Econ Exam 1

scarcity:

-how limited resources are allocated to satisfy our needs and unlimited wants -a good is scarce if you must give something up to get more of it. (diamonds are scarce, also rare) (M&M's are scarce but not rare)

Economic model 5 principles:

1) Scarcity 2) tradeoffs 3) incentives 4) opp. cost 5) trade -make people better off (voluntary MB>MC)

opportunity cost example: paulie can make 5 cups of icecream and 20 tshirts vince can make 10 cups of icecream and 15 tshirts what is paulies opp. cost of making 1 cup of icecream? what is vinces opp. cost of making one tshirt?

1) divide the 20 tshirts by 5 cups of icecream = 4 tshirts (20/5=4) 2) divide the 10 icecreams by the 15 shirts to get 0.67 cups of icecream (10/15=0.67)

Economic model: As tradeoffs change some people change what they do.

people respond to incentives, people do not respond randomly but rationally (As the benefits and costs of an actions change, individual respond by changing their choices)

The economic model is positive rather than normative positive statement: normative statement:

positive statement: addresses the consequences of an action (must be tested before it is correct) normative statement: expresses a value judgement

How do people make choices?

rational people make their choices at the margin they only act when marginal benefit is greater than the marginal cost

Calculating marginal benefit

How much additional benefit does bob get from eating his second piece of pizza? -take second piece of pizza price and subtract it from 1 piece ($14-$8=$6)

Suppose pizza costs $2.50 per slice. how many slices will bob buy?

TB-TC should not take 3rd slice because its worth less than what it costs -take $2.50 keep adding it 2.50+2.50

opportunity cost:

The true cost of something is what you must give up to get it (next highest valued alternative) -take the net benefit- the money you have to spend= opportunity cost (40k-20k=20k) -implicit cost + explicit cost

Armenia can make 500 hats or 200 coats or some combination, and Estonia can make 400 hats or 100 coats or some combination. Which of the following trades would make both countries better off? a) Armenia makes coats and trades them for hats at a price of 1 coat = 3 hats. b) Armenia makes coats and trades them for hats at a price of 1 coat = 4 hats. c) Armenia makes hats and trades them for coats at a price of 1 coat = 4 hats. d) Armenia makes hats and trades them for coats at a price of 1 coat = 3 hats. e) Armenia makes coats and trades them for hats at a price of 1 coat = 2.5 hats.

a) Armenia makes coats and trades them for hats at a price of 1 coat = 3 hats.

Figure 1 Figure 1 depicts PPF for Tesla Motor Company. Tesla produces Model S and Model 3. The points represent possible combinations of Model S and Model 3. Which of the following statements is TRUE? I. Tesla can choose any point marked on the diagram. II. The opportunity cost of Model 3 going from B to A is smaller than the opportunity cost of Model 3 going from D to C. III. Tesla would never willingly choose to produce at points G or H. a) II only b) II and III only c) I only d) III only e) I, II, and III

a) II only

A market can be described by the equations Qd = 100 - P and Qs = P. What are the equilibrium price and quantity in this market? a) The equilibrium price is $50, and the equilibrium quantity is 50 units. b) The equilibrium price is $100, and the equilibrium quantity is 100 units. c) The equilibrium price is $0, and the equilibrium quantity is 0 units. d) The equilibrium price is $0, and the equilibrium quantity is 100 units.

a) The equilibrium price is $50, and the equilibrium quantity is 50 units.**

A producer has a comparative advantage over other producers if his production of the good involves: a) a lower opportunity cost. b) more inputs. c) more output. d) a higher opportunity cost. e) fewer inputs.

a) a lower opportunity cost.

A rational decision-maker takes action only if _____________ a) the marginal benefit is greater than the marginal cost. b)society will be made better off. c) the average benefit is greater than the average cost. d) None of the offered choice are correct. e) the total benefit is positive.

a) the marginal benefit is greater than the marginal cost.

If you pay $400 for a season pool pass at a private club, the marginal cost to you of swimming on any given weekday will be ____________. a) zero. b) $10 if you swim 40 times. c) $20 if the swim season lasts twenty weeks. d) $3 if the swim season lasts twenty-one weeks and there are seven days in a week. e) $400.

a) zero.

Suppose that the price of oranges and apples rises. What would you expect to happen to the market price and quantity of orange juice? (Hint: apple juice is a substitute) a. The equilibrium price would increase, but the impact on equilibrium quantity would be uncertain. b. The equilibrium price would decrease, but the impact on equilibrium quantity would be uncertain. c. Both equilibrium price and quantity would increase. d. Equilibrium quantity would increase, but the impact on equilibrium price would be uncertain. e. Equilibrium quantity would decrease, but the impact on equilibrium price would be uncertain.

a. The equilibrium price would increase, but the impact on equilibrium quantity would be uncertain.**

Suppose a landmark court case makes it more expensive to run Day Care centers, but also makes it less likely that children cared for will be harmed. We can expect a. the price of Day Care services to increase b. the price of Day Care services to decrease c. the price of Day Care services to increase only if demand is upward sloping. d. the price of Day Care services to increase only if the change in supply is greater than the change in demand

a. the price of Day Care services to increase **

Suppose you pay $2 for each ride you take on a roller coaster, and you are about to take your tenth and last ride for the day. The marginal cost of that ride is at least ______. a) It depends on the benefits you receive. b) $2. c) $20. d) $0. e) less than $2, because of diminishing marginal returns

b) $2.

