Exam 1 - Quizzes, Practice Problems, And Extra Notes

Interpreting Supply and Demand Curves: (a) A Horizontal Supply Curve (b) A Horizontal Demand Curve (c) A Vertical Supply Curve (d) A Vertical Demand Curve

(a) A Horizontal Supply Curve: If a supply curve is horizontal, this means that the marginal costs for all firms are the same no matter how much is being produced (vertical interpretation of the supply curve). Producing something like pencils is probably close to a horizontal supply curve: a simple good, easy to scale up production, and not much differences across firms in how easily can make them. (b) A Horizontal Demand Curve: If a demand curve is horizontal, this means that the reservation values for all prospective buyers in the market is the same (vertical interpretation of the demand curve). The market for dollars bills is probably pretty close to this: almost everyone has the same reservation value for a dollar. (c) A Vertical Supply Curve: If a supply curve is vertical, this means that at any price, the same amount gets supplied to the market (horizontal interpretation of the supply curve). An example of of this is a good that is in fixed quantity, e.g. land in a given area. No matter how expensive houses on that land get, you can't "build" more land in a fixed area. (d) A Vertical Demand Curve: If a demand curve is vertical, this means that at any price, the same quantity of goods is demanded. So some life-saving drug will have a demand curve of close to vertical, since even if it got super expensive everyone would still buy it.

11. Jody has purchased a non-refundable $25 ticket to attend a concert on Friday evening. Subsequently, she is asked to go to dinner and dancing at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going on the date, which of the following is the opportunity cost of going on the date:

(a) only the entertainment value of the concert Explanation: - The ticket payment is sunk, so she just has to choose which of the two "free" things to do

The table shown below shows the tradeoff between grades and leisure for a hypothetical student. What is the opportunity cost of in terms of grades of moving from 0 to 2 units of leisure time?

(b) 20 Explanation: If you move from 2 and forgo 0, you end up with a 70 instead of a 90, costing you 20 points.

10. Refer to Table 1 above. If you received a payment of 20 for each additional lawn you worked on, what is the optimal number of lawns cared for?

(b) 9 Explanation: Go down the rows 1 at a time: starting from 0, if I hire 1 employee, I finish 5 additional lawns. This means my marginal benefit is the $100 I get from these 5 extra lawns, while my marginal cost is 60, so I do it. Starting from 1, moving to 2 gets me $80 in marginal benefit and 60 in marginal cost, so I do that too. Starting from 2, moving to 3 gets me $60 in marginal benefit but costs $60 on the margin, so I can either stop at 2, or move on to 3, and I make the same amount.

2. Assume that your opportunity cost of an additional hour of leisure, in terms of grades, is 30 points and constant. Which of the following statements is true?

(b) A one hour increase in leisure will lead to a 30 point decrease in your grades.

18. Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than her next best alternative of spending an equal amount of money ($12) to go to a movie. The opportunity cost of going to the beach is:

(c) the pleasure from the movie she missed seeing minus the $12 cost of the movie. Explanation: Remember that nothing about the action of going to the beach affects the opportunity cost of going to the beach.

5. Forest is a mountain man living in complete isolation in Montana. He is completely self-sufficient through hunting, fishing, and farming. He has not been in the city to buy anything in five years. One can infer that

(c) the scarcity principle still applies because more hunting means less fishing and farming Explanation: - All actions have tradeoffs since Forest still has limited time

17. Pat earns $44,000 per year (after taxes), and Pat's spouse, Chris, earns $35,000 (after taxes). They have two pre-school children. Daycare for the two children together costs $14,000 per year. The children must go to daycare if both parents work. Pat has decided to stay home and take care of the children. Pat must (choose the best answer)

(c) value spending time with the children by $30,000 or more. Explanation: Staying at home has an opportunity cost for Pat of $30,000 = 44k - 14k (for daycare). Since Pat decides to stay home, the value must exceed this opportunity cost of 30k.

5. You had to pay $600 (non-refundable) for your meal plan for Fall semester which gives you up to 150 meals. If you eat only 100 meals, your marginal cost for the 101st meal is

(d) $0 Explanation: The 600 is sunk, and you can get the 101st meal for free once you've already paid and eaten 100.

9. The following question has 4 subparts. Smith ad Jones comprise a two-person economy. Their hourly rates of production are shown below. Answer the next four questions based on the following information. a. The opportunity cost of making an extra calculator for Smith is __________ and for Jones it is __________. i. 0.10 computers; 0.05 computers ii. 10 computers; 6 computers iii. 1 computer; 0.5 computers iv. 0.6 computers; 1.2 computers

. 0.10 computers; 0.05 computers i. Smith makes 100 calculators and gives up 10 computers, so his OC is 10/100 = 0.1 computers. Jones makes 120 calculators and gives up 6 computers, so his OC is 0.05 computers.

Perfectly Inelastic Graph

0 = Perfectly Inelastic - An increase in price has no effect on the quantity a vertical line has undefined slope since it does not run horizontally

Shifters of Demand (Determinants) Shifters of Supply (Determinant) All four possible graphs in the Figure

Demand Shifters: 1. Tastes and Preferences 2. Number of Consumers 3. Price of Related Goods (complements) 4. Income 5. Future Expectations Supply Shifters: 1. Prices/Availability of Resources 2. Number of Producers 3. Technology 4. Government Action: Taxes & Subsidies 5. Expectations of Future Profit

1. If the price elasticity of demand for pineapple is 0.75, a 4% increase in the price of pineapple will lead to a a. 3% decrease in the quantity demanded of pineapple. b. 3% increase in the quantity demanded of pineapple. c. 4% decrease in the quantity demanded of pineapple. d. 3/16% increase in the quantity demanded of pineapple.

a. 3% decrease in the quantity demanded of pineapple. ▪ elasticity = (% Q) / (% P) 0.75= x/4%, therefore x = -3%

3. When the price of insulin was $10 consumers demanded 100 units, when the price was $15 consumers demanded 100 units, and when the price was $20 consumers demanded 100 units. Based on this information, insulin must have a(n) _______ demand curve. a. unitary elastic b. perfectly elastic c. perfectly inelastic d. elastic

c. perfectly inelastic ▪ Perfectly Inelastic Demand: At any price, the amount of units demanded is the same.

14. Based on the Supply & Demand model, which of the following would not cause a shift in the demand curve for coffee: a. it is discovered that drinking coffee increases the risk of cancer. b. the price of doughnuts (a coffee complement) decreases. c. the price of coffee increases as supply decreases. d. consumer incomes decrease.

c. the price of coffee increases as supply decreases. ▪ The supply curve moves, so equilibrium prices move, but this does not cause a shift in the willingness of a buyer to buy at a given price.

QUIZ: Eva earns $50,000 a year at her current job. She decides that she will quit her job to join an environmental conservation group. The new job pays $20,000 per year. We learn from this choice that Eva must a) value helping the environment by less than $50,000 b) value helping the environment by at least $20,000 c) value helping the environment by less than $30,000 d) value helping the environment by at least $30,000

d) value helping the environment by at least $30,000

Of the following four goods, which has a demand curve probably best approximated by the one shown above? Diabetes medication Apple laptop computers Hamburgers Generic brand bottled water

d. Generic brand bottled water

b. Refer to the above tables. Suppose that North Cantina is producing 2 units of capital goods and 17 units of consumer goods while South Cantina is producing 2 units of capital goods and 21 units of consumer goods. We can conclude that: ▪ North Cantina is fully and efficiently using its resources, but South Cantina is not. ▪ South Cantina is fully and efficiently using its resources, but North Cantina is not. ▪ neither South Cantina nor North Cantina are fully and efficiently using their resources. ▪ both South Cantina and North Cantina are fully and efficiently using their resources.

▪ South Cantina is fully and efficiently using its resources, but North Cantina is not. North Cantina could make up to 24 units of consumer goods with 2 units of capital goods, but is not doing so. On the other hand, South Cantina is sitting on its PPC.

