ECON FINAL CHAPTER 1-7

Specialization and trade can _____ the per-unit cost of production because _____ .

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

A headline in The New York Times read: "Study Finds Enrollment Is Up at Colleges Despite Recession." Given what you now understand about opportunity cost, the headline should probably read: "Study Finds Enrollment Is Up at Colleges _______ Recession.

due to/because of

When bad weather in India destroys the crop harvest, does this sound like a fall in the total "supply" of crops or a fall in people's "demand" for crops?

fall in supply

According to the supply curve, if the price of cars ______ carmakers will produce ______ cars.

falls; fewer

When the price of a good increases, the quantity demanded ______. When the price of a good decreases, the quantity demanded ______.

falls; rises

Petroleum, natural gas, coal, and solar power are all sources used to produce energy, and, therefore, can be considered to be substitutes. When the price of petroleum increases, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______.

increases; increases; increases

If income increases and the demand for Good X shifts as shown below, then Good X is a(n) ______ good, such as ______.

inferior; Ramen noodles

Once you graduate from college, get a good job, and experience a rise in income, you will choose to buy fewer ______ goods, such as______.

inferior; Ramen noodles

A pharmaceutical business is ______ likely to hire highly educated workers and use new, experimental research methods when it expects the price of its new drug to be ______.

more; high

Bill is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the competition that is pushing the wage down?

other translators

Jon is on eBay bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, with whom is Jon competing?

others who are bidding on the graphic novel

In the figure below how many pounds of sugar are sellers willing to sell at a price of $20? How much is demanded at this price?

quantity supplied = 20; quantity demanded = 40

The market for marbles is represented in the graph below. What is the total producer surplus? The total consumer surplus? What are the total gains from trade?

consumer surplus = $150; producer surplus = $100; total gains from trade = $250 Correct. Consumer surplus is the area above the price and below the demand curve, producer surplus is the area below the price and above the supply curve, and the total gains from trade are the sum of CS and PS. CS = 1/2(50 $6) = $150; PS= 1/2(50 $4) = 100; total gains from trade = $250.

The price of a one-bedroom apartment in Washington, DC, is currently $1,000 per month, but the supply and demand curves look as follows: Based on the supply and demand curves, the market for apartments is experiencing a ______ and we would expect apartment prices to ______.

shortage; increase

The imposition of an excise tax (production tax) on each unit produced will cause:

supply to decrease.

Which government agency might have helped to avoid much of the Great Depression had it acted more quickly and appropriately?

the U.S. Federal Reserve

$5-60 $15-45 $25-35 $35-20 From your graph, you see that:

the demand curve for pencils slopes downward.

Consider the following table of prices of pencils and quantities supplied. $5 - 20 $15 - 40 $25 - 50 $35 - 55 Based on this information, we know that:

the supply curve for pencils slopes upward.

Deirdre has a choice between writing one more book this year or five more articles this year. What is the opportunity cost of writing half a book this year, in terms of articles?

two and a half articles

Erin has a choice between two activities. She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one transmission?

two fuel injectors

In Sucrosia, the supply curve for sugar is as follows: $30 - 10,000 $50 - 15,000 $70 - 20,000 Under pressure from nutrition activists, the government decides to tax sugar producers with a $5 excise tax per 100-pound bag. After the tax is enacted, what price will bring forth a quantity of 10,000?

$35

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $4, how much consumer surplus goes to Jules?

$4

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $7, how much producer surplus goes to Vincent?

$4

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens?

$5

Michael is an economist. He loves being an economist so much that he would do it for a living even if he only earned $30,000 per year. Instead, he earns $80,000 per year. (Note: This is the average salary of new economists with a PhD degree.) How much producer surplus does Michael enjoy?

$50,000

In Sucrosia, the supply curve for sugar is as follows: $30 - 10,000 $50 - 15,000 $70 - 20,000 Under pressure from nutrition activists, the government decides to tax sugar producers with a $5 excise tax per 100-pound bag. After the tax is enacted, what price will bring forth a quantity of 15,000?

$55

The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (http://econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. How much consumer surplus did Bryan enjoy from this purchase?

$99,990

If the price for a 50-inch plasma TV is $2,010 and Newhart is willing to pay $3,000, what is Newhart's consumer surplus?

$990

Each of 100 people receives a random item from a grocery store and assigns it a value between 1 (low) and 10 (high). They trade those items among themselves for items they prefer rather than those they randomly received and then assign a second value (again, 1 to 10) to the item that they end up with after the trading concludes. How would the sum of those values before trading compare with the sum after trading?

