ECON2105: Macroeconomics
Danielle is planning a cruise to Mexico and has a budget for new clothes of $300. The average price for a pair of shoes is $50 while the average price for a suit is $100. Danielle already has 4 pairs of shoes purchased for her cruise, what is the opportunity cost of buying two more pairs of shoes?
1 dress
A student has a monthly budget of $100 to spend on either beers, which cost $10 each, or tacos, which cost $5 each. What is the largest number of beers that the student could afford to purchase in one month?
10
Juan has a monthly budget of $100 to spend on entertainment. A concert ticket costs $20 while a movie ticket costs $10. This month Juan has attended one concert and 5 movies so far. If Juan decides to only go to movies for the rest of the month. How many movie tickets can he afford to purchase and stay within his budget?
3 tickets
Stephanie is planning a cruise to the Caribbeans and has a budget for new evening wear of $500. She plans to purchase new shoes and dresses. The average price for a pair of shoes is $50 while the average price for an evening dress is $100. What is a combination of dresses and shoes that Stephanie could afford?
6 pairs of shoes & 2 dresses
Due to limits on out time and effort, we are best off when we allocate our time, money, and effort
According to the opportunity cost of out choices
If a data line on a graph slopes down as it goes to the right, it is depicting
An inverse relationship between the two variables on the axes
In East Germany, back before the Berlin wall fell, there was one manufacturer of cars (VEB Sachsenring Automobilwerke Zwickau). They produced one type of car, the Trabant, with a maximum speed of 55 mph (26 horsepower lawnmower type engine). Anyone who wished to buy a car put their name on a list and waited for two or three years to be able to purchase a 'Trabbi'. Whatever was available when their name came up was what they got--no choice of color, style, or engine size. East Germans were living with what type of economy?
Command Explanation: The East German economy was controlled by the government
Alexis owns a small business selling power tools. This past month she has noticed that the quantity demanded for high-end electric drills has decreased by 25%. Which of the following demand curve shifting events is a possible explanation for this change?
Consumers' incomes have decreased Explanation: Falling incomes would lead to a leftward shift of the demand curve causing less quantity demanded at any given price
Which country has characteristics of a command economy?
Cuba Explanation: the Cuban economy is very much controlled by the government
Lynn sat down to calculate the economic equation, y=12+7x18, for her economics course. What should she remember to do in order to find y?
Follow the correct order of operations
Two countries are trying to decide which product should have an increased production. Both Canada and Costa Rica produce coffee and corn, but it is easier for Canada to raise corn than grow coffee. Costa Rica easily grows coffee, but has a more difficult time growing corn.
In comparison with Canada, Costa Rica has a comparative advantage with coffee. Reason: If a country has lower opportunity cost to produce a good, then it has a comparative advantage in that good.
The theory of rational behavior
Is an assumption that economists make to have a useful model for how decisions are made
Making an economically rational decision requires
One to weigh prospective benefits and costs of each option
After the death of the queen in the country of Chedeux, her daughter, Chantasia became the new queen and ruler. Chantasia is known to be a ruler of the people, but as she gains more power from the populus, she begins to instigate sweeping changes to the economy and government, all in the name of helping the 'most downtrodden among us'. One of her first actions is to enforce a command economy to control all aspects of the country and regulate its wealth. As one of the queen's subjects, you've seen the changes she made. Which of these actions would be in line with this new command economy she is creating?
She creates a new body of government called The Ministry of Planning which will set wages, prices, and production targets to reach each month Explanation: These measures would increase the government's control over the economy
Budget constraints illustrate scarcity. They are based upon
The fact that we have limited income and we have to pay for goods and services
A free market is described by which of the following statements?
The government does not set or influence market prices in any way Explanation: Decisions are made through markets
When higher prices result in a lower quantity demanded, economists call this relationship
The law of demand
How does a production possibilities model differ from a budget constraint model?
