Exam 1

Lorenzo is training for a triathlon, a timed race that combines swimming, biking, and running. Each hour he spends swimming is an hour that he can't spend biking or running. Which basic principle of individual choice does this scenario illustrate?

All choices have opportunity costs. (All choices have opportunity costs. If Lorenzo decides to swim, he forgoes the time that he could have spent biking or running. So the opportunity cost of an hour of swimming is an hour of biking or an hour of running, whichever is the highest-valued alternative Kyoko must sacrifice in order to spend an additional hour swimming. There is no information on the effectiveness of an extra hour of swimming as compared to that of an extra hour of biking or running. Therefore, you don't know whether Lorenzo has an incentive to spend more time on swimming. Similarly, you don't know whether it is most efficient for Lorenzo to spend the same amount of time on each of the three activities.)

Which of the following best explains why both nations with high living standards and nations with low living standards face the problem of scarcity?

All individuals, whether rich or poor, are dissatisfied with their material well-being and would like more. Explanation: (Scarcity is a fact of life throughout the world because human wants are forever greater than the available supply of time, goods, and resources. Because of scarcity, people cannot have as much as they would like. It is impossible to satisfy every desire. Even the richest people and richest nations cannot have it all. No matter how affluent an individual is, the wish list continues to grow. See section: "The Problem of Scarcity.")

The following graph shows the market for cakes in Houston, where there are over a thousand bakeries at any given moment. Suppose the price of flour, a major ingredient in cakes, suddenly increases.

Supply curve shifts left (The increase in the price of flour increases each seller's cost of producing cakes. Therefore, for any given price of a cake, sellers are willing and able to supply fewer cakes. For instance, if a seller is willing to sell 250 cakes per day at a given price when the cost of flour is $4 per sack, the seller would be willing to sell fewer than 250 cakes per day at the same price if the cost of flour increased to $5 per sack. Visually, this is seen as a leftward shift of the supply curve.)

The question "Should children receive free lunch at school?" is an example of which fundamental economic question?

The For Whom to Produce question.

The question "Should more capital goods be produced instead of consumer goods?" is an example of which fundamental economic question?

The What to Produce question.

An economist wants to know how demand for bracelets changes when the price of bracelets increases. At the same time, a recession starts to change people's income.

The ceteris paribus assumption does not apply to this situation. (In this case, the ceteris paribus assumption does not apply because the change in income does not allow the economist to study the direct relationship between two key variables: the quantity demanded and the price of bracelets. See section: "The Ceteris Paribus Assumption.")

Law of Demand

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

Producer Surplus

The difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item (the additional cost to the seller of providing another unit of the item). The used-textbook seller earned a surplus of $7, which is the difference between the price the seller received ($43) and the lowest price at which the seller would have been willing to sell the used textbook ($36).

Demand Schedule

A table showing the relationship between the price of a good and the amount that buyers are willing and able to purchase at various prices

Which of the following would decrease the price of packaged hot dogs?

A technological advance that lowers the cost of producing packaged hot dogs.

Even though I was willing to pay up to $189 for a used laptop, I bought a used laptop for only $179.

Consumer Surplus

A manager asks an employee, "We have a huge deadline in just four weeks. Should we meet it by hiring more workers or by renting more capital for our existing workers to use?" The manager's question is best classified as which one of the following fundamental economic questions?

How to Produce? (Even if you know what you want to produce, and who would consume it, there is still the important issue of how it is produced. For example, different methods may be used to meet the deadline.)

Hubert is skilled at making both earrings and bracelets. Hubert has no preference between making earrings or bracelets since he earns the same amount from the two activities.

If the selling price of bracelets increases from $20 to $40, then Hubert's opportunity cost of making earrings increases and making earrings is now less profitable than making bracelets.

Nathan is skilled at making both bracelets and necklaces. Nathan has no preference between making bracelets or necklaces since he earns the same amount from the two activities.

If the selling price of necklaces decreases from $50 to $25, then Nathan's opportunity cost of making bracelets decreases and making bracelets is now more profitable than making necklaces.

