Econ midterm

According to the Incentive Principle, people will be less likely to smoke if the government:

increases taxes on cigarettes, effectively raising the price.

The Cost-Benefit Principle indicates that an action should be taken if:

its extra benefit is greater than or equal to its extra cost.

If a country is a net importer of a good, domestic suppliers will supply _____ of that good after it opens itself to international trade.

less

Suppose two demand curves intersect and so have a point in common. At that point, demand shown by the steeper curve will be _______ the flatter curve.

less elastic than

The demand for a good is inelastic with respect to price if the price elasticity of demand is:

less than one

If the demand for a good is highly elastic, that good is likely to have:

many close substitutes

The extra cost that results from carrying out one additional unit of an activity is the _____ of the activity.

marginal cost

If a production process exhibits diminishing returns, then as output rises:

marginal cost will eventually increase

The additional utility gained from consuming an additional unit of a good is called:

marginal utility

"All else constant, consumers will purchase more of a good as the price falls." This statement reflects the behavior underlying:

the demand curve

The tendency for marginal utility to decline as consumption increases beyond some point is called:

the law of diminishing marginal utility.

Suppose that as the price of apples rises, people switch from eating apples to eating oranges. This is known as:

the substitution effect of a price change.

When a market is in equilibrium:

there is no shortage and no surplus at the equilibrium price

For two goods, A and B, the rational spending rule is expressed as:

(MUA/PA) = (MUB/PB).

A 2 percent increase in the price of milk causes a 4 percent reduction in the quantity demanded of chocolate syrup. What is the cross-price elasticity of demand for chocolate syrup with respect to the price of milk?

-2, complements The cross-price elasticity of demand is calculated as: percentage change in Q (syrup) over percentage change in P (milk) = -4 over 2 which = -2

If 20 percent increase in the price of a good leads to a 60 percent decrease in the quantity demanded, then what is the price elasticity of demand?

3

If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to:

3.

Suppose an 18 percent drop in the price of strawberries leads to a 24 percent increase in the quantity demanded of strawberries and a 12 percent decrease in the quantity demanded of plums. a. What is the price elasticity of demand for strawberries? b. At the current price level, the demand for strawberries is______ because the price elasticity of demand for strawberries is _____ c. What is the cross-price elasticity of demand between strawberries and plums? d. Strawberries and plums are ______ because the cross-price elasticity of demand is ________

1.33± 0.01 elastic, greater than 1 0.67 ± 0.01 substitutes, positive a. The price elasticity of demand for strawberries is |24/18| = 1.33. b. Since the price elasticity of demand for strawberries is greater than 1, demand is elastic. c. The cross-price elasticity of demand between plums and strawberries is given by the percentage change in the quantity demanded of plums divided by the percentage change in the price of strawberries, or -12/-18 = 0.67 d. Since the cross-price elasticity of demand is positive, we know that when the price of strawberries increases, people will buy more plums, implying that strawberries and plums are substitutes.

If the price elasticity of demand for cigarettes is 0.55, and the price of cigarettes increases by 10 percent, then the quantity of cigarettes demanded will fall by:

5.5 percent

Casey earns $150 a week and consumes only fish and shrimp. The price of fish is $3 a pound and the price of shrimp is $5 a pound. If Casey's income rises to $210, he could buy a maximum of ______ pounds of fish or a maximum of ______ pounds of shrimp.

70; 40

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Suppose that, in an attempt to entice citizens to conserve energy, the government enacted regulations requiring that all air conditioners be more efficient in their use of electricity. After this regulation was implemented, government officials were then surprised to discover that people used even more electricity than before. Using the concept of price elasticity, which of the following statements best explains how this increase might have occurred?

Because the regulation effectively reduced the price of cool air, consumers with sufficiently elastic demand might have bought substantially more of it

The price elasticity of supply for basmati rice (an aromatic strain of rice) is likely to be which of the following?

Higher in the long run than the short run, because farmers cannot easily change their decisions about how much basmati rice to plant once the current crop has been planted Because it takes time for producers to switch from one activity to another, the price elasticity of supply will be higher for most goods in the long run than in the short run.