After trading, value would be higher because preferences are diverse.

Suppose LightBright and Bulbs4You were the only two suppliers of 60-watt light bulbs in Springfield and that they had the following supply schedules. Price/LightBright/Bulbs4You $1/10/5 $5/15/7 $7/25/15 $10/35/20 The market supply curve for the 60-watt light bulb industry in Springfield will include which of the following points?

All the points given would be included in the market supply curve for light bulbs.

In the figure below, what is the buyer's willingness to pay for sugar when the quantity is 20 pounds? Is the combination of $20 per pound and a quantity of 20 pounds an equilibrium?

At a quantity of 20, the buyer is willing to pay $45 per pound. Because of this, the combination of a price of $20 and quantity of 20 is not an equilibrium.

If the price of margarine decreases, what happens to the demand for butter? What happens to the equilibrium quantity and price for butter?

Demand for butter decreases and the equilibrium price and quantity of butter decrease.

If everyone believes that the price of tomatoes will increase next week, what is likely to happen to demand for tomatoes today?

Demand will increase as people buy more tomatoes now, hoping to beat the price rise.

If everyone thinks that the price of gasoline will increase next week, what is likely to happen to the demand for gasoline today?

Demand will increase, mostly because owners of gas stations will want to fill up their storage tanks before the price increases.

Which country shows specialization in knowledge and as a result would have more knowledge: Utopia, where in the words of Karl Marx, each person knows just enough about hunting, fishing, and cattle raising to "hunt in the morning, fish in the afternoon, [and] rear cattle in the evening," or Drudgia, where one-third of the population learns only about hunting, one-third only about fishing, and one-third only about cattle raising?

Drudgia, because specialization allows for more productivity

Economics is sometimes called "the dismal science." Of the following big ideas in Chapter 1, which one sounds dismal—like bad news?

Economic Booms and Busts Cannot Be Avoided but Can Be Moderated

When demand increases what happens to price and quantity in equilibrium?

Equilibirum price increases and equilibrium quantity increases.

What if a new study was published that emphasized the negative health effects of consuming sugar?

Equilibrium price and quantity would both fall.

When demand decreases what happens to price and quantity in equilibrium?

Equilibrium price decreases and equilibrium quantity decreases.

When supply increases what happens to price and quantity in equilibrium?

Equilibrium price decreases and equilibrium quantity increases.

When supply decreases what happens to price and quantity in equilibrium?

Equilibrium price increases and equilibrium quantity decreases.

What would happen to the equilibrium quantity and price if the wages of sugar cane harvesters increased?

Equilibrium price would rise and equilibrium quantity would fall.

Conan O'Brien has been a talk show host since 1993, but he began his career in comedy as a writer: first at The Harvard Lampoon while in college, then eventually at Saturday Night Live and The Simpsons. Given that he is such an accomplished comedy writer, it might be surprising to learn that his current talk show staff includes more than a dozen writers. How can you explain this using the information covered in the chapter?

His writers have a lower opportunity cost of comedic writing than Conan.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the market for snow shovels?

It causes an increase in demand for snow shovels.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the supply side of the market for snow shovels?

It causes an increase in the quantity supplied of snow shovels.

When the price of Apple computers declines, what probably happens to the demand for Windows-based computers?

It decreases, because Apple computers and Windows-based computers are substitutes.

If the price of oil falls, what will happen to the quantity of oil supplied?

It decreases, because some oil deposits are no longer worth tapping.

According to the United Nations, there were roughly 300 million humans on the planet 1,000 years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 billion and 3 billion humans (out of about 7 billion total humans) are poor. So, over the last 1,000 years, what has happened to the fraction of humans who are poor?

It fell.

Olive oil and corn oil are very often considered to be substitute products. When the price of olive oil increases, what probably happens to the demand for corn oil?

It increases, because olive oil and corn oil are substitutes.

When the market price of a good is above the equilibrium price, what does greed (in other words, self-interest) on the part of sellers tend to do to the price?

It pushes the price down.

According to the United Nations, there were roughly 300 million humans on the planet 1,000 years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 billion and 3 billion humans (out of about 7 billion total humans) are poor. What happened to the total number of people living in deep poverty?

It rose.

Nobel Prize-winner Milton Friedman said that a bad central banker is like a "fool in the shower." In a shower, of course, when you turn the faucet to change the temperature of the water, there won't be an actual change in the temperature for a few seconds. So if a "fool in the shower" is always making big changes in the temperature based on how the water feels right now, the water is likely to swing back and forth between too hot and too cold. How does this apply to central banking?

