ECON 202 Study Guide for Exam 1

A university student faces the difficult decision of how to spend one hour tonight. She could babysit her professor's child at an hourly wage of $10; she could work at the college library at a wage of $12; or she could finish her economics homework assignment. If she chooses to complete her homework assignment, she has incurred an opportunity cost equal to:

$12.

What factors into the opportunity cost for a decision?

-actual financial cost of the decision -benefits from the best foregone alternative -time spent due to the decision

Shep goes to his favorite coffee shop every morning and always buys one large latte, no matter whether there is a special or not (i.e., half-price Mondays). What is his price elasticity of demand for lattes?

0

4 Principles of Economics

1. People face trade-offs 2. The real cost of something is what you have to give up in order to obtain it 3. Rational people think at the margin 4. People respond to incentives

If Good C increases in price by 5050% a pound, and this causes the quantity demanded for Good D to increase by 60%60%, what is the cross-price elasticity of the two goods? What is the relationship between the two goods?

1.2 and substitutes

"An increase in the cost of oil will cause the price of a plane ticket to increase. This increase in price will cause a decrease in demand for airline travel and a leftward shift in the demand curve." What is the flaw of this reasoning?

An increase in the price of a ticket will not cause a decrease in demand, but rather a decrease in quantity demanded.

ch of the following scenarios describes a business that is NOT following the law of supply?

Automobiles fall in price, and Maria's Autorama Ltd. is now willing to sell more vehicles.

_____ is a measure of how much your decision has _____ your well-being

Economic surplus; increased

Consider the following statement: "Economists always put things into monetary terms; as a result, economics can most appropriately be called the study of money." Is this statement true or false?

False, economists use monetary terms because they can be quantified and compared, but economics is better described as an approach to decision making

Holly doesn't care about the price of toffee. She loves toffee so much that she must eat toffee every day. Which of the following figures most likely depicts Holly's demand for toffee?

Figure A (Demand is high so curve will be the most vertical) This also means that the demand curve is perfectly inelastic. (When demand is inelastic, this indicates that the buyer/seller does not care about the price of that particular good)

marginal costs/benefits

Marginal benefit is the additional benefit received from consuming or producing one more unit of something, while the marginal cost is the additional cost of consuming or producing one more unit of that thing.

How do you determine marginal benefit?

Marginal benefit is the difference between 2 points. EX: Day 1 = 3 dollars, Day 2 = 6 dollars. The marginal benefit for day 2 is 3 dollars

excess demand (shortage)

Occurs when the quantity of good demanded is greater than the quantity supplied.

Suppose that supply decreases and demand increases. (supply curve goes to the right, demands curve goes to the left) What is the MOST likely effect on price and quantity?

Price will decrease, and quantity will decrease.

Producers of hand-made leather wallets have made manufacturing changes that have improved quality but reduced efficiency. Which graph shows this change in the market?

Since the quality has gone up, it will be more expensive to produce. Supply will decrease meaning it will shift to the left.

Substitutes and Complements

Substitute: as price of substitute falls demand decreases for original product and vice versa Complement: as price of complement falls demand of original product increases and vice versa

Economists use money equivalents to compare costs and benefits because money is

a common measuring stick.

Elasticty of demand

a measure of how consumers respond to price changes

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

elasticity of supply

a measure of the way quantity supplied reacts to a change in price

Consider the market demand curve for the Samsung Galaxy smartphone. Use a graph to illustrate the effect, if any, each given scenario has on the demand for Samsung Galaxy smartphones. a. The batteries in Samsung smartphones begin to spontaneously combust. b. Apple increases the price of the newest iPhone by 10%.

a. demand curve will decrease and shift the left b.demand will increase and shift to the right

Identify the scenarios as examples of elastic, inelastic, or unit elastic demand. a. When Ruko, a device used to stream movies at home, increases prices by 4848 percent, total revenue decreases by 6969 percent b.When Cinema Supreme decreases ticket prices by 2626 percent, total revenue does not change c. When Bluebox, a streaming service for foreign television shows and movies, increases its prices by 4949 percent, total revenue increases by 3131 percent.

a. elastic b. unit elastic c. inelastic

Determine whether each statement describes the income effect, the substitution effect, or neither. Assume that all other variables are held constant. a. The price of lobster doubles, making Henri feel less wealthy. As a result, Henri buysfewer lobsters. b.The price of chicken falls by $0.75 a pound. Since chicken is now relatively less expensive than ground beef, Mary buys more chicken and less beef. c. The average price of a DVD falls by 15 percent. Tom buys more DVDs because his monthly movie budget can now stretch further. d.Model Planes Incorporated reduces production of its wooden plane product line. e. Jessica sees that the price of orange juice is higher this week. She decides to buy less orangejuice and more apple juice because orange juice is relatively more expensive.

a. income effect b. substitution effect c. income effect d. neither e. substitution effect

Sunk costs are costs that

are incurred in the past and cannot be reversed.

