ECON1030-Midterm

ch 5, pg 107, problem 4 -A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic? Explain.

-If quantity demanded fell, price must have increased according to the law of demand. For a price increase to increase total revenue, the percentage increase in the price must be greater than the percentage decline in quantity demanded. Therefore, demand is inelastic.

Ch 3: M & S are woodworkers. M makes 4 tables or 20 chairs. S makes 6 tables or 18 chairs. A. M has an absolute advantage in chairs B. M has comparative advantage in tables C. S has absolute advantage in chairs D. S has comparative advantage in chairs

A. M has absolute advantage in chairs

Ch 3: Shannon bakes cookies and Justin grows vegetables. In which is it impossible for Shannon and Justin to both benefit from trade? A. Shannon doesn't like vegetables, Justin doesn't like cookies B. Shannon is better at baking. Justin is better at growing veggies C. Justin is better at baking and growing vegetables D. All of the above

A. Shannon doesn't like vegetables, Justin doesn't like cookies

Ch 3: Reagan grows flowers and makes ceramic vases. Jayson also grows flowers and makes vases, but Reagan is better at producing both. In this case, trade would A. benefit both Jayson and Reagan B. benefit neither party C. benefit Jayson, but not Reagan D. benefit Reagan, but not Jayson

A. benefit both Jayson and Reagan

Ch 1: Average cost per seat is $45 on a 50 passenger bus. 3 seats remain unsold. the company could increase profits only if it: A. charged any ticket price larger than $0 for the 3 seats B. charged at least $15 for each seat C. charged at least $45 for each seat D. paid 3 people to occupy each set

A. charged any ticket price larger than $0 for the 3 seats

Ch 2: One thing economists do to help understand the real world A. make assumptions B. ignore the past C. try to capture every aspect of the real world in their models D. all of the above

A. make assumptions

Ch 3: Making pizza/hr Delivering pizza/hr Lorie 12 6 Miles 10 15 Lorie has an absolute advantage in: A. production of pizza B. neither production of pizza nor delivering C. delivering pizza D. both production and delivering pizza E. delivering and possibly producing pizza

A. production of pizza

Ch 5: A 10% increase in gas prices reduces gas consumption by about A. 6% after 1 year, 2.5% after 5 years B. 2.5% after 1 year, 6% after 5 years C. 10% after 1 year, 20% after 5 years D. 0% after 1 year, 1% after 5 years

B. 2.5% after 1 year, 6% after 5 years

Ch 4: If Frances's income decreases, his demand for A. each good will remain unchanged B. buy less normal goods C. buy more luxury goods D. buy less inferior goods

B. buy less normal goods

Ch 4: Which is correct? A. buyers determine supply, sellers determine demand B. buyers determine demand, sellers determine supply C. buyers determine both supply and demand D. sellers determine both supply and demand

B. buyers determine demand, sellers determine supply

Ch 4: Movement from A down to B on a curve is caused by A. increase in price B. decrease in price C. decrease in substitute good price D. increase in income

B. decrease in price

Ch 4: A leftward shift in the supply curve A. increase supply B. decrease supply C. increase quantity D. decrease quantity

B. decrease supply

Ch 4: You love peanut butter. You hear 50% of the peanut butter crop are wiped out and the price will double. As a result, A. demand increases, but not until the end of the year B. demand increases today C. demand decreases as you look for substitute goods D. wait for price to change before altering demand

B. demand increases today

Ch 5: The smaller the price elasticity of demand, the A. more likely product is a luxury B. smaller responsiveness of quantity demanded to price change C. more substitutes product has D. greater responsiveness of quantity demanded to price change

B. smaller responsiveness of quantity demanded to price change

Ch 1: the opportunity cost of going to college is: A. total of food, clothes, books, transportation, tuition, lodging, etc B. value of best opportunity given up C. 0 for people who have someone else pay their expenses D. 0 since it allows students to earn larger income

B. value of the best opportunity given up

Ch 1: Slow growth of US income in the 1970s and 1980s was caused by A. B. increased competition abroad C. decline in rate of US productivity D. strong US dollar abroad

C. decline in rate of US productivity

Ch 5: If the price of new cars falls, what happens to the demand for used cars? A. remain same B. increase C. decrease D. shift to right E. more inelastic