8. Refer to the above table. What is the marginal benefit of crime control from moving from Level One to Level Two? 9. Refer to the above information. Based on marginal cost-benefit analysis, Normal University should undertake Level:

(a) $40,000 (d) Four

11. Refer to Table 1 above. Now say the daily wages of workers rose from $60 to $100 with price (still) of 20. What is the new optimal number of lawns?

(a) 5 Explanation: Using the same marginal logic as above, you could either produce 0 or do 5 lawns, because the rst worker costs you 100 and gives a marginal benet of 100.

16. Assume the per point opportunity cost of increasing your grades (in terms of hours of leisure) is 0.20. This implies that a

(a) 5 point increase in your grades will cost you 1 hour of leisure. Explanation: You can get 1 point by giving up 0.20 (1/5) of an hour of leisure. Multiply all those numbers by 5 to see the answer.

4. Social science research has shown that, on average, children of still-married parents in the US tend to do better in school than children of divorced parents. A politician suggests we should pay people to remain married in order to increase their children's test scores. An economist's first reaction to this proposed policy would be

(b) Worrying that correlation does not equal causation, so this policy could do nothing or even be counterproductive. Explanation: - There could be a third factor (such as the economic/job circumstances of the parents, or the education level of the parents) that is really causing both the divorces and the poor schooling performance.

8. Relative to a person who earns minimum wage ($7.25 per hour in Indiana), a person who earns $30 per hour has

(b) a higher opportunity cost of taking an extra hour off. Explanation: The direct (monetary cost) is $7, and the opportunity cost is $30 since that's the value of the other option, so the total cost is $37.

6. The opportunity cost of an activity includes the value of:

(b) the next-best alternative that must be foregone.

4. If the marginal costs of 1, 2, and 3 hours of talking on the phone are $50, $75, and $105, then the total costs are

(c) $50, $125, and $230 Explanation: The cost of the first hour is 50 both marginal and total. The second hour of talking adds 75 to that, to 125, and the third hour adds 105 more onto that, which brings us to 230.

3. Suppose the most you would be willing to pay for a plane ticket home is $250, but you buy one online for $175. The economic surplus from buying the ticket online is:

(c) $75. Explanation: Surplus = value - total cost, 250-175 = 75.

12. Assume there are only two goods, burgers and sodas. If the price of a burger is $3.20 and the price of a soda is $0.40, what is the opportunity cost of buying a burger in terms of sodas?

(c) 8 sodas Explanation: - It costs $3.20 for the burger, but if you bought all sodas instead with that 3.20 you could have 8 sodas.

14. Using the concept of opportunity costs, which of the following statements is false?

(c) If the value you place on an action you take is higher than you expected it to be, the opportunity cost of this action is reduced. Explanation: This does not aect the value of the best foregone action.

16. Refer to Table 2 above. Say we observe the farmer producing at point D and trading away10 bushels of soybeans for 10 bushels of corn. Mark the incorrect statement. (a) This farmer has a comparative advantage in producing soybeans relative to his trading partner. (b) The trading partner must have an opportunity cost for producing 10 bushels of soybeans of higher than 10 bushels of corn. (c) The trading partner must be more efficient per day at producing bushels of corn than the farmer. (d) At point D, the farmer's marginal utility of a bushel of soybeans must be lower than his marginal utility of a bushel of corn.

(c) The trading partner must be more efficient per day at producing bushels of corn thanthe farmer.

6. John is trying to decide how to divide his time between his job as an amateur photographer, which pays $12/hr for as many hours as he chooses to work, and as a fossil collector, where his earnings depend on both the price of a fossil and how many of them he can find. He makes $4 for every fossil he finds. John is indifferent between the two tasks. The number of fossils he can find depends on how many hours he searches in a day, as shown in the chart below: Does the 4th hour of searching satisfy the cost-benefit principle?

(c) no, since the marginal amount earned is $8 which is less than $12 Explanation: At 3 hours he finds 12 fossils, which at 4 hours he finds 14 total, meaning he finds 2 "marginal" fossils during that 4th hour. That makes him only $8, which is too little compared to the $12 per hour job.

1. The economic surplus of an action is:

(c) the difference between the benefit and the cost of taking an action.

Comparative Advantage Graphical Comparison

- Flatter Curve has a comparative advantage in good on X-Axis - Steeper Curve has the comparative Advantage in good on Y-axis

Unit Elastic Graph

1 = Unit Elastic

c. If Smith and Jones wish to have 14 computers and 40 calculators, then Smith will spend __________ and Jones will spend __________. 1. 1 hour on computers; 40 minutes on computers and 20 minutes on calculators 2. 1 hour on computers; 20 minutes on computers and 40 minutes on calculators 3. 30 minutes on each; 30 minutes on each 4. 45 minutes on computers and 15 on calculators; 1 hour on calculators

1. 1 hour on computers; 40 minutes on computers and 20 minutes on calculators ▪ Smith is going to specialize in computers (since Jones has a lower OC of making calculators). To get the 14 computers, the least cost way is to have Smith start by spending all her time on computers and making 10. Then there are 4 left over for Jones to make, which takes 40 minutes (2/3) of an hour.

d. For any efficient point with more than 10 computers and fewer than 120 calculators, Smith will __________ and Jones will __________. 1. only produce computers; only produce calculators 2. only produce computers; split her time between computers and calculators 3. split her time between computers and calculators; only produce computers 4. only produce calculators; only produce computers

2. only produce computers; split her time between computers and calculators 1. Imagine Smith was spending some time on calculators and Jones was spending time on computers. You could make the same amount (or more) with lower cost by simply switching who is doing what over that time period.

b. When the other island's delegate offers to give you 1,000 fish in exchange for 500 coconuts, you do the following: 1. accept because you will then have a total of 2,500 fish. 2. refuse because the trade would leave you at a level of consumption that is less than what you could produce on your own. 3. accept because the trade will leave you at a level of consumption that is more than what you could produce on your own. 4. counter, offering to give them 400 coconuts in exchange for 1,000 fish.

2. refuse because the trade would leave you at a level of consumption that is less than what you could produce on your own. ▪ Think of where this trade leaves you: If you give away 500 coconuts for 1000 fish, it leaves you with 0 coconuts and 1000 fish. However, instead of giving away 500 coconuts, if you chose not to produce any coconuts and only catch fishes, you could catch 1500 fishes, which is more than 1000 they are giving you. The point (1000,0) is under your PPC and is thus inefficient.

e. Assume both countries specialize exclusively in the product for which they have a comparative advantage. You have agreed to sell them 350 coconuts in exchange for 1300 fish. After the trade your country has a total of _____ coconuts and _____fish. 1. 150; 2800 2. 500; 1300 3. 150; 1300 4. 500; 1500

3. 150; 1300 ▪ Complete specialization means you produce 0 fish domestically and produce 500 coconuts due to your comparative advantage. After you trade away 350 coconuts (so you are left with 150 coconuts), and get 1300 fish.

f. Assume both countries specialize exclusively in the product for which they have a comparative advantage. You have agreed to sell them 350 coconuts in exchange for 1300 fish. After the trade the other country has a total of _____ coconuts and _____fish. 1. 850; 1200 2. 500; 1200 3. 350; 1500 4. 350; 1200

4. 350; 1200 ▪ The same logic as above. Notice now that both you and the other island are above your autarky PPCs. Even though you are worse at producing fish and equally as good at producing coconuts, trade has still benefited your nation.

d. If you offer to give the other island 400 coconuts in exchange for 1500 fish, they do the following: 1. Refuse your offer because it makes them worse off than producing on their own. 2. Accept your offer because it them on their original PPC, and so is efficient. 3. Accept your offer because it gives them 800 coconuts, which is more than they can make on their own. 4. May accept your offer because it allows them to consume a combination of fish and coconuts that would be unattainable on their own.

