Microeconomics Midterm 1 Review
The field of economics that is concerned about the broader issues in the economy, such as inflation, unemployment, and national output of goods and services is called:
Macroeconomics.
When specialization is used:
There are greater gains in material goods.
Negative Externality
Third party is harmed but not compensated.
Positive Externality
Third party who is not involved in transaction but benefits from it.
Opportunity costs exist because:
Using resources for one activity means that their use elsewhere must be given up (i.e. there is a tradeoff).
Because of scarcity:
We face tradeoffs in nearly every choice we make.
Opportunity Cost
Whatever must be given up to obtain some item.
Explicit Costs
- Direct Cost Ex. Tuition and books.
Implicit Cost
- Missed Opportunities
5 Main Reasons Inefficiencies Exist
1) One or few firms controlling a key input of production. 2) Asymmetric Information 3) Externalities Exist (Positive and Negative) 4) Existence of Public Goods (Non-Rival vs NonExclusive) 5. Governments Intervene to Control Prices and Quantities Sold. (Price Floor & Price Ceiling)
Demand Shifters
1. Change in Price of Related Goods 2. Change In Income 3. Change in Taste and Preferences 4. Changes in Expectations 5. Demographics and Population
Supply Curve Shifters
1. Input Costs 2. Technology 3. Expectations 4. Price of Related Goods 5. Taxes & Subsidies 6. Changes in Number of Sellers
Two Types of Efficiency
1. Productive efficiency - Any point on the Line 2. Allocative efficiency - When supply/production of goods meets demand.
When the incomes of many families fall, they decide to drive to their vacation destination instead of flying there. What can be concluded about driving versus air travel? (Normal and Inferior Goods)
Air travel is a normal good and driving is an inferior good.
What does ceteris paribus mean?
All Else Equal
What are the determinants of the elasticity of supply?
Availability of Inputs and Time
Mr. Cupcakes sells 100 cupcakes per day at $1.50 each. They are considering raising their price to $2.00 per cupcake in order to increase their revenues. If the price elasticity of demand for Mr. Cupcakes is 2, would they be able to increase their revenues? A) Yes; revenues would rise since they would sell even more cupcakes due to its high elasticity. B) Yes; revenues would rise despite selling fewer cupcakes per day. C) No; revenues would fall because they would sell far fewer cupcakes. D) No; revenues would even though they would sell more cupcakes due to its high elasticity.
C) No; rev enues would fall because they would sell far fewer cupcakes.
Fluctuations in graduate school enrollment correlate positively with fluctuations in unemployment. What is the most likely reason why? A) When jobs are difficult to find, the opportunity cost of going to grad school is high. B) When jobs are easy to find, there are strong incentives to go to grad school. C) The opportunity cost of going to graduate school is low when jobs are hard to find. D) Even if you have a job, the salary will be low that going to graduate school is worth the effort.
C) The opportunity cost of going to graduate school is low when jobs are hard to find.
Consider the market for jeans. An increase in the price of cotton will do what to Supply?
Decrease the supply of jeans.
Suppose the Ethiopian government sets coffee prices at $3 per pound. The market price, however, is $6 per pound. The government's actions will:
Cause coffee shortages
The difference between how much a consumer would be willing to pay to consume a good and the amount actually paid to purchase the good is called:
Consumer Surplus
People are concerned that gas prices will rise in a few days, and their demand today rises. This change in consumer behavior can be attributed to a change in:
Consumer expectations
What is total surplus?
Consumer surplus + Producer surplus.
If the demand for Charmin bath tissue is elastic, then the: A) percentage change in quantity demanded is less than the percentage change in price. B) elasticity coefficient is less than 1. C) percentage change in quantity demanded equals the percentage change in price. D) percentage change in quantity demanded is greater than the percentage change in price.
D) percentage change in quantity demanded is greater than the percentage change in price
A coupon-clipper's (or someone who searches for promotional codes) elasticity of demand can be described as:
Elastic because they are sensitive to price change.
Physiocrats
Ex. - Farmers (Top Sector/Productive)
Classical economists
Ex. Adam Smith - Factory Workers (Productive)
Marginalists
Ex. Alfred Marshall - If you have something rare and in demand then you are considered productive.
Mercantilists
Ex. Sir William Petty - Merchants (Top Sector)
According to Adam Smith, this type of worker was considered a productive member of society:
Factor Workers
The question "How do interest rates influence employment?" is an example of a normative question.
False
A pie-baking contest offers the winner a ribbon, a $1,000 check, and the opportunity to be featured in the local newspaper. The contest organizers are using (a) __________ incentive(s).
Financial and Social
The _____ the opportunity cost of an activity, the _____ a person will do that activity.
Higher;Less
Non-Exclusive Goods
If one person is allowed to use the public good, everyone is allowed.
Suppose the United States removes the sugar quotas and the market price of sugar drops. Since sugar is an input in chocolate, we would expect consumer surplus in the chocolate market to:
Increase
Price Ceiling
Legal Maximum Ex. Rent Control and Food Prices
Price Floor
Legal Minimum Ex. Wage and Cigarettes
A price ceiling is a:
Legally established maximum price that can be charged for a good.
Both Sir William Petty and Gregory King thought ________ were productive members of society.
Merchants
The live band plays nearby a restaurant and makes it difficult for restaurant patrons to hold a conversation. This is an example of: (Positive or Negative Externality)
Negative Externality
If hot dogs and relish are complements, their cross elasticity of demand is:
Negative because if hot dogs become more expensive, Demand for relish goes down.
Positive Question
Objective; Could be answered using states or data.
Non-Rival Goods
One person's use of a good does not reduce anyone else's use of it, or ability to enjoy it (TV programs).
What is Asymmetric Information?
One side knows more than the other.
What factor of production is a delivery truck is an example of:
Physical Capital
François Quesnay was a lead thinker in the _________ era.
Physiocrat
A community college creates _____ for a community. (Positive or Negative Externality)
Positive Externality
A 2019 Range Rover will most likely have an income elasticity of demand that is
Positive and Greater than 1.
Normative Question
Subjective; Value Based, usually "Should"
Types of Related Goods
Substitutes - Ex. Coffee & Tea, Pepsi & Coke Complements - Ex. Hot Dog & Bun, Coffee & Sugar
The _____ Jersey tomatoes will decrease if fertilizer prices rise.
Supply of
The quota rent is:
The difference between the demand price and the supply price at the quota limit.
When is a market efficient?
When total surplus is maximized.
In Europe the minimum wage has led to:
Widespread evasion of the minimum wage law in the black market for labor.
If the equilibrium price for a plain pizza pie is $14, then any price above that would result in:
a surplus.
To be effective, a price floor must be set:
higher than the equilibrium price.
The technology used in producing laptops has improved dramatically over the past few years. This has led to a(n) _____ in the _____ laptops.
increase; supply of
The market for Jersey corn is considered to be competitive. This means there are _____ buyers and _____ sellers of corn in New Jersey.
many; many
A rise in the price of iPhones resulted in a decrease in the:
quantity of iPhones demanded.
Fish and chips are complements. When the price of fish rises, the demand curve for chips:
shifts to the left.