Suppose the following graph shows the current market supply for gasoline. Firms expect the price of gasoline to rise in the near future.

Leftward shift in supply

I sold a watch for $63, even though I was willing to go as low as $54 in order to sell it.

Producer Surplus

A table showing the relationship between the price of a good and the amount of it that sellers are willing and able to supply at various prices

Supply Schedule

The following graph shows the market for croissants in Houston, where there are over a thousand bakeries at any given moment. Suppose the number of bakeries decreases significantly.

Supply curve shifts left (Market supply depends on the number of sellers in the market, among other factors. If the number of sellers decreases, then there will be fewer croissants produced at any given price, so the supply curve for croissants will shift to the left.)

The question "Should bank withdrawals be conducted by tellers or ATMs?" is an example of which fundamental economic question?

The How to Produce question.

Which fundamental economic question requires society to choose the technological and resource mix used to produce goods?

The How to Produce question.

Consumer Surplus

The difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays. The watch buyer gained a surplus of $8, which is the difference between the buyer's willingness to pay ($71) and the price the buyer actually paid ($63).

If there is a decrease in demand for lettuce, we would expect:

both the price and quantity sold to decrease.

An increase in the demand for a good means that:

consumers are willing to purchase more of the good at each possible price.

Consider the market for grapes. An increase in the wage paid to grape pickers will cause the:

supply curve for grapes to shift to the left, resulting in a higher equilibrium price for grapes and a decrease in the quantity consumed.

The law of demand is illustrated by a demand curve that is:

downward-sloping

Scarcity:

exists everywhere because human wants can never be satisfied.

Even though I was willing to pay up to $71 for a watch, I bought a watch for only $63.

Consumer surplus

Factors Affecting Supply

•Number of sellers •Technology •Resource prices •Taxes and subsidies •Expectations of producers •Prices of other goods the firm could produce

Suppose that the percentage of the population aged 65 years and older increases. Show the effect of the increase in the older population on the market for health care by shifting one of the curves in the following graph, holding all else constant.

Demand curve shifts right (The number of buyers in the market for health care is an important nonprice determinant of demand. Since people aged 65 years and older tend to have more frequent need for medical attention, an aging population causes the demand for health care to shift to the right.)

Suppose that for several years Congress cuts spending for the military, and then unemployment rises in the U.S. defense industry. There is only an association between these events but no causation.

False (The fact that one event follows another does not necessarily mean that the first event caused the second event. Sometimes it is just an association. You must be very careful to state that there is causation only when the cause-and-effect relationship is stable or dependable over time. In this case, there is causation, because spending on defense directly affects how many people are hired in the defense industry. See section: "Association versus Causation.")

Which of the graphs in Exhibit 3-3 depicts the effect of a decrease in the price of domestic cars on the demand for foreign cars?

Graph C, leftward shift

Suppose the following graph shows the current market supply for coffee. Firms expect the price of coffee to fall in the near future.

Rightward shift in supply

Quantity Demanded

The amount of a good that buyers are willing and able to purchase at a given price

The "ceteris paribus" clause in the law of demand allows which of the following factors to change?

price of the good demanded

Wealthy families wanting finer homes and nicer vacations exemplify

scarcity

The opportunity cost of an action is:

the value of the best opportunity that must be sacrificed in order to take the action.

The finite nature of the economy's resource base:

will always be with us

If the supply of a good decreased, what would be the effect on the equilibrium price and quantity?

Price would increase, and quantity would decrease

The law of demand indicates that as the price of a good increases:

buyers buy less of it.

The following graph shows the market demand for beef. Suppose that the price of chicken, a substitute good for beef, decreases.

Demand shift left

The amount of a good that sellers are willing and able to supply at a given price

Quantity Supplied

A rightward shift of a demand curve is called a(n):

Increase in demand

External benefits from production

Shift the demand curve to reflect the social benefits from consuming the good.

Over a ten year period, the monthly charge for cellular phone service decreased from $120 per month to $30 per month. At the same time, the number of subscribers increased from less than 10 million to more than 75 million. Which of the following provides the best explanation for these changes?