Is the demand for a particular brand of car, like a Chevrolet, likely to be more or less price-elastic than the demand for all cars?

It's likely to be more price-elastic because of the availability of substitutes The price elasticity of a good generally increases with the number of available substitutes for the good. It is easier to substitute a Ford or Toyota for a Chevrolet than it is to substitute a motorcycle or a skateboard for a car. Thus the market demand curve for cars is likely to be less elastic with respect to price than the market demand curve for Chevrolets or any specific car brand.

Refer to the accompanying table. ______ has the comparative advantage in making pies and ______ the comparative advantage in making cakes. Martha pie: 60 min Martha cake 80 min Julia pie: 50 min Julia cake: 60

Martha; Julia

Assume Anna is consuming two goods, movies and books, and at her current level of consumption, the marginal utility of the last movie is 60 and the marginal utility of the last book is 30. The price of a movie is $12 and the price of a book is $4. In order to maximise her utility, what should Anna do?

Movies give Anna twice as much satisfaction as books do (60/30), while the price of a movie is 3 times as high ($12/$4); therefore, she should decrease her consumption of movies and increase her consumption of books

Among the following groups—senior executives, junior executives, and students—which is likely to have the most and which is likely to have the least price elastic demand for membership in the Association of Business Professionals?

The group with the most price elastic demand: students The group with the least price elastic demand: senior executives The more income a person has, the smaller a given expenditure will be as a proportion of her overall budget, and hence the less likely she will be to respond dramatically to a price change. Thus senior executives, the most highly paid of the three groups, should have the least price-elastic demand curves. Students, the least well paid, should have the most price-elastic demand curves.

Suppose a government is considering imposing either a tariff or a quota on imported grain, and either policy will result in exactly 750 tons of grain being imported. How do these policies differ?

The quota will generate revenue for the firms that hold import licenses, while the tariff will generate revenue for the government.

The short run is best defined as:

a period of time sufficiently short that at least one factor of production is fixed.

Suppose an 18 percent drop in the price of strawberries leads to a 24 percent increase in the quantity demanded of strawberries and a 12 percent decrease in the quantity demanded of plums. a. What is the price elasticity of demand for strawberries? b. At the current price level, the demand for strawberries is _______ because the price elasticity of demand for strawberries is _________ c. What is the cross-price elasticity of demand between strawberries and plums? d. Strawberries and plums are _______because the cross-price elasticity of demand is________

a. The price elasticity of demand for strawberries is |24/18| = 1.33. b. Since the price elasticity of demand for strawberries is greater than 1, demand is elastic. c. The cross-price elasticity of demand between plums and strawberries is given by the percentage change in the quantity demanded of plums divided by the percentage change in the price of strawberries, or -12/-18 = 0.67 d. Since the cross-price elasticity of demand is positive, we know that when the price of strawberries increases, people will buy more plums, implying that strawberries and plums are substitutes.

If a nation can produce a more computers per year than any other nation, that nation has a(n) ______ advantage in the production of computers.

absolute

The combination of goods and services Mexico's citizens might feasibly consume are called Mexico's

consumption possibilities

If Fredonia has a closed economy, it _____ with other countries.

does not trade

A society could achieve a higher level of production if _____

each person specializes according to their comparative advantage

If price is above the equilibrium price, then there will be:

excess supply.

The marginal benefit of an activity is the:

extra benefit associated with an extra unit of the activity.

If bagels and cereal are substitutes, then the cross-price elasticity of demand between bagels and cereal will be:

greater than zero.

If David buys more coffee and less ice cream, the ______________ of coffee will ______________ , and the ___ of ice cream will ______________.

marginal utility; fall; marginal utility; rise As consumption of a good increases, its marginal utility falls. The reverse is true as well. So if more coffee is consumed, the marginal utility of coffee falls. But as less ice cream is consumed, its marginal utility increases.

The production possibility curve (PPC) shows the _____ production of one good for ______ production level of the other good.

maximum; every possible

If the demand for a good decreases as income decreases, then the good is a(n):

normal good

One reason there is political opposition to international trade is that:

not everyone benefits from trade

A profit-maximizing perfectly competitive firm must decide:

only on how much to produce, taking price as fixed.