C. decrease

Ch 1: Senator Smith wants to increase taxes on high income people and use it to help the poor. Senator Jones says it would discourage people from working and making society worse off. An economist would say: A. agree w/ Smith B. agree w/ Jones C. good decisions require recognizing both viewpoints D. no trade off between efficiency and equity

C. good decisions require recognizing both viewpoints

Ch 4: You buy 6 packs of hot dogs a month. You graduate in December and start a new job in January. You buy no hot dogs in January. Hot dogs are A. substitute good B. normal good C. inferior good D. law for demand

C. inferior good

Ch 4: Example of a monopoly A. bakery in large city B. bank in large city C. local cable tv company D. small group of corn farmers

C. local cable tv company

Ch 4: A Market is always characterized by A. high degree of organization B. individual sets of prices for all buyers and sellers C. presence of buyers and sellers D. all of the above

C. presence of buyers and sellers

Ch 2: Which of the following applies to economics and other sciences A. experiments are only valid when conducted in a lab B. good theories don't need to be tested C. real world observations lead to theories D. concerned primarily with abstract concepts

C. real world observations lead to theories

Ch 1: Resources are... A. scarce for households, plentiful for economies B. plentiful for households, scarce for economies C. scarce for houses and economies D. plentiful for houses and economies

C. scarce for households and economies

Ch 4: If an input price decreases, all else equal, we'd expect the A. demand for flour to increase B. demand for flour to decrease C. supply for flour to increase D. supply of flour to decrease

C. supply for flour to increase

Ch 3: People who provide you with goods and services do so because A. generosity B. no other choices C. they get something in return D. required to do so by the government

C. they get something in return

Ch 5: If the price falls by 1% and the quantity demanded increases by 3%, find the price elasticity of demand A. 0.03 B. 0.30 C. 0.333 D. 3

D. 3 PED = % change in quantity/ % change in price = 3/1 = 3

Ch 2: At what points can the economy produce? A. points on the curve B. points outside the curve C. points inside the curve D. Both A and C

D. Both A and C

Ch 3: Which isn't correct? A. trade allows for specialization B. trade has potential to benefit all nations C. trade allows nations to consume goods outside their PPF D. absolute advantage is the driving force of specialization

D. absolute advantage is the driving force of specialization

Ch 4: Assume Theresa buys computers in a competitive market. Then A. limited number of sellers to buy from B. negotiates with sellers when buying C. If she buyers a large number, price will rise noticeably D. none of the above

D. none of the above

Ch 4: which are substitute goods A. peanut butter and jelly B. tennis balls and racquets C. tvs and cable tv subscriptions D. pens and pencils

D. pens and pencils

Ch 3: Graph: y intercept = 1000 cars; x intercept = 50,000 agriculture products The opportunity cost of producing 1 car in Genovia is: A. 5000 tons less of agriculture products B. 500 tons less of agriculture products C. 5 tons less of agriculture products D. 50,000 tons less of agriculture products E. 50 tons less of agriculture products

E. 50 tons less of agriculture products

Ch 1 pg 14 problem 4 -You win $100 in a basketball pool. You have a choice between spending the money now and putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?

If you spend $100 now instead of saving it for a year and earning 5 percent interest, you are giving up the opportunity to spend $105 one year from now.

Ch 3, pg 57, problem 2 -American and Japanese workers can each produce 4 cars per year. An American worker can produce 10 tons of grain per year, whereas a Japanese worker can produce 5 tons of grain per year. To keep things simple, assume that each country has 100 million workers. -For this situation, construct a table analogous to the table in Figure 1. -Graph the production possibilities frontiers for the American and Japanese economies. -For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1. -Which country has an absolute advantage in producing cars? In producing grain? -Which country has a comparative advantage in producing cars? In producing grain? -Without trade, half of each country's workers produce cars and half produce grain. What quantities of cars and grain does each country produce? -Starting from a position without trade, give an example in which trade makes each country better off.

