Economics Test 1 FSU
Quantity demanded falls.
A sharp increase in the price of wood causes increases in the prices of dressers and desks. What happens to the quantity of dressers and desks demanded?
monopoly/lack of competition
AT&T, originally American Telephone and Telegraph, gradually gained more and more market share, particularly in long distance service, in the late 19th century. It did so by using patents (which it got from Alexander Graham Bell) to keep competitors from developing similar technology, and this worked until those patents began to expire. At that point other firms began to enter the market to compete, but AT&T aggressively bought some of these firms, which brought government scrutiny. In 1913 the government reached an agreement with AT&T: The company could not buy a phone company without also selling one. Instead of encouraging competition, however, this led to AT&T making deals with local phone companies to divide the country into territories over which AT&T or the local companies would have exclusive control. AT&T maintained complete and exclusive control over the wires that connected these local networks (this was called "long distance" service). This, combined with government-imposed prices, prevented competition from appearing in the telephone service markets. What kind of market failure best fits AT&T?
Carryout policy directives of politicians. They cant maximize profit so they want prestige, respect, authority and power.
Bureaucrats
Quantity demanded rises.
Amazon is holding a buy-one-get-one-free special on MP3 albums. What happens to the quantity of MP3 albums demanded?
Starbucks=normal good Bean-lightened coffee=inferior good Andew's demand for coffee changed from=change in income In economic terms, coffee and creamer (or half-and-half, or whatever you prefer) are usually considered= complements
Andrew, a college student, loves drinking coffee late at night to study for exams. Having no income, he is used to buying cheap bad tasting coffee, such as Beanlightened, that he needs to grind and brew himself. The coffee tastes putrid but, with enough cream and sugar, Andrew is able to tolerate it. Occasionally, he does go out to Starbucks when he has spare money. After graduation, Andrew gets a job working at a database firm as a programmer. His income is now a healthy $75,000 a year and he decides he's had enough bad tasting coffee. He ends up buying coffee daily from Starbucks even though it costs significantly more than Beanlightened. Match each sentence beginning below with the phrase that ends it best.
Government invention to encourage competiton
Antitrust laws
the tragedy of the commons.
Back in the days before it was easy to lock down computers so that users couldn't screw them up, computers in computer labs tended to quickly be infected with viruses,spyware, and unnecessary programs. The failure of users to take care of these computers is an example of...
Other things equal or other things the same
Ceteris Paribus
When price changes, quantity demanded changes (no shift in curve, only shift along curve)
Change in demand vs quantity demanded
Scarcity implies choice
Choice
last-minute buyers of airline tickets.
Congressman Jerk McStupidface suggests a new tax on airline tickets bought at the last minute. Thinking about people who buy airline tickets at the last minute, airlines who sell them, and the way that affects pricing currently, you can conclude that the burden of this tax is likely to fall more heavily on...
a public good.
Consider the light from a lighthouse. Lighthouses shine light over bodies of water, so that ships do not run aground on reefs, shoals, sandbars, other dangers at sea. A ship that can see the light does not reduce the ability of other ships to see the light, and a crew that hasn't paid the lighthouse operator can't be excluded from seeing the light—anyone near the lighthouse can see the light. One could therefore argue that a lighthouse is an example of a...
There will be an increase in quantity supplied.
Consider the supply curve for basketballs. Other things held constant, if the price of basketballs goes up from $7.99 to $14.99, what can we expect from suppliers of basketballs as a result? Correct!
The fact that one thing happened after another doesn't mean one thing caused another
Correlation vs. Causation
There are no reallocation of goods or resources that has benefits greater than costs
Economic efficiency
Two reasons a bureaucracy requests a bigger budget: doing a good job or not doing a good job
Mixon's law
Shifts to the left
Decrease in demand
Shifts to the left
Decrease in supply
Quantity demanded falls.
Due to increases in hay prices, an input for raising cattle, the price of a gallon of 2% milk increases from $2.98 to $3.25. What happens to quantity of milk demanded?
The printing press is invented=shift to the right The cost of paper, an input for textbooks, increases=shift to the left The price of textbooks falls=supply decreases ABC textbook company shuts down, removing the 5th biggest textbook provider from the market=shift to the left
Each graph below shows the supply of textbooks. For each scenario below, select which graph best describes the situation.
Study of how people respond to changes in incentives
Economics
Goods with many substitutes will have an elastic demand, goods with few substitutes will have an inelastic demand
Elastic vs inelastic
Where price comes from 1. Resting place (where things move towards) 2.Place where two forces are equal
Equilibrium
1. Total surplus is maximized 2. Marginal benefit equals marginal costs 3. Every unit that produced has a benefit to the consumers that is greater than (or equal to) the cost of its production
Equilibrium is efficient means
Some of the costs or benefits of an action fall on a third party
Externalities
Represents marginal costs of producing an additional unit
Height of supply curve
Quantity demanded rises.
Groupon (remember Groupon? Does anyone still use that?) has a coupon for $6 off the price of laser tag. What happens to the quantity of laser tag demanded?