Citizens can consume more of everything in a(n)

open economy

Suppose that the ingredients required to bring a slice of pizza to market and their respective costs are as listed in the table: Paper plate: 2cents Flour: 8cents Tomato sauce: 20 cents Cheese: 30 cents Labor: 60 cents If these proportions remain the same no matter how many slices are made, and the inputs can be purchased in any quantities at the stated prices, then the supply of slices is perfectly ______, and the price elasticity of supply is _________

perfectly elastic, infinite The inputs required to produce each slice of pizza cost a total of $1.20, and the marginal cost is constant. The supply curve of pizza is thus a horizontal line at P= $1.20. The supply of pizza slices is perfectly elastic and the price elasticity of supply is infinite.

A graph that illustrates the maximum amount of one good that can be produced for every possible level of production of the other good is called a:

production possibilities curve.

Assume that each day a firm uses 13 employee-hours per day and an office to produce 100 units of output. The price of each unit output is $5, the hourly wage rate is $10, and rent on the office is $200 per day. Each day the firm earns a ______ of ______.

profit; $170 Revenue is $5 times 100, or $500. Total labor costs are $130 (= 13 ×$10) and rent is $200, so total costs are $330. Thus, profit is $500 - $330 = $170.

Refer to the accompanying figure. If the market for doughnuts is perfectly competitive, and the price of a doughnut is 25 cents, then at this firm's profit maximizing level of output, the firm will earn an economic ______ of ______ per day.

profit; $8 At a price of 25 cents, the firm should produce 80 doughnuts per day because at that quantity, marginal cost equals 25 cents. At 80 doughnuts a day, the firm's total revenue is $20 (= 0.25 × 80) and its total cost is $12 (= 0.15 × 80), so its economic profit is $8.

Suppose that at your current consumption of two goods, A and B, MUA/PA = 25 and MUB/PB = 20. In order to maximize, your utility you should:

purchase more of A and less of B

If the supply curve and the demand curve both shift to the left, then the new equilibrium:

quantity will be lower, but the direction of the price change is uncertain.

A legal limit on the quantity of a good that may be imported is called a(n) ________.

quota

Autarky is a situation in which a country is economically

self-sufficient.

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $9, then this firm should: output at 9 is at lowest point on graph

shut down in the short run.

In general, a nation can enjoy a higher standard of living by ______ than by being self sufficient.

specializing and trading

At point A, $4/6 units, on the demand curve shown below, how will a 1 percent increase in the price of the product affect total expenditure on the product?

total expenditure will fall by about 1 The first step in solving this problem is to calculate the price elasticity of demand in order to determine the percentage decrease in quantity demanded that would result from a 1 percent increase in price. This information can then be used to determine the change in total expenditure. The absolute value of the slope of this demand curve is 1/3, so plugging in the Pand Q values at point A into the formula for the price elasticity of demand, (P/Q) × (1/slope), we see that elasticity at A = (4/6) × 1/(1/3) = 2/3 × 3 = 2. A 1 percent price increase will thus lead to a 2 percent decrease in the quantity demanded. There are a couple of different ways to find the effect on total expenditure. One is to recognize that total expenditure equals P ×Q, so after a one percent increase in price and a two percent decrease in quantity demanded, total expenditure will be: (1.01P) × (0.98Q) = (1.01) (0.98) (P × Q) = 0.99 (P × Q). That is, total expenditure after a one percent price increase is about one percent lower than it was originally. A second way to approach the problem is to calculate total expenditure at the original and new points and then find the percentage change:Total expenditure after the price change = (4.04)(5.88) =23.76Total expenditure before the price change = (4)(6) = 24Percentage change = (23.76 - 24)/24 = 0.01 or 1%

If supply and demand both increase, the new equilibrium price will be ______ and the new equilibrium quantity will be ______.

uncertain; higher

For two goods, X and Y, to be classified as substitutes, it must be the case that:

when the price of X rises, the demand for Y increases.

If you have a comparative advantage in a particular task, then:

you give up less to accomplish that task than do others.