*check notes for tables and PPF* -With 100 million workers and 4 cars per worker, if either economy were devoted completely to cars, it could make 400 million cars. Because a U.S. worker can produce 10 tons of grain, if the United States produced only grain it would produce 1,000 million tons. Because a Japanese worker can produce 5 tons of grain, if Japan produced only grain it would produce 500 million tons. These are the intercepts of the production possibilities frontiers shown in the figure. The production possibilities frontiers are straight lines. -Because a U.S. worker produces either 4 cars or 10 tons of grain, the opportunity cost of one car is 2 1/2 tons of grain, which is 10/4. Similarly, the U.S. opportunity cost of a ton of grain 5 is 2/5 car (4 divided by 10). Because a Japanese worker produces either 4 cars or 5 tons of grain, the opportunity cost of one car is 1 1/4 tons of grain, which is 5/4 and the Japanese opportunity cost of a ton of grain is 4/5 car. -Neither country has an absolute advantage in producing cars, because they are equally productive (the same output per worker); the United States has an absolute advantage in producing grain, because it is more productive (greater output per worker). -Japan has a comparative advantage in producing cars, because it has a lower opportunity cost in terms of grain given up. The United States has a comparative advantage in producing grain, because it has a lower opportunity cost in terms of cars given up. -With half the workers in each country producing each of the goods, the United States would produce 200 million cars (50 million workers times 4 cars each) and 500 million tons of grain (50 million workers times 10 tons each). Japan would produce 200 million cars (50 million workers times 4 cars each) and 250 million tons of grain (50 million workers times 5 tons each). -From any situation with no trade, in which each country is producing some cars and some grain, suppose the United States changed one worker from producing cars to producing grain. That worker would produce 4 fewer cars and 10 additional tons of grain. Then suppose the United States offers to trade 7 tons of grain to Japan for 4 cars. The United States will do this because the cost of producing 4 cars in the United States is 10 tons of grain. By trading, the United States can gain 4 cars for a cost of only 7 tons of grain, so it is better off by 3 tons of grain. Suppose Japan changes one worker from producing grain to producing cars. That worker would produce 4 more cars and 5 fewer tons of grain. Japan will take the trade because it values 4 cars at 5 tons of grain, so it will be better off by 2 tons of grain. With the trade and the change of one worker in both the United States and Japan, each country gets the same amount of cars as before and both get additional tons of grain (3 for the United States and 2 for Japan). Thus, by trading and changing their production, both countries are better off.

Ch 4, pg 83, review question 4 -Harry's income declines, and as a result, he buys more pumpkin juice. Is pumpkin juice an inferior or a normal good? -What happens to Harry's demand curve for pumpkin juice?

-Because Harry buys more pumpkin juice when his income falls, pumpkin juice is an inferior good for him. -His demand curve for pumpkin juice shifts out to the right as a result of the decrease in his income

Ch 3, pg 57, problem 4 -Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. -What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods. -Draw Canada's production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier. -Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?

-Because a Canadian worker can make either 2 cars a year or 30 bushels of wheat, the opportunity cost of a car is 15 bushels of wheat. Similarly, the opportunity cost of a bushel of wheat is 1/15 of a car. The opportunity costs are the reciprocals of each other. -If all 10 million workers produce 2 cars each, they produce a total of 20 million cars, which is the vertical intercept of the production possibilities frontier. If all 10 million workers produce 30 bushels of wheat each, they produce a total of 300 million bushels, which is the horizontal intercept of the production possibilities frontier. Because the trade-off between cars and wheat is always the same, the production possibilities frontier is a straight line. If Canada chooses to consume 10 million cars, it will need 5 million workers devoted to car production. That leaves 5 million workers to produce wheat, who will produce a total of 150 million bushels (5 million workers times 30 bushels per worker). This is shown as point A. -If the United States buys 10 million cars from Canada and Canada continues to consume 10 million cars, then Canada will need to produce a total of 20 million cars. So Canada will be producing at the vertical intercept of the production possibilities frontier. However, if Canada gets 20 bushels of wheat per car, it will be able to consume 200 million bushels of wheat, along with the 10 million cars. This is shown as point B in the figure. Canada should accept the deal because it gets the same number of cars and 50 million more bushels of wheat. *check nets for PPF*

ch 4, pg 83, problem 1 -Explain each of the following statements using supply-and-demand diagrams. -"When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country." -"When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets." -"When a war breaks out in the Middle East, the price of gasoline rises and the price of a used Cadillac falls."