Simplified ways to think about how the world works
Models
Marginal benefit=marginal cost
In equilibrium
Flour, an input for cookies, is sold at $3 per bag= not a characteristic of the black market Fortune cookies are sold at $1.90 each=not a characteristic of the black market A Mrs. Field's chocolate chip cookie is sold for $8=characteristic of the black market The web cookie, an illegal delicacy prized for its distinctive icing decorations, is sold at the bazaar=characteristic of the black market
In the neighborhood of Sesame Street, cookies are in particularly high demand. The demand is, in fact, so great that prices for cookies are skyrocketing, and average citizens can no longer obtain this staple food. The government is considering a price control to keep cookies affordable for its citizens. As a result of the price control, a covert bazaar for cookies arises. Assuming the price control is set at $2 per cookie, sort the following statements into whether or not they describe black market activity.
price ceiling
In the neighborhood of Sesame Street, cookies are in particularly high demand. The demand is, in fact, so great that prices for cookies are skyrocketing, and average citizens can no longer obtain this staple food. The government is considering a price control to keep cookies affordable for its citizens. Which kind of price control is the government considering?
Shifts to the right
Increase in demand
Shift to the right
Increase in supply
The lack of profit motive tends to result in costly government action
Inefficiency of government operations
Goods purchased less as income increases and more as income decreases Examples: -Spam -Taco Bell
Inferior Goods
One or more parties to a transaction cannot get enough information to be convinced to make a deal Ex. Used car sales Solution: info markets, regulations
Information problems
Doing economic consulting.
Josephine teaches economics, and makes about $110,000 per year doing so. If she couldn't teach economics, she would be doing economic consulting for a major bank for $150,000 per year. If she couldn't work as an economic consultant, she would go back to school and study history. If she couldn't do that, she would stay at home and take care of the kids (her husband currently does this, but could go back to work if she couldn't find a job she liked). Which of the following is Josephine's opportunity cost of teaching economics?
1500
José is an illegal immigrant from Guatemala. Emma is a well-paid web designer who hires José to do some remodeling on her house. She offers José $5,000, but she would have been willing to pay him $5,500 (because that's how much she values the remodeling). José accepts, but he would have been willing to do the work for $4,000 (because that is how much he would earn doing work on a different house). What are the net gains to José and Emma that they get as a result of trading? You don't need to type a dollar sign with your answer; just enter a number.
-Lack of competition -Antitrust laws
Kinds of market failure
If there are few sellers, price might rise above the efficient level
Lack of competition
As price rises, the quantity supplied increases
Law of Supply
The value of producing one more unit
Marginal benefit
The cost of producing one additional unit
Marginal cost
-Individual pursuit of rational self interest leads to collectively irrational outcomes
Market failure
Horizontal sum of individual supply curves
Market supply
Negative Externality=Pigovian taxes on the harmful activity Monopoly/Lack of Competition=antitrust policy used to big firms or prevent big firms from merging Public Good=Taxes are collected, and the revenue is used to provide a good that the market cannot. The Tragedy of the Commons=Privatize the overused resource, or if that is not possible, try to simulate private property using trade-able permits.
Match each market failure with a government policy that might be able to address the problem. (Of course, it is not guaranteed that the government will get it right.)
Price Ceiling=Government making illegal to charge a price above a certain threshold Consumer Surplus=Difference between what a person is willing to pay for a good and what they actually pay Price Floor=Government making it illegal to charge below a certain level Equilibrium: The condition that occurs when the price is just at the right level to cause the quantity demanded to equal the quantity supplied
Match the descriptions below with the appropriate term.
People who do not pay can't be stopped from consuming Ex. National defense, light house light
Non-excludable
My consumption doesn't affect yours
Nonrivalrous
Goods purchased more as income increases and less as income decreases
Normal Goods
Value given up
Opportunity cost
Want to gain office by offering policies to supporters, maximize votes to get it
Politicians
a negative externality.
Pollution is emitted from a power plant in Kentucky, and drifts on the wind into Canada, where it causes acid rain to fall, damaging buildings and forests. This is an example of...
Some benefits of an action fall on a third party, people do too little of a good thing Ex. Not asking questions in a big class
Positive externalities
Positive: The way the world is Normative: The way the world ought to be
Positive vs Normative
Legal maximum price
Price ceiling
Legal restrictions on what prices can be charged
Price controls
Legal minimum price
Price floor
The difference between price and marginal cost of producing an additional unit
Producers surplus
Under the line= inefficient Over the line=unattainable
Production possibilities frontier
Democratic governments effectively aggregate the preferences of the people and implement beneficial policies
Public Interest View
People in governments make decisions based on what is in their self interest and the incentives created by the political system
Public choice view
A good that is nonrivalrous and non-excludable
Public goods
Assumption that people are rationally self interested
Radical Self Interest Assumption
Many voters rationally choose not to vote
Rational absentation
Voters tend to be poorly informed, information is costly and benefits are low
Rational ignorance
The pursuit of an income, receipt or benefit that cannot be competed away by the usual functioning of the economy
Rent seeking
Resources are finite
Scarcity
-Amplitude, a new company, decides to join the smartphone market. -After discovering that flash steaming tuna first, before using mechanical processes to extract meat, removes more tuna flesh, more cans of tuna hit the shelves at all major grocers.