The production possibilities model demonstrates diminishing returns
The best economic models have an unusual combination of characteristics. They are both
Useful and simple
The theory of rational behavior is
an assumption that economists make to have a useful model for how decisions are make Reason: The theory of rational behavior helps economists reliably predict behavior
Every day 500 airplanes in San Francisco incur an additional 30 minutes of airport delays when flying into or out of the airport. In chicago, the delays amount to 15 minutes for 1,400 airplanes. If the price of time is $20/hour in San Francisco and $15/hour in Chicago, which airport incurs the largest opportunity cost?
chicago
Marcus is considering which college major to choose. In taking a rational approach, Marcus should
consider the benefit of each major and the cost of the degree Reason: Economically rational decision requires considering cost and benefits for oneself and attempting to maximize benefits
George owns a custom pottery business where he makes all types of mugs and drinkware. If the price of ________ decreases, George's profit margins will also decrease.
glass coffee mugs
If Stan's Shoemaker Shop practices the division of labor and each employee concentrates on one step of the shoe-making process, this will likely result in
greater output produced
The slope of a budget constraint line is influenced by
how much 1 product costs compared to another Reason: If the 2 products considered have the same price, the slope will be -1 but if the price of product 1 is twice the price of product 2 the slope will be -2
In order to satisfy as many wants as possible,
it is necessary to achieve allocative efficiency, since otherwise output may go to where it is less valued Reason: If we are pproducing goods that are less valued at the expense of other goods that would be more valued, then we are not achieving allocative efficiency. Allocative efficiency refers to how well the mix of products reflects consumers' wants.
To make an economically rational decision, marginal cost should be compared to
marginal benefit Reason: Cost and benefit of future actions are the basis for rational decision making.
In a world of scarcity, we will never
meet all of society's wants
A demand curve shows the graphical relationship between
quantity demanded and price
The slope of a budget constraint line is influenced by the relative prices of the two goods competing to satisfy wants If a city government spends a good deal of money on crime prevention and also on infrastructure maintenance, then spending even more on crime prevention should result in
relatively small gains in crime prevention
Market economies are based on both private enterprise and the idea that allocation decisions of what and how much to produce is decided by
the interaction of supply and demand Explanation: The decisions over what to produce, how, and for whom are decided through the interactions of sellers and buyers in markets
A competitive market is one in which
there is a large number of buyers and sellers Explanation: The greater the number of buyers and sellers, the greater the level of competition
Normative statements are based upon
value judgements
In a planned economy, the government determines the prices for goods and services, and
what goods will be produced Explanation: The government makes all economic decisions
Suppose that there are only two types of output in a country: nuclear missiles and consumer goods. All else being constant, as the nation produces more missiles, the greater the opportunity cost
will be of satisfying consumer wants
Bianca, a small oil producer is talking to her chief engineer, Pete, about repairs and upgrades to an oil well. Pete: "...additional upgrades on the well would cost $5,000 but would allow increased production and revenue of more than $10,000 per year." Bianca: "I already spent $20,000 on this well, it is a money pit; we should not spend anymore on it." Based on the information given, what is the sunk cost?
$20,000 spent on prior repairs Reason: Prior spending no longer has bearing on the current decision and represents the sunk cost
Jamal is a small business owner who sells delivery trucks to local retailers. Last month the price of a new truck was $32,000 and he sold a total of 16 trucks during that month. This month the price of a new truck has increased to $35,000. Which quantity demanded might Jamal expect to observe this month according to the law of demand?
15 trucks Explanation: The law of demand posits an inverse relationship between price and quantity demanded. If the price goes up, we should expect the quantity demanded to fall not increase
Miriam owns a small shop selling custom headbands and accessories. Last month, she sold 335 headbands for $10 each. According to the law of demand, what quantity might Miriam expect to sell if she drops the price to $6?
