Econ Quiz 1 Review Questions

14. Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately -6. What does this mean? A) A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption. B) A 6 percent increase in the price of grapefruit juice leads to a 1 percent increase in orange juice consumption. C) If the price of grapefruit juice rises by $1, 6 more cartons of orange juice will be purchased. D) The demand for orange juice is 6 times greater than the demand for grapefruit juice.

A) A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption.

6. If an increase in income leads to a decrease in the demand for popcorn, then popcorn is A) an inferior good. B) a neutral good. C) a necessity. D) a normal good.

A) an inferior good

Short Answer Question 3. (total points 19 points) Below are the production possibility frontiers for Costa Rica and Guatemala A. Which country, if any, has absolute advantage in producing pineapples? Why? (4 points) B. Which country, if any, has comparative advantage in producing coconuts? Why? (6 points) C. Before the trade, Costa Rica made and consumed 40 tons of pineapple and 90 tons of coconuts, while Guatemala produces and consumes 45 tons of pineapple and 90 tons of coconuts. How many more additional tons of each good is produced after the counties started to trade? Show your solution. (6 points) D. Can a country change its comparative advantage? Explain briefly or give an example. (3 points)

A. Costa Rica has the absolute advantage in producing because they produce more. B. 150/100=2/3. This means in Costa Rica the opportunity cost for producing 1 coconut is 2/3 a pineapple. 90/180=1/2. This means in Guatemala the opportunity cost to produce one coconut is ½ a pineapple. Therefore, Guatemala has the comparative advantage in producing coconuts because the opportunity cost is less. C. Guatemala will make only coconuts: 180. Costa Rica will make only pineapples: 100. The amount of pineapple consumed in total is 40+45=85. The number of coconuts consumed in total is 90+90=180. Since the number of coconuts produced and consumed is the same there is no additional production of coconuts. Since the number of pineapples produced is 100 and the amount consumed is 85, (100-85=15) That means there is 15 additional tons of pineapples being produced. D. Yes, by improving technology.

This table shows the number of labor hours required to produce a motorcycle and a guitar in Ireland and Scotland. A. Assume each country has a total of 100 labor hours to devote to the production of the two goods and devotes exactly half of the time for making each good. If the two countries do not trade and consume whatever they produce, identify the production and consumption. B. Suppose the two countries specialize and trade. Based on the assumption of total 100 hours of labor available in each country, which country should produce motorcycles and which should produce guitars?

A. Ireland: 100/2=50. 50/5=10. Ireland produces 10 motorcycles in 50 hours and 10 guitars in 50 hours. Scotland: 100/2=50. 50/10=5. 50/4=12.5. Scotland produces motorcycles in 50 hours and 12.5 guitars in 50 hours. Nothing is consumed. B. Ireland should produce motorcycles and Scotland should produce guitars.

The graph shows the marginal benefit and marginal cost of pollution reduction for the pollutant sulfur dioxide in the Lehigh Valley. A. Label the marginal costs curves in the graph. The optimal level of sulfur dioxide in the Lehigh Valley is where the two curves cross. Why is this the optimal level? B. Using the above diagram, explain in detail why the air is less polluted now than 50 years ago? C. What is the tragedy of commons? Why is this a form of market failure? How can the tragedy of commons be reduced/eliminated?

A. The point where the two curves cross is the optimal level of sulfur dioxide in the Lehigh Valley because marginal cost is equal to marginal benefit at this point. B. The air is less polluted now than it was 50 years ago because there have been improvement in technology, changes in people's preferences, and changes in income. This has caused the marginal cost curve to move down and the marginal benefit curve to move up. C. The tragedy of Commons is the tendency for a common resource to be overused. This is a market failure because the Tragedy of Commons will cause a deadweight loss. Tragedy of Commons can be reduced or eliminated through defined property rights.

