ECON midterm review: chapter 1

After graduating from high school, Ron Willis plans to go to college. The college tuition is $15,000 a year. But, instead of going to college, Ron could take a full-time job paying $20,000. If Ron decides to go to college, what is his opportunity cost for attending for one year? $5,000 $15,000 $20,000 $35,000

$35,000

Lady Gaga tickets are $60 but, you're willing to pay a maximum of $100 to see her. You got a free Ed Sheeran ticket and you're; considering seeing him on the same night. What is the OC of seeing Ed Sherran?

$40

Shift or pivot in the PPC is due to changes in

- resource quantity - resource productivity - technology improvements

Shift or pivot in budget line

Income changes Prices change Afford more/less

Oppurtunity cost

What is given up when making one choice instead of another "there is no free lunch"

The Budget line / curve

traces combinations of (two) goods that can be bought using one's entire income or budget

PPC (Production Possibilities Curve)

traces combinations of (two) goods that can be produced using one's production resources - how we represent scarcity principle for producers

Comparative advantage (2 person economy)

the ability to produce a good at a lower opportunity cost than another producer

Absolute advantage (2 person economy)

the ability to produce more of a good using the same or fewer inputs than another producer

We represent the scarcity principle for consumers is

the budget line

Molly decides to spend three hours working overtime rather than watching video with her friends. She earns $8 an hour. Her opportunity cost of working overtime is: A) the enjoyment she would have received had she watched the video. B) the $24 she earns working. C) the $24 minus the enjoyment she would have received from watching the video. D) nothing, since she would have received less than $24 of enjoyment from the video.

the enjoyment she would have received had she watched the video.

Why is the shape of a two person PPC concave?

the fact that the economy moves towards producing more of just one good, it has to give up an increasing amount of the other good

Lady Gaga tickets are $60 but, you're willing to pay a maximum of $100 to see her. An Ed Sheeran ticket is $10 and you're considering seeing him on the same night. What is the OC of seeing Ed Sherran?

40 + 10 = $50 (NB of lady gaga and OC of Ed Sheeran)

Suppose you have a budget of $200 which you can spend on either Washington apples ($1 a unit) or Honeycrisp apples ($2 a unit). If the prices of both Washingtons and Honeycrisps are halved to $0.5 per unit and $1 per unit respectively, then your budget line _____________. A) Shifts in a parallel manner up / outward / to the right B) Shifts in a parallel manner down / inward / to the left C) Pivots outward D) Stays the same

A

Scaling back the U.S. "war on terror" would: A) shift U.S. production from "defense goods" to "civilian goods." B) shift U.S. production from "civilian goods" to "defense goods." C) shift the production possibilities curve inward. D) suggest that the United States is allocating less than the optimal amount of resources to the war on terror.

A) shift U.S. production from "defense goods" to "civilian goods."

The opportunity cost of a new national park is the: A) value of best alternative uses for the land (plus funding for the park). B) cost of constructing park buildings and highways to get to it. C) cost of hiring staff and park rangers to provide services for visitors. D) increased pollution to the wildlife habitat at the park.

A) value of best alternative uses for the land (plus funding for the park).

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

If the total benefits of watching 1, 2, and 3 baseball games on TV are 100, 120, and 125, then the marginal benefits are: A) 100, 120, and 125. B) 100, 20, and 5. C) 100, 609, and 42. D) 100, 240, and 375

B) 100, 20, and 5.

Which question is an example of a microeconomic question? A) What should the federal government do to reduce the trade deficit with Japan? B) Will the merger of two airlines likely result in higher airline ticket prices? C) What factors are contributing to the rise of unemployment in the economy? D) Will the inflation rate remain relatively stable this year?

B) Will the merger of two airlines likely result in higher airline ticket prices?

The difference between production possibility curves that are bowed out and those that are linear is that: A) bowed out PPCs illustrate tradeoffs where linear PPCs do not. B) bowed out PPCs show increasing opportunity cost where linear ones show constant opportunity cost. C) bowed out PPCs show constant opportunity cost where linear ones show increasing opportunity cost. D) linear PPCs illustrate real world conditions more than bowed out PPCs.

B) bowed out PPCs show increasing opportunity cost where linear ones show constant opportunity cost.

The production possibilities curve bows outward from the origin because: A) opportunity costs decrease as the production of a good increases. B) opportunity costs increase as the production of a good increases. C) more production of one good results in more production of the other good. D) resources are not of uniform quality.

B) opportunity costs increase as the production of a good increases.

If a production possibilities boundary is a curve concave to the origin and not a straight line, then: A) resources are equally suited to producing alternative products. B) resources are not equally suited to producing alternative products. C) resources are perfectly interchangeable to alternative uses. D) there are unemployed resources.

B) resources are not equally suited to producing alternative products.

