price 1 - 100 2 - 85 3- 75 Suppose the market price of a grape wine bottle is $80 per unit. Calculate the consumer surplus and the consumer's total benefit. Consumer surplus is $____________, and the consumer's total benefit is $____________.
decreased; 3 25; 185
A newly married couple plans to go on a trip to Hawaii on their third wedding anniversary. The total approximate cost for a trip after three years is $12,000. Their relative is willing to make them a future payment of $12,000 in 3 years if the couple lends him $10,000 today. The next best option available for the couple to raise $12,000 is to invest in a risk-free investment for 3 years with an interest rate of 4%. When the newly married couple lends money to their relative the discounted value of the future payment _____________ the upfront cost. Therefore in this case, the net present value is _______________ The newly married couplel will gain by_____________ A. lending more than $10,000 to their relative and receiving a negative net present value B. investing the discounted value of the future payment in a risk-free investment and receiving a positive net present value C. investing the amount of future payment in a risk-free investment and receiving a negative net present value D. lending $10,000 to their relative and receiving a positive net present value Which of the following statements are true regarding the present value? A. It involves a reduction in magnitude. B. It involves an increase in magnitude. C. Discounting brings back money to the present. D. Compounding brings back money to the present.
exceeds; positive D. lending $10,000 to their relative and receiving a positive net present value A. It involves a reduction in the magnitude C. Discounting brings back money to the present
Economists use the concept of utility to measure ___________ The discount weight is used to ____________. Suppose Sarah is out at a local club with her friends and finds out that it is "Ladies' Night" and that all women can drink for free. She knows that if she drinks it will give her immediate pleasure equal to 70.00 utils, but she also knows that if she drinks she will feel bad the next morning and will therefore have a cost of drinking equal to 160.00 utils. If Sarah's discount weight for tomorrow is 0.50, will she drink at the club?
general well-being, and it is not measured in terms of dollars compare delayed utils and immediate utils; it is usually less than 1 No, her net benefit fro drinking is negative; therefore, the costs of drinking outweigh the benefits
Most decisions have costs and benefits that occur at different times. To value the delayed benefits, economists weight the reward by __________ This process implies that future rewards are worth ____________ current reward
multiplying the reward by a positive factor that is less than 1. less
The figure on the right shows the typical firm in a perfectly competitive industry. Equilibrium in the market is currently yielding a price of $30. At this price, the typical firm earns a __________ economic profit. As a consequence of the current short-run conditions in this industry, it may be expected that firms will __________ this market. As this movement of firms occurs, economic profits for the typical firm will _____________
negative leave approach zero
Suppose you put $500 into a bank account that has a 6 percent interest rate. In this example, the $500 reflects the _______ and the 6 percent reflects the _____________ If you leave your money in the bank for 1 year, then the future value of your money is $__________ The idea of leaving all the money in an account and earning interest not only on the original deposit but also on the past interest earned is called __________
principal; time value of money $530; 500x0.06 = 30 $500 + $30 = $530 compounding
The amount of money the firm brings in from the sale of its outputs is called ___________ while the change in total revenue associated with producing one more unit of output is called ____________ If the graph on the right represents the market supply and demand curves for pizza, what do we know about the demand curve for an individual pizza shop if the pizza market is in perfect competition?
revenue; marginal revenue The shop's demand curve is horizontal at exactly $8
All else being equal, the flatter the demand curve, the ___________ the social surplus in a market All else being equal, the flatter the supply curve, the ___________ the social surplus in a market
smaller; smaller
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it 1/2 (base of triangle X height of triangle)