4. May accept your offer because it allows them to consume a combination of fish and coconuts that would be unattainable on their own. ▪ The other nation's opportunity cost of 1 coconut is 5 fishes. So the OC for 400 coconuts for them is 2000 fishes. However, since you are only requiring them to trade of 1500 of the fishes, they are left with those 500 fishes in excess value and leaving them at a point which is above their PPC. ▪ This won't be possible in autarky, but with trade, they can totally specialize in fishing. This means that they will catch 2500 fishes, and trade 1500 of them off to you for 400 coconuts' leaving them with 400 coconuts and 1000 fish. If they were to produce 400 coconuts themselves, they would have to give up 2000 fishes implying that they would only be able to have 400 coconuts and 500 fish without trade.

c. You have arrived with 300 coconuts to trade. The minimum number of fish you would be willing to accept in exchange for those coconuts. 1. is 1500 fish, because that's how many you can catch without trade. 2. is 1200 fish, because that is just enough to offset the opportunity cost of harvesting the coconuts. 3. is 301 fish, because anything better than a one-for-one trade benefits your island. 4. is 901 fish, because that is just a little more than the opportunity cost of harvesting the coconuts.

4. is 901 fish, because that is just a little more than the opportunity cost of harvesting the coconuts. ▪ Your opportunity cost of harvesting 300 coconuts is 900 fish (since the unit Opportunity Cost is 3, as we calculated above). So if you accepted anything less than this price, you will not be maximizing your derived value since it would be cheaper to just keep the coconuts for yourself by making a different production decision.

3. The following question has 6 subparts. You are the Minister of Trade for a small island country in the South Pacific. While your Production Possibility curve is given on the left hand side, your neighbor island has the following annual PPC (on right side): a. As soon as you see the other island's PPC you realize that: 1. there will be no trade because the other island has the same comparative advantage as yours. 2. there will be no trade because there is no difference in your ability to harvest coconuts. 3. your island will have to specialize in fish if it wants to gain from trade. 4. your island will have to specialize in coconuts if it wants to gain from trade.

4. your island will have to specialize in coconuts if it wants to gain from trade. A couple of ways to do this: ▪ For all understanding all the opportunity costs involved, we will find all the 4 opportunity costs possible: 1. Island 1: OC for 1 more coconut = 1500/500 = 3 Fishes; OC for 1 more fish = 500/1500 = 1/3 coconuts. 2. Island 2: OC for 1 more coconut = 2500/500 = 5 Fishes; OC for 1 more fish = 500/2500 = 1/5 coconuts. ▪ Another way to do this is if you draw these graphs on the same axes, you'll see that the slope of the other country is flatter than yours, meaning they have a comparative advantage in the x good (Fish), which means you must have a comparative advantage in the y good.

Relatively Inelastic Graph

<1 = Relatively Inelastic - very few substitutes Revenue Rules: (Price Increases, then Total Revenue Increases) (Price Decreases, Total Revenu Decreases)

Relatively Elastic Graph

>1 = Relatively Elastic - product has many substitutes, are a luxury, Revenue Rules: (Price Increases, then Total Revenue Decreases) (Price Decreases, Total Revenue Increases)

6. Cathy and Katie can both write computer code or build computer hardware. They both have 10 hours (H) to allocate. They face the following technologies for producing the two goods, where Qcode is the quantity of code produced, etc.: a. Draw Cathy's PPC and Katie's PPC on separate graphs. b. What are Cathy and Katie's opportunity costs for code and hardware? c. If they freely trade services, who will specialize in what? Cathy : Q(code) = 1 x H, Q(hw) = 2 x H Katie: Q(code) = 2 x H, Q(hw) = 2 x H

A) Let us take units of coding produced on the x-axis and units of building hardware on the y-axis. Starting with the corners, to build Cathy's PPC, ▪ If Cathy spends all 10 hours coding, she produces 10 units of code and 0 units of hardware. Thus, we have our first point on the PPC which is (10,0). However, if Cathy devotes all 10 hours to building hardware, she will produce 20 units of hardware, but 0 units of code. Thus, another point on her PPC will be (0,20). Since the opportunity costs are constant (or since it is a linear equation), we get Cathy's PPC by joining the 2 points, as seen below. ▪ Similarly, we can find Katie's PPC by assigning all her 10 hours to either activity. Thus, we get the 2 points on Katie's PPC to be (0,20) and (20,0). Please note that the (x,y) represents (units of coding produced, units of hardware built). B) For the opportunity costs, we know that Cathy has to give up 20 units of hardware to get 10 units of coding done. Thus, her OC for 1 additional unit of coding is 2 units of hardware, whereas her OC for 1 additional unit of hardware built is ½ unit of coding. ▪ Whereas, for Katie, we know that she has to give up 20 units of hardware to get 20 units of coding done. Thus, her OC for 1 additional unit of coding is 1 unit of hardware, whereas her OC for 1 additional unit of hardware built is 1 unit of coding. C) Katie has the lower opportunity cost of producing a unit of code, so she will specialize in coding and Cathy will specialize in hardware.

Chapter KEY-TERMS

Economics is the science of scarcity Scarcity - we have unlimited wants but limited resources Microeconomics - Study of small economic units such as individuals, firms, and industries Trade-Offs - ALL the alternatives that we give up when we make a choice Opportunity Cost - the most desirable alternative given up when we make a choice. Consumer Goods - created for direct consumption Capital Goods - created for indirect consumption, goods used to make consumer goods(oven, blenders, knives) Human Capital - Any skills or knowledge gained by a worker through education and experience The Factors of Production - Land, Labor, Capital, Entrepreneurship Comparative Advantage - The producer with the lowest opportunity cost. Terms of Trade - The agreed-upon conditions that would benefit both countries. (Both countries can benefit from trade if they each have relatively lower opportunity costs) Demand - Demand is the different quantities of goods that consumers are willing and able to buy at different prices. Law of Demand - There is an inverse relationship between price and quantity demanded Supply - Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. Law of Supply - There is a direct (or positive) relationship between price and quantity supplied. Double Shift Rule - If TWO curves shift at the same time, either price or quantity will be indeterminate (ambiguous). Price Ceiling - The maximum legal price a seller can charge for a product. If below the equilibrium price, this creates a shortage, if above equilibrium there is no change. Price Floor - Minimum legal price a seller can sell a product. If the price floor is above the equilibrium price then there is a surplus Surplus = Qd<Qs Shortage = Qd>Qs Economic Surplus - the difference between the benefit and the cost of taking an action. Value of $36 - Opportunity cost of $35 = $1 Economic Surplus Total Economic Cost - Direct costs + opportunity costs Price elasticity of demand is unitary, moving price in any direction will lead to a decrease in revenue The elasticity of Demand - Measures how sensitive quantity demanded is to a change in price - The more substitutes that a product has, and the more sensitive it is to a change in price, the greater the elasticity of demand coefficient is. Marginal Utility - There is often something extra satisfying about obtaining or using more than one of a certain item, whether that item is a can of soda, a pair of jeans, or an airline ticket. The extra satisfaction is an economic term called marginal utility. 5 Key Economic Assumptions : 1. Society has unlimited wants and limited resources (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off) 3. Everyone responds to incentives and acts in their own "self-interest". 4. Everyone makes decisions by comparing the marginal cost and marginal benefits of every choice. 5. Real-life situations can be explained and analyzed through simplified models and graphs.

Complementary Goods

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely). - A fall in the price of one complement will lead to an increase in demand for the other. A shift of demand to the right in the other one. - An increase in demand for one will cause the increase in demand for the other. (Hot doges and Soda), (Steak and A1)

2. What is the slope of the line shown in question 1?

Rise of -10/3, run of 10, so the slope is −10/3/10 = − 1/3. Use Y2 - Y1 / X2 - X1

1. Draw a (simple) graph of the question Q = 10 − 3 ∗ P with P on the vertical axis and Q on the horizontal axis.

The easiest way to do this is notice that it's the equation of a line and and the two intercepts First by setting P = 0 (giving Q = 10), and second by setting Q = 0 and solving for P, giving P = 10/3 = 3 1/3 .