Short Answer Question 2. (total points 20 points) A. When the price per lipstick is $10, the quantity demanded for chap-sticks is 10. As the price per lipstick increases to $20, the quantity demanded for chap-sticks is 20. Are the lipsticks and chap-sticks complements, subtitutes or unrelated goods? Explain (4 points) B. . Consider the market for cigarettes. Let's say the government decides to impose federal cigarette tax of $1.00 per pack and consumers end up paying the entire tax. Assume the equilibrium price before the tax is $5.00 per pack and the equilibrium quantity is 30 million packs. What is the equilibrium quantity with the tax in place? Why? (4 points) C. Which has a higher demand elasticity: coca cola or all cold beverages? Why? Assume that gasoline has unexpectedly increased from $2 a gallon to $3 a gallon. When is the demand for gasoline more elastic: the day after gasoline first increased to $3 or six months later? Explain your answer. (6 points) D. Disney parks are hoping to decrease the volume of visitors. They increased one-day ticket price to $140, up from $100. Disney reported the price rises in the US have led to a fall in ticket sales by 2 percent. How will the increase in price will affect Disney's revenues? Why? (6 points)

A. They are substitutes because more ChapSticks are purchased as lipstick price increases B. The quantity remains the same because the tax is being paid by customers meaning its perfectly inelastic C. Coca cola has a higher demand than cold beverages because it is in a narrower market than cold beverages. ---Six months later is more elastic because more time has passed D. Since the percent price increase is well over 2%, the falloff in quantity demanded, the change in price did not have a large impact on demand. This means the price elasticity of demand is inelastic. This means that there was an increase in Disney's revenue.

Short Answer Question 1. The graph below represents the market for pink salmon. A) Show the market equilibrium for the price and quantity. Label this equilibrium price, $1 and label the equilibrium quantity, 150 million (2 Points) B) As time goes on, fishermen employ a more productive technology, hydrographic charts, which allows them to catch fish more efficiently. Which curve(s) will move and in which direction? Why? Show the shift(s) on the graph. What will happen to the equilibrium price and the number of fish caught? (6 points) C) The pink salmon is primary used for canning. Canned pink salmon is perceived as a less desirable good compared to more expensive other fish. Now assume the buyers' incomes increase. Which curve, if any, will move and in which direction? Why? Show the change on the graph. (4 points). D) Pink salmon naturally occur in the North Pacific and Arctic Oceans and they are free for all to catch. Assume that the government begins to impose a fee (per pound) of salmon caught. Now consider the imposed fee on fish caught, along with increased consumer' income and the employment of the new fishing technology. What can be said definitely about the final equilibrium quantity and the price? Why? (4 points)

A: Shown in graph B: The supply curve will shift right because better technology allows for in an increase in production or the catching of fish in this case. The equilibrium price will decrease and the number of fish caught will increase C: The demand curve will shift left because salmon is an inferior good and there is less demand for it as income increases D: Both the equilibrium price and quantity are undetermined because the magnitude of the shifts in the curves are unknown.

5. Refer to Figure 3-2. A decrease in the price of the product would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1.

B) B to A

2. Which of the following is a positive economic statement? A) The standard of living in the United States should be higher. B) If the price of iPhones falls, a larger quantity of iPhones will be purchased. C) The government should revamp the health care system. D) The U.S. government should not have bailed out U.S. auto manufacturers

B) If the price of iPhones falls, a larger quantity of iPhones will be purchased.

3. Comparative advantage means the ability to produce a good or service A) at a lower selling price than any other producer. B) at a lower opportunity cost than any other producer. C) of a higher quality than any other producer. D) at a higher profit level than any other producer.

B) at a lower opportunity cost than any other producer.

13. Which of the following is an example of a positive externality? A) raising the speed limit to 60 mph in school zones B) planting trees along a sidewalk which add beauty and create shade C) permitting smoking on commercial airplanes D) a police department stops enforcing DUI laws

B) planting trees along a sidewalk which add beauty and create shade

8. The total amount of producer surplus in a market is equal to A) the difference between quantity supplied and quantity demanded. B) the area above the market supply curve and below the market price. C) the area above the market supply curve. D) the area between the demand curve and the supply curve below the market price.

B) the area above the market supply curve and below the market price.

12. If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered A) external costs. B) transactions costs. C) marginal benefits. D) social costs of the pollution

B) transactions costs.

7. According to a recent study, "Stricter college alcohol policies, such as raising the price of alcohol, or banning alcohol on campus, decrease the number of students who use marijuana." On the basis of this information, how would you describe alcohol and marijuana? A) The two goods are substitutes in consumption. B) There is no relationship between the two goods. C) The two goods are complements in consumption. D) They are both luxury goods.

C) The two goods are complements in consumption.

9. Rent control is an example of A) a subsidy for low-skilled workers. B) a price floor. C) a price ceiling. D) a black market.