415 Explanation: The law of demand describes the inverse relationship between price and quantity. If the price falls, the quantity demanded would rise
Two countries are trying to decide which product should have an increased production. Both Canada and Costa Rica produce coffee and corn, but it's easier for Canada to raise corn than grow coffee. Costa Rica easily grows coffee but has more difficulty growing corn. In comparison with Costa Rica, Canada has
A comparative advantage with corn
The relationship between headsize and a person's successin playing soccer can best be represented on a grapgh by
A line with zero slope (no relationship between size od student hear and test scores)
The town of Chester has an economy composed entirely of 2 equally sized food companies. Both company Q and company R produce peanut butter and jam. Company Q is better at producing jam than company R which is better are producing peanut butter. In order to maximize output, company R should...
Abandon the production of jam to fully specialize in the production of peanut butter and trade with company Q for jam
Kayden decided to attend college and gain a degree in accounting. He is now starting his degree. The yearly cost of tuition is $10,000 and he left his auto mechanic shop management job giving up $32,000 a year to attend college. Kayden's decision resulted in
An opportunity cost to attend college of $42,000 a year
The country of Armenia has an economy that includes people buying and selling freely, a government setting some price restrictions such as a minimum wage equivalent to $5 an hour and regulates certain industries (pharmaceutical, mining, and farming).
Armenia's economy is likely a mixed economy. Explanation: There is a strong reliance on markets with some government intervention
According to the law of demand, assuming other factors are held constant
As the price of milk decreases, the quantity of milk increases Explanation: The law of demand is the inverse relationship between price and quantity demand
The economy of Atlantia is defined by the private ownership of the means of production by Atlantia's citizens. While owners are usually free to utilize their property as they see fit, the government does intervene to ban certain harmful products (i.e. addictive drugs, lead paint, etc) from entering the market. Atlanta's parliament has recently passed a minimum wage law setting minimum hourly compensation at $5.00 per hour.
Atlantia is an example of a mixed market economy. Explanation: Private business ownership of the means of production along with limited government intervention are characteristics of market economy
Consider the example presented above about Biana, a small oil producer, trying to decide about investing more money into an oil well. If upgrades cost $5,000 but increase revenue will be more than $10,000 a year, what should Bianca do (assuming the $5,000 is available to her)?
Bianca should spend $5,000 on the well with the expectation that the additional revenue would outweigh the additional spending Reason: The decision should weigh whether the $5,000 upgrade is beneficial by comparing its cost and its potential benefit and not be based on sunk cost alone. We assume that the $5,000 is available to Bianca.
Which of the following statements reflects marginal decision-making?
Booking this condo in a better location is worth the extra $100 reason: Considers the marginal cost and marginal benefit
The law of demand states that as the price of a good decreases,
Buyers want to buy more of it Explanation: The law of demand is the inverse relationship between price and quantity demanded. If the price falls, the quantity demanded would rise
Self-interest can include a concert for oneself. To the extent that the happiness of others contributes significantly to that of our own happiness, actions taken in our own self-interest have benefits for
Close friends and family
Natalie runs a fast food stand selling hot dogs and soft drinks. A decrease in the price of which good below is likely to negatively impact her bottom line?
Hamburgers Explanation: Hamburgers and hot dogs are likely to be substitutes, so if the price of hamburgers falls this will likely shift the demand curve for hot dogs to the left, decreasing her sales of hotdogs
An Uber driver estimates that he will make $300 on Fridays if he works all evening. He decides to stay home because $300 will not be enough to pay his car loan.
His reasoning is incorrect because he should work to pay down his debt even if he cannot earn the entire car payment in one night. Reason: The car loan is a sunk cost (it will be paid no matter what) and so by earning $300 the driver would be better off than if he stayed home and earned nothing
Macroeconomic topics can by impacted by which of the following microeconomic topics?
How do people decide how much to save for the future, or whether they should borrow to spend beyond their current means
Over the past century the quantity of potatoes purchased by Irish consumers has fallen significantly, while incomes have grown exponentially. Meanwhile potatoes are still the cheapest source of calories available to the consumer. From this information it would be correct to assume that potatoes are a(n) ________ good.
Inferior Explanation: an inverse relationship between demand and incomes is the hallmark of an inferior good
Two common ways to discourage tobacco use are taxes on tobacco and information campaigns on the hazards of tobacco use. Which one causes a shift in the demand curve for smoking?