The difference between a marginal cost and an opportunity cost is _______. a) marginal cost involves decisions "at the margin", while opportunity cost involves alternatives. b) There is no difference. c) opportunity cost makes up only part of the marginal cost. d) All of the choices are correct. e) marginal cost is the cost of the last unit, while opportunity cost is the cost of the opportunity sacrificed.

b) There is no difference.

A supply curve shows ____________________. a) the cost of supplying the good. b) all of the choices are correct c) how many units of the good will be supplied at various prices. d) the relationship between price and quantity supplied.

b) all of the choices are correct

Specialization and trade can _____ the per-unit cost of production because _____ . a) increase; more expensive labor is needed b) decrease; it creates economies of scale associated with large-scale production c) decrease; people are better in doing one thing at the time. d) increase; it requires more expensive, specialized equipment e) decrease; it allows for more small-scale production

b) decrease; it creates economies of scale associated with large-scale production

Most economists believe that the assumption of rationality: a) is the best argument for the economic model. b) is not always a realistic assumption, but allows useful predictions to be made nonetheless. c) should be supported by teaching people how to act rationally. d) is how humans behave in all circumstances.

b) is not always a realistic assumption, but allows useful predictions to be made nonetheless.

Which of the following trades would make both countries better off? a. Armenia makes hats and trades them for coats at a price of 1 coat = 3 hats. b. Armenia makes coats and trades them for hats at a price of 1 coat = 3 hats. c. Armenia makes hats and trades them for coats at a price of 1 coat = 4 hats. d. Armenia makes coats and trades them for hats at a price of 1 coat = 4 hats. e. Armenia makes coats and trades them for hats at a price of 1 coat = 2.5 hats.

b. Armenia makes coats and trades them for hats at a price of 1 coat = 3 hats.**

Which of the following is the most plausible explanation for the changes? a. The price of basketball players rose while the price of basketballs fell. b. The price of basketball players rose while the price of NHL hockey games (a substitute) fell.** c. The price of basketball players fell while income increased, and NBA basketball is a normal good. d. The price of hockey players rose while the cost of basketball jerseys fell.

b. The price of basketball players rose while the price of NHL hockey games (a substitute) fell.

Your comparative advantage as a house painter (as opposed to as a student) a. increases during exam week. b. increases during the summer vacation. c. depends only on how good you are with a paintbrush. d. All of the above.

b. increases during the summer vacation.**

If equilibrium price in a market has risen from $10 to $25 and the equilibrium quantity has fallen from 50,000 to 35,000, we would know that a. demand has increased. b. supply has decreased. c. demand has decreased. d. supply has increased. e. both supply and demand have decreased.

b. supply has decreased.**

If you are searching for an expensive new suit, it makes sense to keep looking as long as a. you haven't found the lowest price available. b. the shopping time matters less to you than the lower price you expect to get. c. there are stores left that you haven't checked. d. you face no opportunity costs. e. All of the above.

b. the shopping time matters less to you than the lower price you expect to get.**

The idea that "people respond to incentives" would lead us to conclude that the murder rate a. would rise if tougher penalties are enacted. b. would fall if tougher penalties are enacted. c. would be unaffected by changes in penalties, since crimes are committed in moments of passion. d. depends entirely on the level of penalties enacted

b. would fall if tougher penalties are enacted.**

Could you ever have too much environmental protection? a) No, because it is important to protect the environment. b) Yes, if the demand for environmental protection is not very important. c) Yes, if the marginal costs are greater than the marginal benefits. d) No, because the benefits of a clean environment outweigh the costs. e) No, because a clean environment is a scarce good.

c) Yes, if the marginal costs are greater than the marginal benefits.

How can I raise the price of coming to class? a) schedule class at inconvenient times b) charge an admission fee c) all of the offered choices are correct. d) give extra homework to anyone who shows up

c) all of the offered choices are correct.