Suppliers produce two goods, cheese and butter. Assume that there is no cost to switch resources from cheese production to butter production and vice versa. Suppose the demand for butter increases. What do we expect to happen to the equilibrium in the market for cheese? The price will go down and the quantity will drop. The price will go up and the quantity will drop. The price will go up and the quantity will rise. The price will go down and the quantity will rise.

The price will go up and the quantity will drop.

Which of the following will increase the demand for higher education (e.g. college)? The population size of the next generation of students is larger. More educational institutions are built. The future expected income gains from graduating from university decrease. Tuition fees fall due to government subsidies.

Tuition fees fall due to government subsidies.

Which of the following cases illustrates a situation where demand is least price elastic? Gasoline prices rise from $2 per gallon to $2.5 per gallon and total sales revenue decreases from $10,000 to $8,000. Milk prices fall from $1 per gallon to $0.8 per gallon and total sales revenues increases from $1,000 to $1,200. Prices for college football tickets fall by 20% and the total sales revenues have no change. Wage rates for clerical workers increase by 20% and the number of workers firms want to hire decreases by 10%.

Wage rates for clerical workers increase by 20% and the number of workers firms want to hire decreases by 10%.

The state of Indiana announced that the minimum wage would be $15.00. Until yesterday, the market wage was $12.87. What is the economic outcome of this policy you cannot expect from basic S+D analysis? Wages will increase. Restaurants will fire some servers. More job-seekers will enter the market. Working conditions will improve.

Working conditions will improve.

7. Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. (a) The opportunity cost of attending State College is (b) Larry maximizes his surplus by attending

a) $15,000 Explanation: - We first need to calculate the values of each of the colleges. I'm going to calculate the "net value" for each, taking its total value and subtracting the direct costs. We do this by taking the value Larry has of attending and subtracting the cost he'll face. For Elite U, he values it at 60k and must spend 50k, giving him a value of 10k. For State college, he values it at 40k and must pay 20k (30 - 10 for the scholarship), giving him a value of 20k. For NoName, he values it at 15k and pays 0, giving him a total value of 15k. - Then, the opportunity cost of attending State College is the value of the best foregone option. The best forgone option is NoName at 15k value. b) State College, because the difference between the benefit and cost is greatest there Explanation: We know it is State College since his economic value is 20k and his economic surplus is then 20k - 15k = 5k.

10. You paid $30 for a ticket (which is non-refundable) to see JAM, a local rock band, in concert on Saturday. (Assume that you would not have been willing to pay any more than $35 for this concert.) Your boss called and she is looking for someone to cover a shift on Saturday at the same time as your concert. You will have to work 4 hours and she will pay you $9/hr. (a) What is the opportunity cost of going to the concert? (b) What is your economic surplus if you go to work on Saturday? (c) Should you go to the concert instead of working Saturday?

a) $36 Explanation: Simply the value of the work that you have to forgo. b) $1 Explanation: Value of 36 - the opportunity cost of 35, which is your value of attending the concert. This is (almost) a bit of a trick question: the $30 you paid to get the ticket is a sunk cost, but your value of attending the concert is $35, so that is what you use in your calculation. c) No, your benefit is less than your cost Explanation: Going to work has positive surplus so you should do that.

Market experts observe a decrease in the quantity of aspirin demanded at all prices. Which of the following is the best explanation to explain this phenomenon? a) Aspirin are normal goods and the income of consumers has decreased. b) People have become more informed about the positive impact of aspirin on their health. c) The inputs in the aspirin production process are becoming more expensive. d) A new scientific study reveals that consumption of one aspirin per day reduces the risk of heart attacks by 10%.

a) Aspirin are normal goods and the income of consumers has decreased.

15. The next two questions refer to the following chart. Assume the chart represents combinations of goods that are feasible for an economy at a given point in time: (a) What can we say about the opportunity cost of increasing Good X in this economy? (That is, if you want to keep accumulating X more and more, what happens to the amount of Y you have to give up?) (b) Using the table shown above, what is the opportunity cost of good X per unit of good Y when changing the production of Y from 1000 to 1100?

a) It is increasing Explanation: To move from 970->980 units of good X, you have to give up 30 units of good Y; then to move from 980->990, you have to give up 50; Finally, from 990-> 1000 X requires giving up 100 units of good Y. b) 10/100 Explanation: I give up 10 units of X, but get 100 units of Y, so the cost of X in terms of Y is 10/100

7. Sean studied 5 hours for his first Economics test and his test score was 85; 6 hours for his second Economics test and scored 90, and 7 hours for his third Economics test and scored 95. He also studied 5 hours for his first Math test and his test score was 68; 6 hours for his second Math test and scored 78, and 7 hours for his third Math test and scored 88. Answer the next three questions based on this information and the assumption that future outcomes will follow exactly what has happened so far. (a) Decision making on future study amounts should be based on (b) Assume Sean is trying to maximize his total points earned regardless of class. If Sean has already spent 5 hours studying Economics and 5 hours studying Math, he should spend the next hour

a) choosing the next hour of study time based on the highest marginal benefit. Explanation: The marginal cost-benefit principle says we make choices based on marginal costs and benefits, not averages b) Studying only Math Explanation: The marginal benefit of studying math is 10 points, whereas it's only 5 points for economics, so you want to spend that whole hour on math.

QUIZ: Refer to the table above. According to the data, Dana has a comparative advantage in a) delivering pizza b) neither the production of pizza nor the delivering of pizza c) the production of pizza d) both the production of and the delivering of pizza.

a) delivering pizza

QUIZ: The opportunity cost of an activity is the value of a) the next-best alternative that must be foregone. b) the chosen activity minus the value of the next-best alternative. c) all of the alternatives that must be forgone. d) the least-best alternative that must be foregone.

a) the next-best alternative that must be foregone.

15. Consider the market for tickets to an upcoming Taylor Swift concert in Bloomington. For the following events, indicate whether it will induce a shift in the demand curve or a movement along the demand curve: a. Ticketmaster decides to move to a new, larger, venue and so can release more tickets. b. Taylor makes a controversial statement that leads to fans protesting c. A recession hits Bloomington, lowering everyone's incomes. d. Another major artist announces a concert in Bloomington within a few days of Taylor Swift's. e. The stadium announces that tickets will have their price reduced by 10%

a. A movement of the supply curve but does not affect anyone's willingness to (try to) buy at a given price, so this leads to movement along the demand curve. b. At any given price, fewer people will want to see the concert: a shift of the demand curve. c. At any given price, fewer people can afford to see the concert: a shift of the demand curve. d. Assuming this other concert is either a substitute for Taylor's, this will lead to fewer people willing to pay a given price: a shift of the demand curve. (If it were a complement, more people would want to buy at a given price.) e. The supplier is moving the supply curve, but this does not change demand at a given price, leading to movement along the demand curve.

19. The model of S&D tells us that in equilibrium, making it illegal for individuals under 21 years of age to buy alcoholic beverages, as well as making it illegal to sell to those individuals, would a. decrease price and decrease quantity purchased. b. decrease quantity purchased and have an indeterminate effect on price. c. raise price and decrease quantity purchased. d. raise price and have an indeterminate effect on quantity purchased.

a. decrease price and decrease quantity purchased. ▪ This is a leftward movement of the demand curve, since there are fewer people demanding at any given price. This leads to a decrease in quantity as well as a decrease in price.