-Cold weather damages the orange crop, reducing the supply of oranges and raising the price of oranges. This leads to a decline in the supply of orange juice because oranges are an important input in the production of orange juice. This can be seen in Figure 6 as a shift to the left in the supply curve for orange juice. The new equilibrium price is higher than the old equilibrium price. *check notes for graph* -People often travel to the Caribbean from New England to escape cold weather, so the demand for Caribbean hotel rooms is high in the winter. In the summer, fewer people travel to the Caribbean, because northern climates are more pleasant. The result, as shown in Figure 7, is a shift to the left in the demand curve. The equilibrium price of Caribbean hotel rooms is thus lower in the summer than in the winter, as the figure shows. *check notes for graph* -When a war breaks out in the Middle East, many markets are affected. Because a large proportion of oil production takes place there, the war disrupts oil supplies, shifting the supply curve for gasoline to the left, as shown in Figure 8. The result is a rise in the equilibrium price of gasoline. With a higher price for gasoline, the cost of operating a gas-guzzling automobile like a Cadillac will increase. As a result, the demand for used Cadillacs will decline, as people in the market for cars will not find Cadillacs as attractive. In addition, some people who already own Cadillacs will try to sell them. The result is that the demand curve for used Cadillacs shifts to the left, while the supply curve shifts to the right, as shown in Figure 9. The result is a decline in the equilibrium price of used Cadillacs. *check notes for graphs*

Ch 3, pg 57, problem 1 -Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying. -Draw Maria's production possibilities frontier for reading economics and sociology. -What is Maria's opportunity cost of reading pages of sociology?

-If Maria spends all 5 hours studying economics, she can read 100 pages, so that is the vertical intercept of the production possibilities frontier. If she spends all 5 hours studying sociology, she can read 250 pages, so that is the horizontal intercept. The opportunity costs are constant, so the production possibilities frontier is a straight line. *check notes for PPF* -It takes Maria 2 hours to read 100 pages of sociology. In that time, she could read 40 pages of economics. So the opportunity cost of 100 pages of sociology is 40 pages of economics.

ch 4, pg 83, problem 3 -Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. -People decide to have more children. -A strike by steelworkers raises steel prices. -Engineers develop new automated machinery for the production of minivans. -The price of sports utility vehicles rises. -A stock market crash lowers people's wealth.

-If people decide to have more children, they will want larger vehicles for hauling their kids around, so the demand for minivans will increase. Supply will not be affected. The result is a rise in both the price and the quantity sold, as Figure 12 shows. -If a strike by steelworkers raises steel prices, the cost of producing a minivan rises and the supply of minivans decreases. Demand will not be affected. The result is a rise in the price of minivans and a decline in the quantity sold, as Figure 13 shows. -The development of new automated machinery for the production of minivans is an improvement in technology. This reduction in firms' costs will result in an increase in supply. Demand is not affected. The result is a decline in the price of minivans and an increase in the quantity sold, as Figure 14 shows -The rise in the price of sport utility vehicles affects minivan demand because sport utility vehicles are substitutes for minivans. The result is an increase in demand for minivans. Supply is not affected. The equilibrium price and quantity of minivans both rise, as Figure 12 shows. -The reduction in peoples' wealth caused by a stock-market crash reduces their income, leading to a reduction in the demand for minivans, because minivans are likely a normal good. Supply is not affected. As a result, both the equilibrium price and the equilibrium quantity decline, as Figure 15 shows *check notes for graphs*

Ch 5, pg 107, problem 1 -For each of the following pairs of goods, which good would you expect to have more elastic demand and why? -required textbooks or mystery novels -Adele recordings or pop music recordings in general -subway rides during the next six months or subway rides during the next five years -root beer or water