What would happen in the market for interior house paint if the price of paintbrushes falls while the price of wallpaper (a substitute) rises? a. The equilibrium price would increase, but the impact on quantity would be uncertain. b. The equilibrium price would decrease, but the impact on quantity would be uncertain. c. Both equilibrium price and quantity would increase. d. The equilibrium quantity would increase but the impact on price would be uncertain. e. The equilibrium quantity would decrease but the impact on price would be uncertain.

c. Both equilibrium price and quantity would increase.**

If the demand for widgets is Qd= 90 -Pdand the supply of widgets is Qs= Ps-30, what is the total surplus created is widgets sell at the equilibrium price? a.225 b.500 c.900 d.2700 e.-2700

c.900

D0is the original level of demand and S0is the original level of supply. What would you expect to happen if the price of the chemicals used to make film rises? a.Demand to shift to D1. b.Demand to shift to D2. c.Supply to shift to S1. d.Supply to shift to S2.e.Demand to shift to D1 and supply to shift to S1.

c.Supply to shift to S1. (supply decreased)

Given that supply of Levi's pants is given by Qs=10+2P. We know that Levi's would produce 50 pants if price was _______________. a) $30 b) X c) $10 c) $15 d) $20

d) $20

This is a schedule of the marginal benefits and marginal costs for widgets Quantity 1 2 3 4 5 Marginal benefit $15 $10 $8 $7 $2 Marginal cost $6 $7 $7 $8 $9 Use the marginal principle to predict how many widgets will be consumed: a) 4, as you get an average benefit of $10 versus an average cost of $7. b) none of the offered choices are correct.. c) 5, as you get total benefits of $42 versus a total cost of $37. d) 3. e) 1, as you get a net benefit of $9.

d) 3.

Which of the following statements is TRUE? I. When someone says that he does not have a choice, then we know that his alternatives are not very appealing. II. Demand is a downward slopping function which indicates the existence of substitutes. III. Supply is an upward slopping function because of increasing opportunity costs. a) I and II only b) I only c) III only d) I, II, and III e) II only

d) I, II, and III

Demand curve for a good X is downward sloping because when ______of good X increases individuals buy ______ of good X. a) MB; less b) opportunity cost; more c) sunk cost; less d) price; less e) MC; more

d) price; less

In a market economy, resources are allocated primarily ___________________. a)None of the offered choice are correct. b) by a few large corporations. c) by a single central planner d) through the combined actions of millions of households and thousands of firms. e) by the governing Board of Economic Planning in the Department of Commerce.

d) through the combined actions of millions of households and thousands of firms.

Why does quantity demanded fall as price rises? a. Because supply decreases. b. Because demand decreases. c. Because BOTH supply and demand decrease. d. Because people switch to substitutes.

d. Because people switch to substitutes.**

The real cost of any action a. depends upon the number of suppliers b. is the cost to the consumer plus the cost to the producer c. is greater when demand shifts d. is the value of the alternative sacrificed e. all of the above

d. is the value of the alternative sacrificed**

Jon needs 200 cases of Cristal champagne to cater a wedding. First, Jon visits all the wine shops located within ten miles, but can't get enough cases. Then Jon visits all wine shops located between 10 and 50 miles, but still is short a few cases. Finally Jon visits all wine shops located within 50 and 100 miles, and gets the last few cases he needs. Jon's struggles illustrate a. the law of demand. b. that sometimes the gains from trade aren't worth it c. the principal of absolute advantage d. the law of supply.

d. the law of supply.**

If Armenia can make 500 hats or 200 coats or some combination, and Estonia can make 400 hats or 100 coats or some combination, then: a) None of the choices are correct. b) Armenia has the comparative advantage in hats and Estonia in coats. c) Neither has the comparative advantage in either product since the differences aren't large. d) Armenia has the comparative advantage in both hats and coats. e) Estonia has the comparative advantage in hats and Armenia in coats.

e) Estonia has the comparative advantage in hats and Armenia in coats.

Sunk costs are irrelevant when making economic decisions because _____________. a) they don't affect a firm's profit. b) opportunity costs rise with the quantity supplied. c) they don't involve monetary expenditures, merely opportunity costs. d) they don't reflect what people value. e) they cannot be affected by the decision in question.

e) they cannot be affected by the decision in question.

When countries produce those goods for which they have a comparative advantage: a) at least one country will be worse off; maximizing production comes from producing those goods for which they have the absolute advantage. b) they are maximizing their opportunity costs. c) trade will increase, but production will decrease. d) they produce all of the goods. e) total production and consumption will increase in all countries.

e) total production and consumption will increase in all countries.

At which price is there excess demand and at which price is there excess supply? a. At 15 there is excess demand and at 10 there is excess supply. b. At 15 there is excess demand and at 8 there is excess supply. c. At 10 there is excess demand and at 10 there is excess supply. d. At 8 there is excess demand and at 10 there is excess supply. e. At 8 there is excess demand and at 15 there is excess supply.

e. At 8 there is excess demand and at 15 there is excess supply.**

implicit costs: explicit costs:

implicit costs: lost opportunities ($, time, happiness) (forgiven wages) explicit costs: (accounting costs) (tuition) out of pocket costs or a firm or individual