Select which of the following scenarios describe a shift in the supply curve (and NOT a movement along the supply curve).
-After it earns 1st prize in the "whose tastebuds have been most numbed by years of eating spicy food" category of a cookoff, fans of spicy noodles buy a lot more Double Burn brand ramen noodles. -In the country of Stilleoersubstanse, pants that are designed to sag low are no longer in vogue after a series of tragic walking accidents, and sales fall as a result. -Out-N-In, a burger joint with a cult-like national following in the U.S., sells more burgers as the price of chicken increases. -Buzzier, an energy drink company, notices students are desperate to stay awake in order to study during final exam week, and change their buying behavior.
Select which of the following stories describes a shift of the demand curve (and NOT a movement along the demand curve).
-Change in technology -Firms enter or exit -Natural disasters or manmade disasters -Changes in input costs -Changes in taxes or regulation -Changes in expectations
Shift in supply
Politicians have little incentive to look into the future
Shortsightedness
When a concentrated group gets the policy it wants with the expense of a huge group
Special Interest Effect
There will be a surplus of food at many of the restaurants as quantity supplied exceeds quantity demanded at a price of $10 per meal.
Suppose that the city of Halifax decrees that all restaurants located within a 15 mile radius of the University of Halifax must charge at least $10 a meal so that college students can become more refined in their dining. What is a likely result of this price floor? (Note that the last problem asked you which was not likely; this one asks which one is likely.)
There will be food surpluses at many of the restaurants as quantity supplied exceeds quantity demanded at a price of $1 per meal.
Suppose that the city of Lethbridge decrees that all restaurants located within a 15 mile radius of the University of Lethbridge can charge no more than $1 a meal so that college students can eat out economically. Which of the following is NOT a likely result of this price ceiling?
consumers will end up paying some of the tax, because the burden of a tax is not determined by the legal assignment of the tax.
Suppose the government proposes a $100 per phone tax on smartphones, arguing that the producers of smartphones can easily afford to pay it. An economist would respond that...
Price is indeterminate, quantity rises.
Suppose the market for bread is in equilibrium. Two things then happen at the same time: Warmer-than-usual weather results in a larger harvest of wheat (which is used to make bread), and a new diet, known as the Anti-Atkins-Anti-Paleo diet sweeps the country, encouraging everyone to eat more bread. What happens to the equilibrium price and quantity of bread?
Price falls, quantity rises.
Suppose the market for desktop computers is in equilibrium. Intel develops a new process for producing computer chips which does not improve performance, but does allow more chips to be produced at a lower cost. What happens to the equilibrium price and quantity?
Price rises, quantity is indeterminate.
Suppose the market for tequila is in equilibrium, but then two things happen simultaneously. First, a new mixed drink using tequila, known as a "Fancy Spindiffilizer", sweeps the country. Second, an earthquake in Mexico damages several tequila production facilities. What happens to the equilibrium price and quantity of Tequila?
-Moves supply and demand whether it affects consumers or producers -Harms both consumers and producers and is inefficient
Taxes
Droves of college students funnel into their respective college towns after summer vacation= shift to the right After the first few months of college, students grow to detest ramen= shift to the left The price of ramen increases=Quantity demanded lower, price higher The price of ramen decreases=Quantity demand higher, price lower
The graphs below depict demand curves for ramen noodles. For each scenario below, select a graph that best describes the situation.
Quantity demanded stays the same.
The price of Coca-Cola stays at 5 cents per bottle all year. What happens to the quantity of Coca-Cola bottles demanded?
Quantity demanded rises.
There is a week-long special at Safeway, where pork shoulder is on sale at $1.99 per pound, down from $3.99 per pound. What happens to the quantity of pork shoulder demanded?
-Changes in tastes/preferences -Consumer income -Changes in population -New information/changes in quality -Time of year -Changes in prices of substitutes and complements -Expectations -Taxes/Regulations
Things that shift demand
Total surplus=consumer surplus+producer surplus
Total surplus
Another way to say opportunity cost
Tradeoffs
There are too many people with a property right who can say no stop
Tragedy of the Anti Commons
People overuse commonly owned resources Ex. People over fishing
Tragedy of the Commons
-black markets -extra fees -discourage new houses built -no incentive to maintain buildings -discrimination
Unintended consequences of price controls
Creates value
Voluntary exchange
Want to get beneficial policies at a low price, your vote doesn't matter in a statistical sense
Voters
Firms will lower price
What happens when price is above equilibrium
-Aidan, tired of being made fun of because his parents gave him a fashionable name that very quickly became dated, has his name legally changed. He pays $40 in legal fees. -Anna has been playing a lot of League of Legends in her spare time, and has become so good at it that she has been offered $70,000 a year to play for a professional team. She takes the job, dropping out of college.
Which of the following are examples of people responding to incentives according to their rational self-interest? (There may be more than one correct answer.)