-Mystery novels have more elastic demand than required textbooks because mystery novels have close substitutes and are a luxury good, while required textbooks are a necessity with no close substitutes. If the price of mystery novels were to rise, readers could substitute other types of novels, or buy fewer novels altogether. But if the price of required textbooks were to rise, students would have little choice but to pay the higher price. Thus, the quantity demanded of required textbooks is less responsive to price than the quantity demanded of mystery novels. -Adele recordings have more elastic demand than pop music recordings in general. Adele recordings are a narrower market than pop music recordings, so it is easier to find close substitutes for them. If the price of Adele recordings were to rise, people could substitute other pop recordings, like Rhianna. But if the price of all pop recordings were to rise, substitution would be more difficult. (A transition from pop music to classical is unlikely!) Thus, the quantity demanded of pop recordings is less responsive to price than the quantity demanded of Adele recordings. -Subway rides during the next five years have more elastic demand than subway rides during the next six months. Goods have a more elastic demand over longer time horizons. If the fare for a subway ride was to rise temporarily, consumers could not switch to other forms of transportation without great expense or great inconvenience. But if the fare for a subway ride was to remain high for a long time, people would gradually switch to alternative forms of transportation. As a result, the quantity demanded of subway rides during the next six months will be less responsive to changes in the price than the quantity demanded of subway rides during the next five years. -Root beer has more elastic demand than water. Root beer is a luxury with close substitutes, while water is a necessity with no close substitutes. If the price of water were to rise, consumers have little choice but to pay the higher price. But if the price of root beer were to rise, consumers could easily switch to other sodas or beverages. So the quantity demanded of root beer is more responsive to changes in price than the quantity demanded of water

Ch 3: Paul's PPF: x intercept = 8 wheat; y intercept = 10 corn Cliff's PPF: x intercept = 6 wheat; y intercept = 4 corn Who has the comparative advantage in wheat? In corn?

-Paul has an absolute advantage in both wheat and corn -Paul 8W = 10C; 1 W=1.25 C; 1 C = 0.8 W -Cliff 6W = 4C; 1 W= 2/3 C; 1 C = 1.5 W -Cliff has a comparative advantage in wheat -Paul has a comparative advantage in corn

ch 5, pg 107, problem 5 -Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions. -What happens to the price of coffee beans? -What happens to the price of a cup of coffee? What happens to total expenditure on cups of coffee? -What happens to the price of donuts? What happens to total expenditure on donuts?

-The effect on the market for coffee beans is shown in Figure 2. When a hurricane destroys half of the crop, the supply of coffee beans decreases, the price of coffee beans increases, and the quantity decreases. -The effect on the market for cups of coffee is shown in Figure 2, too. When the price of coffee beans, an important input into the production of a cup of coffee, increases, the supply of cups of coffee decreases, the price of a cup of coffee increases, and the quantity decreases. -Because cups of coffee have an inelastic demand, when the price of a cup of coffee increases, the total expenditure on coffee increases. -The effect on the market for donuts is shown in Figure 3. When the price of coffee increases and the quantity demanded of coffee decreases, consumers demand fewer donuts because coffee and donuts are complements. When demand decreases, the price of donuts decreases. -Because donuts have an inelastic demand, when the price of donuts decreases, the total expenditure on donuts decreases. *check notes for graphs*

ch 5, pg 107, problem 3 -Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run. -If the price of heating oil rises from 1.80 to 2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your calculations.) -Why might this elasticity depend on the time horizon?

-The percentage change in price is equal to (2.20 - 1.80)/2.00 x 100 = 20%. If the price elasticity of demand is 0.2, quantity demanded will fall by 4% in the short run [0.20 × 0.20]. If the price elasticity of demand is 0.7, quantity demanded will fall by 14% in the long run [0.7 × 0.2]. -Over time, consumers can make adjustments to their homes by purchasing alternative heat sources such as natural gas or electric furnaces. Thus, they can respond more easily to the change in the price of heating oil in the long run than in the short run

ch 5, pg 107, problem 9 -Two drivers, Walt and Jessie, each drive up to a gas station. Before looking at the price, each places an order. Walt says, "I'd like 10 gallons of gas." Jessie says, "I'd like $10 worth of gas." What is each driver's price elasticity of demand?

-Walt's price elasticity of demand is zero, because he wants the same quantity regardless of the price. Jessie's price elasticity of demand is one, because he spends the same amount on gas, no matter what the price, which means his percentage change in quantity is equal to the percentage change in price.

Ch 2, pg 34 problem 4 -An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day and can produce two services: mowing lawns and washing cars. -In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly can either mow two lawns or wash one car. -Calculate how much of each service is produced in the following scenarios, which we label A, B, C, and D: All three spend all their time mowing lawns. (A) All three spend all their time washing cars. (B) All three spend half their time on each activity. (C) -Larry spends half his time on each activity, while Moe only washes cars and Curly only mows lawns. (D) -Graph the production possibilities frontier for this economy. Using your answers to part a, identify points A, B, C, and D on your graph. -Explain why the production possibilities frontier has the shape it does. -Are any of the allocations calculated in part a inefficient? Explain.