It takes a fairly long time for central bank decisions to trickle through the economy.

In 30 minutes, Kara can either make miso soup or she can clean the kitchen. In 14 minutes Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. Who has the comparative advantage in cleaning the kitchen?

Kara has the comparative advantage in cleaning the kitchen.

Who has absolute advantage in making rotids?

Mandovia

Who has absolute advantage in making taurons?

Mandovia

Imagine that a technological innovation reduces the costs of producing high-quality steel. What happens to the supply curve for steel?

Supply increases and the supply curve shifts down and to the right.

How would the supply and demand curves for this market look? Price of 1 loaf/ QS/QD $0.50/10/75 $1/20/55 $2/35/35 $3/50/25 $5/60/10

Supply would be upward sloping and demand would be downward sloping.

According to The Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high-tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Using the information in the productivity table below, who has the comparative advantage in making high-quality cars?

The North has the comparative advantage in high-quality cars.

According to The Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high-tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Using the information in the productivity table below, who has the comparative advantage in making low-quality cars?

The South has the comparative advantage in low-quality cars.

Cars and gasoline are complements. What will happen to the demand curve for gasoline if the price of cars decreases?

The demand curve for gasoline will shift upward and to the right.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the equilibrium price and quantity of snow shovels?

The equilibrium price and quantity would both rise.

Consider farmers who have land that is suitable for growing both wheat and soybeans. Suppose all farmers are currently farming wheat, but the price of soybeans rises dramatically. How does this affect the opportunity cost of producing wheat?

The opportunity cost of wheat production increases.

The book describes Vernon Smith's experiment with supply and demand models. What happened in Vernon Smith's lab?

The price and quantity were close to equilibrium and gains from trade were close to the maximum.

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. At a price of $3.50 how many units are demanded? How many units are supplied?

The quantity demanded is 2 and the quantity supplied is 3.

Assess the validity of the following statement in terms of incentives: A scientist who earns a percentage of the profits from any new medicine he or she may invent is likely to work longer hours in a laboratory researching new cures for diseases than a scientist who will get a handshake and a thank you note from the boss if he or she invents a new medicine.

True. The potential for monetary reward provides an incentive to work harder.

Evaluate the accuracy of the following statement: People search harder for substitutes for oil when the price of oil is high.

True; when oil prices are high, there are greater potential savings from oil substitutes.

Many people talk about manufacturing jobs leaving the United States and going to other places like China. Why isn't it possible for all jobs to leave the United States and go overseas, as some people fear?

U.S. productivity is still higher than China's, which is why the United States has higher wages.

Glass is an input for producing both windows and bottles. However, glass bottles are a less valuable product than glass windows. If the price of glass increases dramatically, what are we likely to see a lot less of: glass windows or glass bottles? Why?

bottles

By how much did national output fall during the Great Depression?

30%

If the price of oil per barrel is $10, how much oil will be demanded each day?

55 MBD

Katie works at a customer service center, and every hour she has a choice between two activities: answering 200 telephone calls per hour or responding to 400 e-mails per hour. What is the opportunity cost of responding to 400 phone calls?

800 e-mails

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $4, how much producer surplus goes to Vincent?

$1

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $7, how much consumer surplus goes to Jules?

$1

Using the following diagram, calculate total producer surplus if the price of oil is $50 per barrel. Note that MBD stands for "millions of barrels per day," which is how the supply of oil is usually measured.

$1,350 million The area of a right triangle = 1/2 (base × height) = 1/2(60 MBD × $45) = 1/2($2,700) = $1,350 million. This is because we are showing quantities of oil supplied in the millions of barrels per day.

Consider the figure below for the total demand for plasma TVs. What is the total consumer surplus at a price of $2,010 per TV, where 1,200 TVs were demanded?

$1,794,000 The consumer surplus is the difference between the value to consumers and the market price for all units sold. In this case, it is the triangle that lies above the price and below the demand curve. Area = 1/2 (base × height) = 1/2(1,200 × $2,990) = 1/2($3,588,000) = $1,794,000.

What is the lowest price at which suppliers of oil would be willing to supply 20 million barrels per day?

$12

What is the maximum price (per barrel) consumers will pay for 20 million barrels of oil each day?

$25

Your roommate just bought an iPod for $200. She would have been willing to pay $500 for a machine that could store and replay that much music. How much consumer surplus does your roommate enjoy from the iPod?

$300

If the price of a barrel of oil was $15, how much oil would oil suppliers be willing to supply?