6. Pepsi One is a close substitute for Diet Coke. When Pepsi introduced Pepsi One, the price elasticity of demand for Diet Coke ______ and Coke's ability to raise revenues through price increases _________. a. increased; was reduced b. increased; increased c. decreased; was reduced d. had no effect; was reduced

a. increased; was reduced ▪ Consumers may be willing to switch to Pepsi One now if the price of Diet Coke rises, meaning the elasticity of demand is now higher. This makes it more difficult from Coke to increase revenues through price hikes, since they will lose more customers.

The price elasticity of demand for life insurance has been estimated to be 0.75. This implies, acting as a group insurance companies could increase their revenues by a. increasing rates charged for insurance policies. b. decreasing rates charged for insurance policies. c. increasing the supply of insurance policies.

a. increasing rates charged for insurance policies. If insurance companies all raised their prices by 10% (say), only 7.5% of customers would stop buying, leading to an increase in total revenues. So, 10 people, paying price of 10 (10 * 10 = $100) 10 people, paying price of 11, we lose 7.5% of our 10 people when we increase the price, due to our given elasticity. Now, 10 * 0.075 = 9.25 people * 11 = 101.75 Increase in revenue by $1.75

7. The price elasticity of demand for life insurance has been estimated to be 0.75. This implies, acting as a group insurance companies could increase their revenues by a. increasing rates charged for insurance policies. b. decreasing rates charged for insurance policies. c. increasing the supply of insurance policies.

a. increasing rates charged for insurance policies. ▪ If insurance companies all raised their prices by 10% (say), only 7.5% of customers would stop buying, leading to an increase in total revenues

QUIZ: John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $8/hr for as many hours as he chooses to work, and cleaning windows for the businesses downtown. John wants to make as much money as possible. The number of windows he can clean depends on how many hours he cleans a day, as shown in the table below: At what price per window will Jon end up cleaning exactly 4 windows? a) $5.00 b) $10.00 c) $2.00 d) Any price

b) $10.00

QUIZ: Errol is thinking about going on a ski trip with friends next weekend. Transportation costs plus a lift ticket cost $70 altogether, but he will have to take a weekend off work, which would pay him $120. The opportunity cost of the ski trip is a) $70 plus the benefit of skiing. b) $120 c) $70 d) $190

b) $120

Answer the next two questions on the basis of the following production possibilities tables for two coffee shops, A and B: in the figure Refer to the above tables. If Coffee Shop A is producing at production alternative B, the opportunity cost of the 21st unit of coffee will be: a) 1 / 4 of a unit of muffins. b) 1 / 8 of a unit of muffins. c) 8 units of muffins. d) 10 units of muffins.

b) 1 / 8 of a unit of muffins.

Suppose you are the owner of a small island with the following annual PPC: in figure You would like to trade with a neighboring island that has the following annual PPC: in figure As soon as you see the other island's PPC you realize a) there will be no trade because the other island has the same comparative advantage as yours. b) The neighboring island will have to specialize in fish if it wants to gain from trade. c) there will be no trade because there is no difference in your ability to harvest coconuts. d) your island will have to specialize in fish if it wants to gain from trade.

b) The neighboring island will have to specialize in fish if it wants to gain from trade.

QUIZ: Evolutionary biologists study the biological factors leading to the success or failure of one species versus another in the evolutionary study for survival. Mark the most accurate statement about the use of the scarcity principle from economics in evolutionary biology. a) The scarcity principle is irrelevant since natural systems evolve to have enough resources to supply the needs of all the life in the system. b) The scarcity principle applies both to individual animals making choices as well as groups of animals using up resources. c) The scarcity principle is irrelevant to evolutionary biology since animals don't use money or prices to make decisions. d) The scarcity principle applies to some animals who are intelligent enough to "barter" food, shelter, etc.

b) The scarcity principle applies both to individual animals making choices as well as groups of animals using up resources.

Refer to the setup from the previous question. When the neighboring island offers to give you 900 fish in exchange for 400 coconuts, you a) accept because you will then have a total of 2,400 fish. b) refuse because the trade would leave you at a level of consumption that is less than what you could produce on your own. c) accept because the trade will leave you at a level of consumption that is more than what you could produce on your own. d) counter offer, offering to give them 100 fish in exchange for 300 coconuts.

b) refuse because the trade would leave you at a level of consumption that is less than what you could produce on your own.

7. What might cause a supply curve to shift upwards today? a. An increase in the product's own price. b. An expectation that the product's price will fall in the future. c. An expectation that the product's price will rise in the future. d. A decrease in the price of one of the inputs to making the product.

b. An expectation that the product's price will fall in the future. ▪ If the product's price will fall in the future, the producer who is currently marginal (the producer with marginal cost equal to the market price) will begin finding something else to produce, and the quantity supplied at any given price will fall.

A leftward shift in the supply curve of apples would result from: a. An increase in the demand for apple cider b. An increase in the price of farm machinery c. A decrease in the price of apples d. An increase in consumers' incomes

b. An increase in the price of farm machinery

16. Which of the following statements correctly represents a change in demand? a. Recent increases in the supply of IBM stock have led to a reduction in the price of IBM stock leading to an increase in demand for IBM stock. b. Because of recent decreases in the price of home computers, consumers have increased their demand for word processing software. c. The recent 5% increase in the price of gasoline has led to a 1% decrease in demand for gasoline. d. All of the above statements represent a change in demand.

b. Because of recent decreases in the price of home computers, consumers have increased their demand for word processing software. ▪ The word "Demand" by itself corresponds to our demand curve: this is the only phenomenon that is claimed to have shifted a demand curve via changes in the prices of complements.

21.Assume steel is used in the production of cars and public transportation is viewed as an alternative to driving by consumers. What will happen to the equilibrium price and quantity of new cars if the price of steel falls and simultaneously the price of public transportation falls? a. The price will rise and the quantity will decrease. b. The price will fall and the quantity may increase, decrease, or stay the same depending on the magnitude of the shifts. c. The price change may increase, decrease, or stay the same depending on the magnitude of the shifts. The quantity would increase. d. Both the price and the quantity may increase, decrease, or stay the same depending on the magnitude of the shifts. e. The price change may increase, decrease, or stay the same depending on the magnitude of the shifts. The quantity would decrease.

b. The price will fall and the quantity may increase, decrease, or stay the same depending on the magnitude of the shifts. ▪ Draw the figure. If the price of steel falls, the supply curve will shift out, leading to higher equilibrium quantity and lower equilibrium price. On the other hand, if the price of a substitute falls, demand falls, leading to a lower eqm. price and a lower equilibrium quantity. Putting these together, both effects reduce price but the equilibrium quantity could go either way.

The price elasticity of demand measures a. How sensitive the quantity demanded is to changes in demand b. The responsiveness of the quantity demanded to changes in price c. How often the price of a good changes d. The slope of a budget curve

b. The responsiveness of the quantity demanded to changes in price

13. The economic significance of successful ticket scalping (re-sellers sell tickets at higher than official prices) at baseball games, and the possibility of seller profit, is that: a. There is an oversupply of tickets and ticket prices should be lowered b. There is an excess demand for tickets and ticket prices should be raised c. Morality has no place in professional games d. There is an oversupply of tickets and ticket prices should be raised.

b. There is an excess demand for tickets and ticket prices should be raised ▪ A reselling market arises when there is excess demand because the price is too low, as there exist buyers whose reservation value is above the market price.

3. Refer to the figure below. Now suppose that the government imposes a price ceiling of $40. What is the most likely result of this price ceiling? a. Many sellers would go out of business because $40 is above the equilibrium. b. There would be no change in the price. c. The market would reach a new equilibrium at a price of $40. d. An underground, or black, market would emerge where this product would be sold at a price above $40.

b. There would be no change in the price. ▪ The equilibrium price is already $35, so no trades would be affected.