Technological improvements that reduced the cost of supplying cellular phone service

In Exhibit 4-1, suppose that a reduction in the price of an important input used to produce the good causes an increase in quantity supplied of 150 units at every price level. Assuming that demand does not change, the new equilibrium price will be:

$2

In the following table, categorize each of the following examples as a topics in microeconomics or macroeconomics.

- The government's decision on how much to spend on public projects = Macroeconomics - The effect of government regulation on a monopolist's production decisions = Microeconomics - A consumer's optimal choice when buying a flat-screen TV = Microeconomics

Demand curves are negatively sloped when people buy:

more as the price decreases.

The following graph shows the market demand for new homes in a local community. Suppose that a recent increase in the crime rate reduces the rate at which new families move into the town.

Demand shift left

Which of the following is an example of scarcity?

Camden would like to have more designer clothes than he can afford.

Human wants:

can never be fully satisfied.

The perpetual problem in economics is:

our inability to satisfy everyone's wants with the available resources

Suppose that a powerful nurses' union negotiates higher wages for its members. Show the effect of higher wages for nurses on the market for health care by shifting one of the curves in the following graph, holding all else constant.

Supply curve shifts left (The wages of nurses are an important input cost in the production of health care. An increase in the wages paid to nurses would shift the supply of health care to the left.)

Three basic decisions must be made by all economies. What are they?

What will be produced, how goods will be produced, and for whom goods will be produced.

Suppose the following graph shows the market supply for oranges. A severe drought destroys much of the crop of oranges.

Leftward shift in supply

Suppose the following graph shows the market supply for oranges. There is an increase in the price of fertilizer used to produce oranges.

Leftward shift in supply

Which of the following is not one of the three fundamental economic questions?

Where to produce?

The agricultural nation of Luckidom is attempting to answer the three fundamental economic questions. Develop the three questions as they relate to this nation.

1. Should we produce more wheat and fewer soybeans? 2. Should we farm with equipment or by hand? 3. Do the farmers or the governors receive a higher salary?

Your coworker Simone is really concerned about a project that she has just been assigned. She is in charge of analyzing and determining conditions in the market for televisions from an extensive sales report.

If Simone's boss is interested in a graphical presentation of the relationship between the price and quantity of televisions demanded, you would advise your coworker to construct [a demand curve] using the data provided. However, if Simone's boss is more interested in the detailed numbers used to construct this visual representation, you would instead advise your coworker that [a demand schedule] would be more appropriate. (The graphical representation of the relationship between the price of a good and the amount that buyers are willing and able to purchase is known as a demand curve. On the other hand, a table showing similar data over a range of prices is known as a demand schedule. Therefore, if Simone's boss prefers a graphical presentation of the market analysis, a demand curve would be more appropriate. However, if Simone's boss prefers a table of data, a demand schedule would be the better approach.)

Which of the following accurately explain the importance of the ceteris paribus assumption for an economic model? Check all that apply.

It allows economists to isolate or focus attention on selected variables. (Ceteris paribus is a Latin phrase that means while certain variables change, "all other things remain unchanged." It allows economists to isolate or focus attention on selected variables. See section: "The Ceteris Paribus Assumption.")

Suppose Argentina produces only two goods: wheat and laptops. The following graph shows Argentina's current production possibilities curve, along with six output combinations represented by black points (plus symbols) labeled A to F.

Points inside the production possibilities curve, such as A and F, represent inefficient output combinations. At these points, it is possible to increase the production of both goods because some resources are unemployed. For example, point A is inefficient because it is possible for Argentina to produce at point B instead, where the economy is producing both more wheat and more laptops. Points on the production possibilities curve, such as C and B, represent efficient output combinations. At these points, it is impossible to increase the production of one good without producing less of the other. For instance, if Argentina is currently producing at point B and decides that it wants to produce more wheat, it must produce fewer laptops. Points on or inside the production possibilities curve represent attainable output combinations. Therefore, both inefficient output combinations and efficient output combinations are attainable, but not all attainable points are efficient. Points outside the production possibilities curve, such as E and D, represent output combinations that are unattainable, given current resources and technology. Recall that each point on the production possibilities curve shows the maximum quantity of wheat Argentina can produce if it also wants to produce the given quantity of laptops. For example, compare point B (46 million laptops and 36 million bushels of wheat) with point D (46 million laptops and 90 million bushels of wheat). Because point B is on Argentina's production possibilities curve, you can see that if Argentina is producing 46 million laptops, it can produce—at most—36 million bushels of wheat; therefore, point D must be unattainable, given current resources and technology.