Information campaigns on hazards of tobacco
The following statement given at a political rally: 'Poverty should be eliminated given the size of our economy; and that's a fact." This is normative because
It is expressing someone's values and opinions Reason: A normative statement reflects someone's values and opinions and cannot be proven or disproven.
Over the past 10 years consumer incomes have grown by 15%, while the price of automobiles has increased by over 20%. Tires and automobiles are complement goods. What would be a reasonable expectation regarding the demand for tires today compared to 10 years ago?
It is impossible to know with the given information Explanation: the income will increase demand for tires, while the increase in the price of automobiles will decrease demand. It is impossible to know at the present time which effect is stronger
Jane Doe is a shop owner in the fictional country of Xanadu. Every month the government's planning ministry sends her a large booklet (which resembles a phone book) regulating the price of essential commodities including milk, flour, and eggs. In response to these regulations, Jane Doe has reduced her inventory of essential goods and switched to selling luxuries such as cakes, pies, and soft drinks. Luxury goods are not price-controlled. Does Jane Doe reside in a command economy? Why or why not?
Jane does not reside in a command economy. She owns her own business and is free to make some production and price decisions Explanation: The government's extensive intervention in the economy combined with private ownership and limited independent market activity allows us to best characterize the economy as mixed
You are the leader of a revolutionary movement that has recently overthrown the government of the tiny country of Tropico. During the 3rd Party Congress, which was held shortly before your glorious victory, the party committee decreed that "to free Tropico's struggling masses from the jackboots of capitalism and reactionary imperialism, it is necessary to immediately enforce a command economy upon realization of our final victory." Which of the following actions would betray your mandate to create a command economy in Tropico?
Maintain private ownership but legalize labor unions which will now be free to bargain with private businesses for improved wages and benefits Explanation: This form of government intervention is limited and allows for the continued independence of privately owned businesses and resources. Their continued existence is a betrayal of the decrees.
If an increase in the price of Nike shoes increases the demand for Adidas shoes, this means that
Nike shoes and Adidas shoes are substitutes Explanation: An increase in the price of Nike shoes would cause consumers to substitute for Adidas and the demand for Adidas shoes would increase
After Jamal increased the price of his trucks, he actually observed that his buyers increased rather than decreased their number of vehicle purchases. While he sold 16 trucks to his customers the month before the price increase, he sold a total of 18 trucks one month later. What is the most likely explanation for this apparent violation in the law of demand?
Not all variables that affect demand have held constant for the past month
What would cause the level of demand (meaning the relationship between price and quantity demanded) to shift?
Population grows in a particular market area
When creating a graph for your economics course, which axis is most commonly used to represent quantity (q)?
Quantity is most commonly represented on the x-axis
Sumin wants to examine whether doing laundry for several hours one day a week saves more time than doing it in small chunks twice a week, so she sets up an equation to think about the time involved in various steps.
Sumin has developed a mathematical function
You are a consultant analyzing the American car market for the new Toyota Prius. Your chief competitor Tesla has recently dropped the list price of their vehicles by 20%. When illustrating shifts of the demand curve it is customary to draw arrows to show the direction of change. Which directions should the arrows be drawn in the graph below? Which curve represents old demand and which curve the new demand?
The arrows should be drawn pointing leftwards. The curve on the right represents the old demand and the curve on the left represents the new demand Explanation: if the price of a substitute good decreases we would expect demand to increase for that good thereby lowering demand and shifting the curve to the left for the substitute
Alice is analyzing the demand for American made moped market for the company Genuine. The main competition, BMW, increased their listing price by 20% recently. Arrows are used to indicate the direction of the demand curve shift in a graph. Which is the correct direction the arrows should be drawn to reflect the Genuine moped market and which line is the old demand and new demand curve?