11. Refer to the figure above. Assume the market is originally at point W. Movement to point Y is a combination of: a. an increase in quantity supplied and an increase in demand. b. an increase in supply and an increase in demand. c. an increase in supply and an increase in the equilibrium quantity demanded. d. a decrease in supply and an increase in quantity demanded.

b. an increase in supply and an increase in demand. c. an increase in supply and an increase in the equilibrium quantity demanded. i. The demand curve does not move, so "demand" stays constant, but the equilibrium quantity demanded increases. The supply curve, on the other hand, does move.

8. An increase in the demand for GM automobiles results in: a. a lower equilibrium price for GM automobiles. b. an increase in the quantity supplied of GM automobiles. c. an increase in the supply of GM automobiles. d. a lower equilibrium quantity of GM automobiles.

b. an increase in the quantity supplied of GM automobiles. ▪ The supply curve does not move, but the equilibrium quantity sold will increase (along with the equilibrium price) as the demand curve shifts outwards. Thus, there is an increase in the quantity supplied and the equilibrium price for GM automobiles, due to an increase in the demand for it.

4. Assume the elasticity of demand for CDs is 2. Given only this information, one could estimate that a 20% increase in the price of CDs (caused by higher taxes on firms producing CDs) would lead to a. increased revenues from CD sales and a reduction in quantity sold of 40%. b. decreased revenues from CD sales and a reduction in quantity sold of 40%. c. increased revenues from CD sales and a reduction in quantity sold of 100%. d. decreased revenues from CD sales and a reduction in quantity sold of 100%.

b. decreased revenues from CD sales and a reduction in quantity sold of 40%. - elasticity = (% Q) / (% P) ▪ 2=(% Q)/20%, therefore % Q=40% ▪ You get 20% more per unit sold, but lose 40% of your units, so your total revenue will decrease

1. Shelly purchases a leather purse for $400. If she is rational, one can infer that a. she paid too much. b. her reservation price was at least $400. c. her reservation price was exactly $400. d. her reservation price was less than $400

b. her reservation price was at least $400. ▪ A consumer's reservation price is the maximum you would pay to get a good.

8. If the price of muffins rises from $1 to $1.5, and the quantity demanded of muffins drops from 9 to 8, then the demand for muffins is: a. elastic. b. inelastic. c. unitary elastic. d. perfectly elastic.

b. inelastic. ▪ Elasticity = (% change in Q)/(% change in P) ▪ The % change in P is 50%, with an associated % change in Q of approximate 11% ▪ So E = 11/50 = 0.22, which is less than 1. ▪ So demand is inelastic.

QUIZ: Suppose that the Surgeon General announces that eating fruit substantially increases tooth decay. We would think this might _______ consumer's desire for fruit because it has changed the ______ of eating fruit. a) decrease; marginal cost b) increase; marginal cost c) decrease; marginal benefit d) increase; marginal benefit

c) decrease; marginal benefit

Demand for coffee last Monday is shown in bold [labeled D(Monday)]. in the figure On Tuesday the news featured a story that a new machine was developed that could eventually increase the output of coffee producers in South America. Choose the most likely response on Tuesday to this outcome. a) the demand function remains at D(Monday), but the quantity demanded decreases. b) demand shifts to D(B) in anticipation of future price decreases. c) demand shifts to D(A) in anticipation of future price decreases. d) there would be no change in either the demand function or the quantity demanded because not enough time had passed for the effects of this new technology to be felt.

c) demand shifts to D(A) in anticipation of future price decreases.

Tyrone purchases a new laptop computer for $1000. We can infer that a) he would be willing to pay exactly $1000 for this laptop and no more. b) his marginal cost to produce a laptop himself was below $1000. c) his reservation price for the laptop was at least $1000. d) money and laptops are complementary goods for him.

c) his reservation price for the laptop was at least $1000.

QUIZ: A Production Possibilities Curve is sloped downwards due to a) the fact that the dollar prices of all goods are positive b) comparative advantage dictating specialization c) the scarcity principle d) the abstractions required for an economic model

c) the scarcity principle

A 15 percent increase in the quantity of pizza demand results from a 10 percent decline in its price. The price elasticity of demand for pizza is

c. 1.5

8. If Jim's opportunity cost per unit of making 1 cookie is 3 brownies, and Joe's opportunity cost per unit of making cookies is 6 brownies, which of the following statements is correct regarding a trading price for cookies (Pc)? a. 1/3 brownies < Pc < 3 brownies b. 1/6 brownies < Pc < 6 brownies c. 3 brownies < Pc < 6 brownies d. 1/6 brownies < Pc <1/3 brownies

c. 3 brownies < Pc < 6 brownies Due to the varied OCs, Jim will specialize in making cookies whereas Joe will make brownies. Now since Jim has to give up 3 brownies to make 1 additional cookie, the minimum he'll want is 3 brownies. For Joe, he can at max give up 6 brownies for 1 additional unit of cookies, thus the maximum traded brownies is capped at 6. Therefore, the market/ trading price of cookies will be between 3-6 brownies.

Which of the following will not cause the demand for muffins to change? a. A change in the price of a close substitute product, for example, bagel b. An increase in consumers' incomes c. A change in the price of muffins d. A change in consumer's tastes for muffins

c. A change in the price of muffins

Refer to the above diagram. A price of $60 in this market will result in: a. Equilibrium b. A shortage of 100 units c. A surplus of 100 units d. A change in consumer's tastes for muffins

c. A surplus of 100 units

4. In a market where the government has fixed the price below the equilibrium price, one might expect: a. quantity demanded to equal quantity supplied. b. excess supply. c. An illegal market to develop as individuals try to take advantage of unexploited opportunities. d. quantity supplied to surpass quantity demanded.

c. An illegal market to develop as individuals try to take advantage of unexploited opportunities. ▪ Below the equilibrium price, demand exceeds supply, so there would be people trying to get access to the good at that price by any means necessary.

7. If the opportunity cost of producing cars in Brazil is 50 computers per car and the opportunity cost of producing cars in the U.S. is 100 computers per car, a feasible trade between Brazil and the U.S. is a. Brazil selling computers to the U.S. for 70 cars per computer. b. Brazil selling computers to the U.S. for 35 cars per computer. c. Brazil selling cars to the U.S. for 80 computers per car. d. Brazil selling cars to the U.S. for 15 computers per car.

c. Brazil selling cars to the U.S. for 80 computers per car. We know Brazil will specialize in cars (lower OC), and so they will want at least 50 computers per car. The US will specialize in computers and refuse to give more than 100 computers for a car. The only one that works here is 80.

20. Suppose butter and potatoes are dietary complements. Suppose the demand for potatoes increases due to a change in perception regarding their positive dietary characteristics. Which of the following is expected from a S&D analysis of the butter market? a. Price increase, Qd decrease b. Price decrease, Qd decrease c. Price increase, Qd increase d. Price decrease, Qd increase

c. Price increase, Qd increase ▪ Demand for potatoes goes up, supply of potatoes fixed, so people eat more potatoes. Eating more potatoes, their reservation price of butter goes up, which leads to a rightward shift of the demand curve for butter. A rightward shift of demand by itself increases price and increases quantity demanded.

12.Which of the following statements about price elasticity of demand is true? a. The longer the time period considered, the lower the price elasticity of demand is expected to be. b. Medical necessities such as insulin will likely have a relatively high price elasticity of demand. c. The price elasticity of demand for the Seven Up soda at Walmart is likely to be larger than the price elasticity of demand for all brands of soda in Bloomington. d. If there is an increase in the sales tax on a product, the quantity demanded will not change if price elasticity is 1.

c. The price elasticity of demand for the Seven Up soda at Walmart is likely to be larger than the price elasticity of demand for all brands of soda in Bloomington. - If the price for seven up in Walmart went up 50% then customers would most likely substitute for other soda. But, if all prices of soda went up in Bloomington by 50% then customers would be much more likely to accept the new prices and buy soda because they cannot substitute cheaper.