C) a price ceiling

4. Refer to Figure 2-1. Point A is A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) the equilibrium output combination.

C) inefficient in that not all resources are being used.

1. Opportunity cost is defined as A) the benefit of an activity. B) the monetary expense associated with an activity. C) the highest valued alternative that must be given up to engage in an activity. D) the total value of all alternatives that must be given up to engage in an activity.

C) the highest valued alternative that must be given up to engage in an activity.

10. Which of the following displays these two characteristics: rivalry and nonexcludability? A) a public good B) a private good C) a quasi-public good D) a common resource

D) a common resource

11. If the social cost of producing a good or service exceeds the private cost A) a positive externality exists. B) the sum of consumer surplus and producer surplus is maximized. C) the market achieves economic efficiency. D) a negative externality exists.

D) a negative externality exists.

Suppose you own a bookstore. You believe that you can sell 40 copies per day of the latest John Grisham novel when the price is $35. You consider lowering the price to $25 and believe this will increase the quantity sold to 50 books per day. Compute the price elasticity of demand using the midpoint formula and this data. Will you decrease the price if you want to increase revenue.

Elasticity= ((Q2-Q1)/((Q1+Q2)/2))/((P2-P1)/((P1+P2)/2)) ((50-40)/45)/((25-35)/30)= (10/45)/(-10/30)= -2/3 The price elasticity of demand is -2/3. The absolute value is <1 meaning its inelastic. This means as the price is increased the revenue will increase and also the demand will relatively stay the same. Therefore I should not decrease the price if I want to increase revenue.

According to the study by the U.S. Centers for Disease Control and Prevention, Americans purchase about 360 billion cigarettes each year. The government wants to reduce the number of smokers in the society. Would you recommend to tax the cigarettes? Why or why not? The tobacco products carry a 2% tax (on top of 6% sales tax) in Philadelphia county. With the goal of reducing number of smokers in mind, should the tax be levied on the smokers or producers of the cigarettes? Please explain briefly.

The demand for cigarettes is inelastic meanings there is little change on demand and as price goes up revenue goes up. If the goal of the tax is increasing tax revenue then the tax should be levied. However if the goal is to reduce the number of smokers it should not be. With this goal in mind, the tax, if there need be one, should be levied on the producer and not the consumer. If it was levied on the producer it would have no effect. However with it levied on producers it's almost as a punishment.

Figure 4-2 shows the demand and supply curves for the coffee market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at $7.00. Refer to Figure 4-2. What is the value of the deadweight loss after the imposition of the price floor? a. $600 b. $2,700 c. $1,800 d. $3,300

a. $600

Economics promotes which of the following as the way to make the best decision? a. Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost. b. Continue an enjoyable activity as long as you do not have to pay for it. c. Continue an enjoyable activity until you cannot afford to pursue it. d. Continue an enjoyable activity until it is no longer enjoyable.

a. Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.

Analyze the automobile equilibrium price and quantity. a. A new manufacturer enters the market (producing same type car) b. Gas prices increases c. Consumers expect higher automobile price in the future

a. Price goes down, quantity goes up b. price decreases, quantity increases c. price increases, quantity increases Both equilibrium price and quantity is unable to be determined.

The market of HDTV channel faces the following impacts. Analyze the equilibrium price and quantity. a. New TV shows are going to be released b. Increase in income HDTV channel is normal good c. Decrease in the cost of TV manufacturer

a. Price increases, quantity increases b. price increases, quantity increases c. price decreases, quantity increases Equilibrium price is not able to be determined. There is an increase is equilibrium quantity.

Figure 4-2 shows the demand and supply curves for the coffee market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at $7.00. Refer to Figure 4-2. What is the value of consumer surplus after the imposition of the price floor? a. $4,500 b. $1,500 c. $5,700 d. $2,700

b. $1,500

Figure 4-3 shows the market for beer. The government plans to impose a per-unit tax in this market Refer to Figure 4-3. How much of the tax is paid by buyers? a. $2 b. $5 c. $12 d. $7

b. $5

Figure 4-1 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at R0. Refer to Figure 4-1. What is the area that represents consumer surplus after the imposition of the ceiling? a. A+B+C b. A+B+D c. A+B+D+F d. A+B+D+F+G

b. A+B+D

Which of the following statements is true? a. Any time you have to decide which action to take you are experiencing economic equity. b. Every individual, no matter how rich or poor, is faced with situations that require trade-offs. c. Economics is a social science that studies the trade-offs we are forced to make because resources are unlimited. d. Trade-offs do not apply when the consumers purchase a product for which there is excess supply, such as with a stock clearance sale.

b. Every individual, no matter how rich or poor, is faced with situations that require trade-offs.