The arrows should be drawn pointing rightwards. The curve on the right represents the new demand and the curve on the left old demand. Explanation: This is consistent with an increase of demand for American made mopeds when competitors raise their prices. If a price of a substitute good increases, quantity demanded of the alternative good will increase
Suppose that a family decides to spend all of their available money on a fancy vacation instead of purchasing a much needed new automobile. From an economist's perspective, which of the following statements about this decision is likely to be true?
The decision is rational in the sense that it reflects the family's preference for vacations over new automobiles Reason: Economists have to make broad assuptions about behavior and therefore choices of individual agents uder conditions of scarcity. If the family decides to take the vacation instead of the automobile economists must assume that it reflects their preferences even if the decision may seem irrational to outside observers
Because of ________ if a city government decides to spend money on beautifying its downtown and attracting tourism to its city when no money has been devoted to those efforts before, then gains in tourism may be significant
The law of diminishing returns Reason: When adding one unit of resource, the gains in production are greater when you have low existing production. As you add more and more resources, the gains in production start to decline.
The construction estimator told the storage unit owner that building another section of storage units will likely add 100 more storage space renters to the bottom line. The rational storage business owner considered the rental prices of an additional 100 units, but he would decide to add more units if and only if
The marginal benefit is greater than the marginal cost of additional units
A technology company starts a program dedicated to training high school students in the use of the latest computer programing languages. How can the company justify creating and funding such a program since it is not about its primary products?
The money spent will boost the company's image and create potential employees with needed skills
A rock star intentionally sets her ticket prices below what would be necessary to sell out her shows. How might this be justified by a manager whose goal is to maximize long-term profit?
The revenue sacrificed is worth the boost it gives to her image as lines form for tickets
Raj and Annie, owners of a trucking company, are discussing opening a new distribution center and are analyzing the estimated cost and potential benefits of the project. Raj and Annie are behaving rationally because
Their decision is bases on self interest Reason: Comparing cost and benefit and choosing the option that brings the most satisfaction based on available information is rational and based on self interest
Which is a true statement about marginal benefit?
To an individual, one good may have a larger marginal benefit than another good
Peyton and Paul are brothers who own a manufacturing business and are considering opening a new distribution center. They estimate that the project would add $5 million in expenses and that their profit would increase by $1.5 million per year for the next 5 years (other things equal). Peyton and Paul decide
To go ahead with the project because the expected marginal benefit ($7.5 million over 5 years) is greater than the estimated marginal cost of the project ($5 million) Reason: An action is worth taking when the marginal cost is less than the marginal benefit. The potential additional profit is greater than the added expenses.
Darian and Ivan have been friends since college. They started a limousine rental business from scratch in Philadelphia. They are now contemplating opening an additional location for their business in Baltimore. They have crunch the numbers and discover it would mean adding $2 million more in expenses, and their profit would increase by $250,000 each year for the next 5 years. They decide...
To not open in a new city because the marginal cost proved to be too high relative to benefits
Willa and Westley are siblings who built a hair salon business from the ground up. They are now contemplating opening an additional salon location. The estimate to open an additional salon would mean adding $1 million in expenses and a profit of $2 million in total over the next 5 years (all other things equal). Willa and Westley decide...
To take on the new salon because the expected marginal benefit is greater than the estimated marginal cost
Given that total spending for a certain household will always include a base amount of $1,000/month, and that additional spending is equal to half of any income earned, we can predict total household spending with a model y=b+mx.
X represents income earned
The circular flow diagram simplifies the interaction of two groups, firms and households, and allows us to make predictions about
economic behavior
The production possibilities model illustrates an inverse relationship between the quantity of two goods or services produced because
production of different products will compete for limited resources Reason: As you need resources to produce more of product A, automatically you will have less to produce product B. Therefore, if the production of product A rise, then the production of product B has to fall.
Making an economically rational decision
requires considering the prospective benefits and costs to oneself Reason: Economically rational decision requires considering cost and benefits for oneself and attempting to maximize benefits.
Marginal benefit is
the additional benefit to a consumer from consuming one more unit of a good or service
A graph in the xy plane with a single point at 4 on the x (horizonal) axis and a vertical line upwards from that point to infinity would be represented by the equation
x=4