Scarcity Principle for Consumers

Because of limited incomes or budgets, in order to consume more of something, we must give up the consumption of something else

Scarcity Principle for Producers

Because of limited resources (time, manpower, machinery), in order to produce more of something, we must give up the production of something else

Suppose you have a budget of $200 which you can spend on either Washington apples ($1 a unit) or Honeycrisp apples ($2 a unit). If your budget doubles to $400, the price of Washingtons stays the same, while the price Honeycrisps also double, then your budget line _____________. A) Shifts in a parallel manner up / outward / to the right B) Shifts in a parallel manner down / inward / to the left C) Pivots outward D) Stays the same

C

Are the goods that businesses offer for "free" to consumers also free to society? A) Yes, because the individual consumer does not have to pay for them. B) Yes, because the marginal benefit is greater than the marginal cost. C) No, because scarce resources were used to produce the free goods. D) No, because society does not assign a value to free goods.

C) No, because scarce resources were used to produce the free goods.

Assume that a consumer purchases two products and the consumer's money income increases. All other things equal, the most likely effect is: A) an outward shift in the production possibilities curve because the consumer can now satisfy more wants. B) an inward shift in the budget line because the consumer can now purchase less of both products. C) an outward shift in the budget line because the consumer can now purchase more of both products. D) no change in the consumer's buying pattern.

C) an outward shift in the budget line because the consumer can now purchase more of both products.

An economic model is: A) a value judgment. B) a fact. C) built using theory. D) built on policies.

C) built using a theory

When an economy is at full employment and full production, more of any one product: A) cannot be produced because there is full production. B) can be produced only if there is a general decrease in prices. C) can be produced only if there is less production of some other products. D) cannot be produced unless private enterprise does so rather than government.

C) can be produced only if there is less production of some other products.

A nation can increase its production possibilities by: A) shifting resources from investment good production to consumer good production. B) shifting resources from private goods to public goods. C) improving labor productivity. D) reducing international trade.

C) improving labor productivity.

The utility of a specific product A) is determined by consumer income. B) is determined by the price of the product. C) varies from person to person using the product. D) is constant from person to person using the product.

C) varies from person to person using the product.

A basic assumption used in most economic theories is that: A) what is true for a part of the whole must also be true for the whole. B) as price decreases, quantity demanded will decrease. C) whatever goes up must come down. D) all other things remain the same.

D) all other things remain the same.

The law of increasing opportunity cost explains why the shape of the production possibilities curve is: A) a straight line parallel to the horizontal axis. B) a straight line from one axis to the other. C) bowed inward (convex) to the origin of the graph. D) bowed out (concave) from the origin of the graph.

D) bowed out (concave) from the origin of the graph.

On a production possibilities curve, the optimal or best combination of output for any society: A) is at a point near the top of the curve. B) is at the precise midpoint of the curve. C) is at a point near the bottom of the curve. D) depends upon the preferences of society.

D) depends upon the preferences of society.

The scarcity principle implies that to have more of one thing usually means: A) increasing resources. B) limiting wants. C) increasing the need for another. D) having less of another.

D) having less of another.

When society over-allocates resources to a product it means that the: A) investment in the product is declining. B) opportunity cost of the product is decreasing. C) marginal benefit is greater than the marginal cost. D) marginal benefit is less than the marginal cost.

D) marginal benefit is less than the marginal cost.

The Cost-Benefit Principle tells people they should take an action if: A) total benefits exceed total costs. B) total costs exceed total benefits. C) marginal costs exceed marginal benefits. D) marginal benefits exceed marginal costs.

D) marginal benefits exceed marginal costs.

The role of an assumption in an economic theory is to: A) add realism. B) prove the theory. C) increase the scope of application. D) simplify the theory.

D) simplify the theory.

Shape of two person PPC

In a two or many person economy, the PPC is bowed out or concave due to the principle of increasing OC

Why does the budget line have a downward sloping shape?

Represents the fact that to consume more of one good, we must give up another (due to scarcity) - individual has limited income

The marginal principle

Should pursue a choice or action up to the point where MB (additional benefit) is greater than or equal to MC (additional cost) net benefit= MB - MC (greater than or equal to zero)

Scarcity principle for consumers

The OC of consuming one more unit of a good (pizza) is the units of consumption of another good we must give up (pasta)

Scarcity principle for producers says

The OC of producing one more unit of a good (pizza) is the units of production of another good we must give up (pasta)

principle of comparative advantage

The party with the LOWER opportunity cost in producing a good should specialize in that activity - economic welfare may increase by people specializing and trading

Attainable point

any combination of goods that can be produced using currently available resources (either on our outside PPC)

Zone of Possible Agreement (ZOPA)

minimum asking price and maximum paying price

Efficient point

points that make use of all the avaliable resources in the economy to produce the maximum possible combo of goods (these points are on the PPC)

PPC downward sloping shape

represents the idea that to produce more of one good, we must give up another (due to scarcity)