Figure 4-3 shows the market for beer. The government plans to impose a per-unit tax in this market Refer to Figure 4-3. As a result of the tax, is there a loss in consumer surplus? a. No, because the market reaches a new equilibrium b. Yes, because consumers pay a price above the economically efficient price. c. No, because the producer pays the tax. d. No, because consumers are charged a lower price to cover their tax burden.

b. Yes, because consumers pay a price above the economically efficient price.

If the price of grapefruit rises, the substitution effect due to the price change will cause a. a decrease in the quantity of grapefruit supplied. b. a decrease in the quantity of grapefruit demanded. c. a decrease in the demand for grapefruit. d. a decrease in the demand for oranges, a substitute for grapefruit.

b. a decrease in the quantity of grapefruit demanded.

Figure 4-2 shows the demand and supply curves for the coffee market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at $7.00. Refer to Figure 4-2. What is the value of producer surplus after the imposition of the price floor? a.$4,500 b.$3,000 c.$3,600 d.$4,200

b.$3,000

Bella can produce either a combination of 60 silk roses and 80 silk leaves or a combination of 70 silk roses and 55 silk leaves. If she now produces 60 silk roses and 80 silk leaves, what is the opportunity cost of producing an additional 10 silk roses? a. 55 silk leaves b. 2.5 silk leaves c. 25 silk leaves d. 10 silk leaves

c. 25 silk leaves

Figure 4-1 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at R0. Refer to Figure 4-1. What area represents the deadweight loss after the imposition of the ceiling? a. C + E + J + H b. G + H c. C + E d. J + H

c. C + E

Figure 4-1 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at R0. Refer to Figure 4-1. What is the area that represents the portion of producer surplus transferred to consumers as a result of the rent ceiling? a. D+E b. F c. D d. D+F

c. D

Figure 4-1 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at R0. Refer to Figure 4-1. With rent control, the quantity supplied is Q1. Suppose apartment owners ignore the law and rent this quantity for the highest rent they can get. What is the highest rent they can get? a. more than R1 b. R0 c. R1 d. R*

c. R1

Vineyards can grow either red wine grapes or white wine grapes on their land. Which of the following would cause the supply of red wine grapes to decrease? a. an increase in the demand for red wine grapes b. an increase in the price of red wine c. an increase in the price of white wine grapes d. a decrease in the price of white wine grapes

c. an increase in the price of white wine grapes

Figure 2-4 shows various points on three different production possibilities frontiers for a nation. Refer to Figure 2-4. A movement from X to Y a. is the result of advancements in plastic production technology only, with no change in food production technology. b. could be due to a change in consumers' tastes and preferences. c. could occur because of an influx of immigrant labor. d. is the result of advancements in food production technology only, with no change in the technology for plastic production.

c. could occur because of an influx of immigrant labor.

Economists assume that rational people a. never use all available information as they act to achieve their goals. b. undertake activities that benefit others and hurt themselves. c. respond to economic incentives. d. only weigh the benefits and costs of the most desirable alternative actions.

c. respond to economic incentives.

Table 2-10 shows the output per month of two people, Fred and Barney. They can either devote their time to making pogo sticks or making unicycles. Refer to Table 2-10. What is Fred's opportunity cost of making a pogo stick? a. 6/7 of a pogo stick b. 1/2 of a unicycle c. 3 unicycles d. 1/3 of a unicycle

d. 1/3 of a unicycle

The Internet has created a new category in the book selling market, namely, the "barely used" book. How does the availability of barely used books affect the market for new books? a. The demand curve for new books shifts to the right. b. The supply curve for new books shifts to the right. c. The supply curve for new books shifts to the left. d. The demand curve for new books shifts to the left.

d. The demand curve for new books shifts to the left.

The payroll tax is a tax imposed on ________ that is used to fund Social Security and Medicare. a. workers only b. employers only c. the unemployed d. employers and workers

d. employers and workers