13.Which of the following cases illustrates a situation where demand is most price elastic? a. Gasoline prices rise from $2 per gallon to $2.5 per gallon and total sales revenue increases from $10,000 to $12,000. b. Milk prices fall from $1 per gallon to $0.8 per gallon and total sales revenue falls from $10,000 to $9,000 c. Wage rates for clerical workers increases by 10% and the number of workers hired increases by 20%. d. Prices for college football tickets fall by 20% and the number of tickets sold increases by 30%.

c. Wage rates for clerical workers increases by 10% and the number of workers hired increases by 20%. a - price goes up 25%, and revenue went up by 20% - inelastic b - price goes down 20% and sales go down 10% - inelastic c - 0.2 / 0.1 = 2 elasticity d - 0.30 / 0.20 = 1.5 elasticity

5. Refer to the figure below that shows the demand for coffee on a particular day (Monday). On Tuesday the news featured a story that a storm wiped out the entire coffee crop in Brazil. On Wednesday, the , the following change was observed in the demand for coffee: a. the demand function remained at D(Monday), but the quantity demanded increased. b. demand shifted to D(A) in anticipation of future price increases. c. demand shifted to D(B) in anticipation of future price increases. d. there would be no change in either the demand function or the quantity demanded because not enough time had passed for the storm's effects to be felt.

c. demand shifted to D(B) in anticipation of future price increases. ▪ Since the coffee plant destruction implies a shift in the supply of coffee leftward with a great proportion, the equilibrium price of coffee is expected to increase in the future due to a shortage. Thus, in anticipation of the future prices of coffee increasing, people will stockpile coffee. A future price increase would lead to stockpiling behavior today, where I would buy extra at the current price to avoid the future price increase. This would lead to an outwards shift of the demand curve. The important point is that consumers anticipating future price changes can affect their reservation price today, which shifts the demand curve.

9. Demand will tend to be less price-elastic for a product which: a. all consumers have a very similar reservation value for b. is not a necessity. c. has very few substitutes. d. the time period being considered is very long.

c. has very few substitutes. ▪ Just to mention why answer (d) is incorrect: over a longer period of time, it's easier to find substitutes. If I raised the price of your favorite sneakers, you might still buy them as your next pair of shoes, but over a longer timeframe you might spend time looking for other ones you like and stop buying them. So we typically think demand is more elastic over a longer timeframe than a shorter time frame.

9. If both supply and demand increase simultaneously, the new equilibrium price is ___________ and the new equilibrium quantity is _________________. a. lower; lower b. lower; indeterminate c. indeterminate; higher d. higher; indeterminate

c. indeterminate; higher ▪ If both curves shift outwards, their intersection can move either up or down depending on the relative size of the shifts. However, we know the intersection (equilibrium. quantity sold) will move to the right.

2. Jessica's marginal cost for producing a pitcher of lemonade is $0.25. Therefore, $0.25 can also be called her a. marginal revenue. b. equilibrium price. c. reservation price. d. Producer surplus.

c. reservation price. ▪ For a producer, receiving any payment above your marginal cost would make you better off, so your marginal cost is also your reservation price.

4. Suppose the U.S. can produce computers at an opportunity cost of 0.1 car for each computer, whereas Mexico can produce computers at an opportunity cost of 0.2 cars for each computer. Using only this information, a feasible trade would have the U.S.: a. specialize in cars and trade for computers at a price greater than 0.2 computers per car. b. specialize in cars and trade for computers at a price greater than 0.1 computers per car. c. specialize in computers and trade for cars at a price greater than 0.1 cars per computer. d. specialize in computers and trade for cars at a price greater than 0.2 cars per computer.

c. specialize in computers and trade for cars at a price greater than 0.1 cars per computer. i. First of all, you know the US has a lower opportunity cost of making computers than Mexico, and so will specialize in computers. Additionally, the US would accept any trade where they make a computer and sell it for more than their opportunity cost (0.1), since that will make them better off.

11.Suppose the price of pencils falls by 20%, we can say that demand is elastic if: a. the quantity demanded increases by 15%. b. total expenditures on pencils fall by 15%. c. total expenditures on pencils rise by 15%. d. total expenditures on pencils fall by 25%.

c. total expenditures on pencils rise by 15%.

2. Having a comparative advantage in a particular task means that: a. you are better at it than other people. b. you give up more to accomplish that task than others (give up). c. you give up less to accomplish that task than others (give up). d. you have specialized in that task, while others have not.

c. you give up less to accomplish that task than others (give up). 1. Comparative advantage is about your opportunity cost relative to other people's opportunity cost to do the same thing

Refer to the graph above. The market equilibrium price is ___ and the market equilibrium quantity is ____. a) 20; 15 b) 25; 45 c) 35; 35 d) 35; 20

d) 35; 20

Suppose Canada can produce masks at an opportunity cost of 5 hand sanitizers for each mask that is produced. Suppose Italy can produce masks at an opportunity cost of 2 hand sanitizers for each mask. Using only this information, a feasible terms of trade between the Canada and Italy would be: a) Canada ships masks to Italy at a price of 1/5 hand sanitizer for each mask. b) Canada ships hand sanitizers to Italy at a price of 3 masks for each hand sanitizer. c) Canada ships masks to Italy at a price of 2 hand sanitizers for each mask. d) Canada ships hand sanitizers to Italy at a price of 1/3 mask for each hand sanitizer.

d) Canada ships hand sanitizers to Italy at a price of 1/3 mask for each hand sanitizer.

(Refer again to the table) Suppose that Coffee Shop A is producing 4 units of muffins and 34 units of coffee while Coffee Shop B is producing 4 units of muffins and 42 units of coffee. We can conclude that: a) both Coffee Shop A and B are fully and efficiently using their resources. b) neither Coffee Shop A nor B are fully and efficiently using their resources. c) Coffee Shop A is fully and efficiently using its resources, but Coffee Shop B is not. d) Coffee Shop B is fully and efficiently using its resources, Coffee Shop A is not.

d) Coffee Shop B is fully and efficiently using its resources, Coffee Shop A is not.

QUIZ: A new study is published describing a survey taken at major universities showing that students who study more hours per week also have higher average grades. This is an example of a) neither correlation nor causation b) correlation that could not be causation c) causation that could be a correlation d) correlation that could be causation

d) correlation that could be causation

QUIZ: Kofia had three choices for how to spend her time: work two hours, or watch a football game, or sleeping. She decides to work for two hours. Her hourly wage is $10. Kofia's opportunity cost of working is a) $20 minus the greatest value of the enjoyments she would have received from watching the football game or the enjoyment she would have received from sleeping for two hour b) the value of the enjoyment she would have received from watching the football game plus the value of the enjoyment she would have received from sleeping for two hours. c) $20 plus the value of the enjoyment she would have received from watching the football game plus the value of the enjoyment she would have received from sleeping for two hours. d) the greatest value of the enjoyments she would have received from watching the football game or the enjoyments he would have received from sleeping for two hours.

d) the greatest value of the enjoyments she would have received from watching the football game or the enjoyments he would have received from sleeping for two hours.

10.Assume the equilibrium price and quantity demanded for fish is $8 per pound and 1,000 pounds respectively. If supply decreases, which of the following new equilibrium price-quantity pairs would be consistent with an elastic demand for fish? a. $9 and 900 b. $10 and 850 c. $12 and 750 d. $15 and 500

d. $15 and 500 ▪ The simplest way to get this answer is to look at how revenue changed: since the price goes up, if demand were elastic, revenue would fall. Total revenue starts at $8,000, and for the answers: (a) 8,800, (b) 8,500, (c) 9.000, (d) 7,500

17. In the 1990's the demand for cigarettes fell. This statement implies that: a. at each possible price, consumers were willing to buy less compared to before the 1990's. b. the demand curve for cigarettes shifted downward during the 1990's. c. during the 1990's, buyers' reservation prices for cigarettes decreased. d. All of the above would be true statements.

d. All of the above would be true statements. ▪ All 3 of the first statements are re-statements of a downward shift of the demand curve.