-a. A: 40 lawns mowed; 0 washed cars B: 0 lawns mowed, 40 washed cars C: 20 lawns mowed; 20 washed cars D: 25 lawns mowed; 25 washed cars -b. The production possibilities frontier is shown in Figure 8. Points A, B, and D are on the frontier, while point C is inside the frontier. -c. Larry is equally productive at both tasks. Moe is more productive at washing cars, while Curly is more productive at mowing lawns. -d. Allocation C is inefficient. More washed cars and mowed lawns can be produced by simply reallocating the time of the three individuals. *check notes for PPF*

ch 4, pg 83, problem 4 -Consider the markets for film streaming services, TV screens, and tickets at movie theaters. -For each pair, identify whether they are complements or substitutes: -Film streaming and TV screens -Film streaming and movie tickets -TV screens and movie tickets -Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens. -Draw two more diagrams to show how the change in the market for TV screens affects the markets for film streaming and movie tickets.

-a. Film streaming services and TV screens are likely to be complements because you cannot watch a film without a television. Film streaming services and movie tickets are likely to be substitutes because a movie can be watched at a theater or at home. TV screens and movie tickets are likely to be substitutes for the same reason. -The technological improvement would reduce the cost of producing a TV screen, shifting the supply curve to the right. The demand curve would not be affected. The result is that the 9 equilibrium price will fall, while the equilibrium quantity will rise. This is shown in Figure 16. -The reduction in the price of TV screens would lead to an increase in the demand for film streaming services because TV screens and film streaming are complements. The effect of this increase in the demand for film streaming is an increase in both the equilibrium price and quantity, as shown in Figure 17. -The reduction in the price of TV screens would cause a decline in the demand for movie tickets because TV screens and movie tickets are substitute goods. The decline in the demand for movie tickets would lead to a decline in the equilibrium price and quantity sold. This is shown in Figure 18. *check notes for graphs*

comparative advantage

-ability to product a good at a lower opportunity cost than another producer

absolute advantage

-ability to product a good using fewer inputs than another producer

total revenue

-amount a firm receives for the sale of its output

law of demand

-claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

market economy

-economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

inferior goods

-good for which an increase in income reduces the quantity demanded

production possibilities frontier

-graph that shows the combination of output that the economy can possibly product given the available factors of production and the available production technology

Ch 3, pg 57 Review Question 1 -Under what conditions is the production possibilities frontier linear rather than bowed out?

-if the opportunity cost of producing a good is constant no matter how much of that good is produced. -most likely if the good is not produced using specialized inputs

competitive market

-market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

income elasticity of demand

-measure of how much the quantity demanded of a good responds to a change in consumers' income -computed as the percentage change in quantity demanded divided by the percentage change in income

price elasticity of demand

-measure of how much the quantity demanded of a good responds to a change in the price of that good -computed as the percentage change in quantity demanded divided by the percentage change in price

cross price elasticity of demand

-measure of how much the quantity demanded of one good responds to a change in the price of another good -computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

Ch 1: pg 14, review question 2 -What items would you include to figure out the opportunity cost of a vacation to Disney World?

-monetary costs of: admission, travel, souvenirs -cost of time spent on vacation. The time cost depends on your next best use of that time; if it is staying home and watching TV, the time cost may be small, but if it is working an extra week hours at your job, the time cost is the money you could have earned. -NOT include the costs of food and lodging unless they exceeded the costs you would have incurred had you not gone to Disney World. In that case, you would only include the additional costs, not the total costs of food and lodging.

Efficiency

-property of a resource allocation of maximizing the total surplus received by all members of society

productivity

-quantity of goods and services produced from each unit of labor input

marginal change

-small incremental adjustment to a plan of action

microeconomics

-study of how households and firms make decisions and how they interact in markets

complements

-two goods for which an increase in the price of one leaders to a decrease in the demand for the other

substitutes

-two goods for which an increase in the price of one leads to an increase in the demand for the other

Opportunity cost

-whatever must be given up to obtain some item