Kathleen Alvarado is binge-watching her favorite show on Netflix. She is trying to decide how many more episodes to watch. Kathleen should continue watching episodes unless the marginal

benefit of watching another episode is equal to the marginal cost

The cost-benefit principle states that a decision should be pursued only if the

benefits are greater than the costs.

In a voluntary economic transaction between a buyer and a seller, _____ can earn economic surplus from the transaction.

both the buyer and the seller

A decrease in the demand for pastry chefs may come about because of an increase in

concerns about healthy living.

If a 3535% price increase for product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for product B, what is the cross‑price elasticity of these goods? What is the relationship between these goods?

cross price elasticity is 0 and the relationship between the two goods it not related

You have paid $100 for student season tickets to the football games at your university. It is halfway through the season, and the team has not won any games (this isn't happening at A&M!!). You are considering whether you will attend any future games this season. All of the following are costs or benefits you should consider when making this decision EXCEPT the

frustration experienced from watching the team lose in previous games.

Louise works 46 hours a week at $12 an hour. If her wage increases to $18.50:

if leisure is a normal good, the income effect implies that she will work less.

A labor demand curve may shift to the right because of a(n) _____ in the demand of the _____.

increase; good that the labor produces

A decrease in demand and an increase in supply will lead to a(n) _____ in the equilibrium quantity and a(n) _____ in the equilibrium price.

indeterminate change; decrease

You manage a restaurant, and lately revenues have been rather poor. One of your waiters suggests that raising food prices will increase revenues, but your chef suggests that decreasing food prices will increase revenues. You aren't sure who is right, but you know that your waiter believes that the demand for your food is _____, and your chef believes that the demand for your food is _____.

inelastic; elastic

Consider the local market for fast food hamburgers, an inferior good. If more fast food restaurants open, while consumers' incomes increase, the equilibrium price will be _____, and the equilibrium quantity will be _____.

lower; ambiguous

To maximize economic surplus, keep increasing output as long as

marginal benefits exceed marginal costs.

Jonathan Mendez is deciding whether to study for his economics exam at a café or go to a concert with friends tonight. The cost of the concert ticket that he purchased yesterday is ____ in his opportunity cost and represents a _____ cost.

not included; sunk

Use Figure: Demand and Supply of Sugar. What might cause the supply curve to shift from S2 back to the initial supply curve S1? (Supply curve shifts to the left)

restrictions on sugar cane exports by Brazil

Diminishing marginal product leads to

rising marginal costs for a seller.

Rising input costs lead to

rising marginal costs for a seller.

Lenovo produces laptops and tablets. What will happen to the supply of Lenovo tablets, if laptops loose popularity and their demand falls?

supply will increase and the curve shift to the right

Suppose the price of real estate increases by 37.11% in New York City next year. If the quantity of new homes supplied does not change, the price elasticity of _____ will be perfectly _____ in New York City next year.

supply; inelastic

You have been appointed head of marketing for Barry's Younique Yachts. Barry, the CEO, is interested in determining whether offering his yachts at a lower price would increase the firm's revenue. He asks you for advice.

that he should reduce his prices. Yachts are luxury goods and therefore exhibit a high price elasticity of demand. Thus, reducing prices would increase revenue.

How do you determine the elasticity of both supply and demand?

the more vertical the curve becomes, the more inelastic it is. If the line is completely vertical it is perfectly inelastic. If the line is horizontal, it is perfectly elastic

A shift in the demand for labor will NOT occur if:

the price of labor falls.

equilibrium price

the price that balances quantity supplied and quantity demanded

Comparing the benefits and costs of engaging in an activity. (Also: everything you do requires giving up something (time, money, etc.).

trade-offs

It is a rainy day, and you are considering taking an Uber one mile to meet some friends. You have decided you are willing to pay $20 to avoid getting wet from the rain. The trip would normally cost you $8, but due to the weather the surcharge is triple the regular cost. You should _____ because the benefit to you of taking the Uber is _____ than the cost.

walk; less

excess supply (surplus)

when quantity supplied is more than quantity demanded

Juan McDonald is willing to pay $600 for a new iPad. Apple (the producer of iPads) is selling a new iPad for $700. It costs Apple $400 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because ____ would be better off due to the transaction.

will not; only Apple