5. Suppose Florida can produce grapefruit at an opportunity cost of 5 oranges for each grapefruit that is produced. Suppose Arizona can produce grapefruit at an opportunity cost of 2 oranges for each grapefruit. Using only this information, the feasible terms of trade between the Florida and Arizona would be: a. Florida ships grapefruit to Arizona at a price of 1/5 orange for each grapefruit. b. Florida ships grapefruit to Arizona at a price of 2 oranges for each grapefruit. c. Florida ships oranges to Arizona at a price of 3 grapefruits for each orange. d. Florida ships oranges to Arizona at a price of 1/3 grapefruit for each orange.

d. Florida ships oranges to Arizona at a price of 1/3 grapefruit for each orange. ▪ Arizona has the lower opportunity cost of producing grapefruit and so will specialize in grapefruit, so Florida will specialize in oranges. Since Florida is specializing in oranges it will be exporting them, and will be willing to trade an orange for anything above the opportunity cost of a single orange, which is 1/5 of a grapefruit.

5. Chris had been charging a dollar a pound for potatoes. When Chris lowered the price to 90 cents, total revenue fell. When Chris raised the price to $1.10, total revenue also fell. Why? a. $1.00 is the equilibrium price for potatoes. b. At 90 cents, there is excess demand for potatoes. c. $1.10 is more than Chris's customers' reservation prices. d. Price elasticity of demand is unitary at $1.00.

d. Price elasticity of demand is unitary at $1.00. ▪ If price elasticity of demand is unitary, moving price in any direction will lead to a decrease in revenue

1. If Scout has an absolute advantage over Dill, then: a. Scout has more money than Dill. b. the problem of scarcity applies to Dill but not to Scout. c. the problem of scarcity applies to Scout, but not to Dill. d. Scout can accomplish more in a given period of time than can Dill.

d. Scout can accomplish more in a given period of time than can Dill.

12.The US Govt. banned cigarette ads on TV and radio after January 1971. After the ban took effect you would expect that: a. The price of magazine ads for cigarettes alone would fall b. The price of magazine ads for all goods would fall c. The price of magazine ads for cigarettes alone would increase d. The price of magazine ads for all goods would increase.

d. The price of magazine ads for all goods would increase. ▪ First of all, we are interested in the market for all magazine ads, since we are trying to see what happens to the price in that market. A ban on cigarette ads will reduce demand, since there are fewer firms wanting to post advertisements in magazines. On the other hand, supply is left unchanged, since the number of magazines (and pages for ads in magazines) is unaffected by the law. So an increase in demand and a fixed supply curve will lead to an increase in price.

18.Market experts observe an increase in the quantity of aspirin demanded at all prices. Which of the following is the best explanation to explain this phenomenon? a. Aspirin are normal goods and the income of consumers has decreased. b. The technology used to produce aspirin has improved. c. People have become more concerned about the negative impact of aspirin on their health. d. The prices of the inputs used in producing aspirin have decreased. e. A new scientific study reveals that consumption of one aspirin per day reduces the risk of heart attacks by 10%.

d. The prices of the inputs used in producing aspirin have decreased. e. A new scientific study reveals that consumption of one aspirin per day reduces the risk of heart attacks by 10%. ▪ (a) and (c) would lead to a decrease in demand, while (b) and (d) would lead to an increase in supply. Only (e) is associated with people wanting more at the same price.

10.Suppose that the equilibrium price of pickles falls while the equilibrium quantity rises. The most consistent explanation for these observations is: a. a decrease in demand for pickles with no change in supply. b. an increase in demand for pickles with no change in supply. c. a decrease in the supply of pickles and a decrease in the demand for pickles. d. an increase in the supply of pickles with no change in demand.

d. an increase in the supply of pickles with no change in demand. ▪ Let us go through this case by case. If the demand falls, and supply remains constant, the equilibrium Q and the equilibrium P both increases. Thus, this isn't the right option. If the demand increases, and supply remains constant, the equilibrium Q and the equilibrium P both increases. Thus, this isn't the right option. If the supply falls, and demand remains constant, the equilibrium Q decreases whereas the equilibrium P increases. Thus, this isn't the right option either. Lastly, if the supply increases, and demand remains constant, the equilibrium Q rises whereas the equilibrium P decreases. Thus, this is the right answer, as drawn below.

22. "As the price of personal computers continues to fall, demand increases." This headline is inaccurate because a. a change in the price of personal computers shifts the demand curve. b. a change in the price of personal computers shifts the supply curve. c. the causality in the statement is backwards: increased demand leads to lower prices. d. falling prices for personal computers increases quantity demanded, not demand.

d. falling prices for personal computers increases quantity demanded, not demand. ▪ Again, "demand" by itself is ambiguous, so we use it as referring to the demand curve, not equilibrium quantity demanded.

23. Suppose one knows two facts: first, the market for prescription drugs experiences chronic shortages and second, the government sets the price for prescription drugs. One can conclude that the a. government has set the price too high. b. government has set the price above the equilibrium price. c. buyers are hoarding prescription drugs. d. government has set the price below the equilibrium price.

d. government has set the price below the equilibrium price. ▪ At a low price, there are individuals whose reservation price exceeds the prevailing market price. This leads to excess demand and shortages, as people will queue or do illegal activities to get the good.

6. Refer to the figure below. Assume that these are demand curves for a normal good. Moving from demand curve D2 to demand curve D1 could be caused by an: a. increase in consumers' incomes. b. increase in quantity supplied. c. increase in the price of a close substitute. d. increase in the price of a complement.

d. increase in the price of a complement. ▪ If the price of a complement rises, I will buy less of the complement, and then for any given price of good D I will want less of it.

2. If the slope of the demand curve is zero, the price elasticity of that demand curve will be a. perfectly inelastic. b. unit elastic. c. elastic. d. perfectly elastic

d. perfectly elastic ▪ The marginal willingness to pay for every unit is the same. If you tried to charge above that, no one would buy anything. Therefore, demand is "infinitely" responsive to price

b. By coordinating their production decisions, the maximum number of calculators Smith and Jones can collectively produce (in an hour) is: i. 120 ii. 220 iii. 110 iv. 126

ii. 220 If both entirely specialize, Smith makes 100 and Jones, 120.

Perfectly Elastic

inf = Perfectly Elastic - A horizontal line has slope zero since it does not rise vertically

Refer to the setup from the previous question. When the neighboring island offers to give you 900 fish in exchange for 400 coconuts, you accept because you will then have a total of 2,400 fish. refuse because the trade would leave you at a level of consumption that is less than what you could produce on your own. accept because the trade will leave you at a level of consumption that is more than what you could produce on your own. counter offer, offering to give them 100 fish in exchange for 300 coconuts.

refuse because the trade would leave you at a level of consumption that is less than what you could produce on your own.

Based on the S&D model, which of the following would not cause a shift in the demand curve for coffee: a) consumer incomes decrease. b) the price of coffee increases as supply decreases. c) it is discovered that drinking coffee increases the risk of cancer. d) the price of doughnuts (a coffee complement) decreases.

the price of coffee increases as supply decreases.

10. Answer the next two questions on the basis of the following production possibilities tables for two countries, North Cantina and South Cantina: a. Refer to the above tables. If North Cantina is producing at production alternative B, the opportunity cost of the eleventh unit of consumer goods will be: ▪ 10 units of capital goods. ▪ 1 / 4 of a unit of capital goods. ▪ 8 units of capital goods. ▪ 1 / 8 of a unit of capital goods.

▪ 1 / 8 of a unit of capital goods. To get 8 more units of consumer goods will require giving up 1 unit of capital goods; divide by 8.