25 MBD (look at graph)

Based on the supply curve above, what quantity of oil would be supplied at a price of $20?

30 MBD

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. Assuming the market works as predicted and moves to equilibrium, will the buyer who values the good at $1 be able to purchase? Why or why not?

No, in equilibrium the price will be higher than this buyer is willing to pay so they won't get the good.

Let's connect Big Ideas Six and Nine: Do you think that people in poor countries are poor because they don't have enough money? In other words, could a country get richer by printing more pieces of paper called "money" and handing those out to its citizens?

No, printing lots of paper money will simply cause inflation and because wealth does not originate in the supply of paper money.

Part of the reason the Great Depression was so destructive was that economists didn't understand how to use government policy very well in the 1930s. Does this mean that we should lose confidence about the know-how of economists?

No. Economics is not a perfect science, since there are so many variables. Furthermore, economic conditions are continuously changing. Today, the tools of monetary and fiscal policies are better understood to reduce swings in unemployment and GDP.

Some people worry that machines will take jobs away from people, making people permanently unemployed. In the United States, only 150 years ago most people were farmers. Now, machines do almost all of the farm work and fewer than 2% of Americans are farmers, yet that 2% produce enough food to feed the entire country while still exporting food overseas. What happened to all of those people who used to work on farms?

Now that our food can be produced by such a small group of workers, most Americans have moved on to work in other sectors of the economy.

What is the equilibrium price (P) and quantity (Q)? $0.50/10/75 $1/20/55 $2/35/35 $3/50/25 $5/60/10

P = $2; Q = 35

The following table shows the supply and demand schedules for Good X. What is the equilibrium price (P) and quantity (Q) for this good? Price of Good X/QS/QD $22/100/225 $25/115/200 $30/130/175 $32/150/150 $40/170/110

P = $32; Q = 150

What is the equilibrium price (P) and quantity (Q)?

P = $4; Q = 20 (where they intersect)

In recent years, Zimbabwe has had hyperinflation, with prices tripling (or more!) every month. According to what you learned in this chapter, what do you think the government can do to end this hyperinflation?

Print less money.

When supply falls, what happens to quantity demanded in equilibrium?

Quantity demanded decreases.

How do specialization and trade help you to avoid boredom and ignorance?

Specialization allows people to focus on one thing, thus learning more about it, than if they had to learn a little about everything, alleviating ignorance; trade introduces us to new items to prevent boredom.

The federal education reform law known as No Child Left Behind requires every state to create standardized tests that measure whether students have mastered key subjects. Since the same test is given to all students in the same grade in the state, this encourages all schools within a state to cover the same material. According to the division of knowledge model (specialization), what are the costs of this approach (or what are the costs from reducing the degree of specialization or division of knowledge)?

The state will be less productive because the children will know a little about of a lot of the same things, and no one will be an expert in anything.

In Sucrosia, the supply curve for sugar is as follows: $30 - 10,000 $50 - 15,000 $70 - 20,000 Under pressure from nutrition activists, the government decides to tax sugar producers with a $5 excise tax per 100-pound bag. How will the tax affect the market for sugar?

The supply curve will shift up and to the left.

What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East?

There was a fall in supply and a rise in market demand.

Ending hyperinflation in an economy is like an obese person trying to lose 100 pounds. Why?

They are both difficult to do and will require lots of sacrifice.

Nobel Prize-winner and New York Times columnist Paul Krugman has noted that economics is a lot like medicine: Knowledge is limited and many cures are quite painful. What are some other ways that economics and medicine are alike?

They are not perfect sciences. You are never 100% sure of the consequences and outcome of a remedy. Medicine is a practice and economics is also a practice.

Butter and margarine are substitutes. When the price of margarine increases, what will happen to the demand for butter? Why?

When the price of margarine rises, some people will switch from margarine to butter. Because of this, demand will increase, making butter's demand curve shift up and to the right.

In the Wealth of Nations, Adam Smith said that one reason specialization makes someone more productive is because "A man commonly saunters a little in turning his hand from one sort of employment to another." How can you use this observation to improve your pattern of studying for your four or five college courses this semester?

You should devote entire days to studying for each course instead of switching back and forth between subjects during the day.

Over the last 10 years, China and India have both become substantially richer. At the same time, oil prices have risen. The change in oil prices is due to:

a rise in demand.

If the price in a market is above the equilibrium price, then the market is experiencing:

a surplus.

Which of the following situations would lead to more starvation?

a world where everyone grows his or her own food and there is no trade