Darnell is training for a triathlon, a timed race that combines swimming, biking, and running. Darnell has only 20 hours per week that he can devote to training for his race. Which basic principle of individual choice does this scenario illustrate?

Resources are scarce (Darnell faces limited choices due to time constraints. If he had an unlimited amount of time, he would spend many more hours training for the triathlon. However, time, the key resource for his training, is scarce, and Darnell has only 20 hours to spend.)

Complete the following sentences to explain why it is important for an economic model to be an abstraction from the real world.

The purpose of a model is to construct an abstraction from real-world complexities to make events understandable . To be useful, a model requires simplified assumptions. (A model, which is an abstraction from the real world, uses simplified assumptions, allowing you to see past many of the complexities of a question in order to examine the core of the issue. The purpose of an economic model is to forecast or predict the results of various changes in variables. An economic theory can be expressed in the form "If X, then Y, all other things held constant." An economic model is useful only if it yields accurate predictions. When the evidence is consistent with the theory that X causes outcome Y, there is confidence in the theory's validity. When the evidence is inconsistent with the theory that X causes outcome Y, the researcher rejects this theory. See section: "The Methodology of Economics.")

The following graph shows the market demand for automobiles, which are normal goods. Suppose that a deep economic recession causes consumer income to decline.

Demand shift left

External costs of production

Shift the supply curve to reflect the social costs of producing the good.

Your boss would like your help on a marketing research project he is conducting on the relationship between the price of soda and the quantity of soda supplied. He hands you the following document:

Your task is to take this supply schedule and construct a graphical representation of the data. In doing so, you determine that as the price of soda rises, the quantity of soda supplied increases. This confirms the law of supply.

Scarcity is a problem:

because human wants are unlimited while resources are limited.

Why must every nation answer the three fundamental economic questions?

because of the problem of scarcity

indicate whether each argument adapted from this case is an example of positive economics or normative economics.

- The government should require airbags in all cars. = Normative Economics - Airbags have killed both adults and children whose heads were within the inflation zone at the time of deployment. = Positive Economics (Positive statements rely on facts, or "what is." Note that positive statements may or may not be correct. "Airbags have killed both adults and children whose heads were within the inflation zone at the time of deployment" is a positive statement. Normative statements are opinions, or "what should be." "The government should require airbags in all cars" is an example of a normative statement. See section: "Why Do Economists Disagree?")

The following graph shows the demand curve for sedans in New York City. For simplicity, assume that all sedans are identical and sell for the same price. Initially, the graph shows market demand under the following circumstances: Average household income is $50,000 per year, the price of a gallon of regular unleaded gas is $4 per gallon, and the price of a subway ride is $3.00.

A decrease in average income causes a leftward shift of the demand curve; therefore, you may conclude that sedans area normal good. Suppose that the price of a gallon of gas rises from $4.00 to $5.00. Because sedans and gasoline are complementary goods , an increase in the price of a gallon of gas shifts the demand curve for sedans to the left.

Suppose the economy initially produces 120 million gallons of drinking water and 10 million tons of steel, which is represented by point A. The opportunity cost of producing an additional 40 million gallons of drinking water (that is, producing at point B rather than at point A) is1.6 million tons of steel. Suppose, instead, that the economy currently produces 160 million gallons of drinking water and 8.4 million tons of steel, which is represented by point B. Now the opportunity cost of producing an additional 40 million gallons of drinking water (that is, producing at point C rather than at point B) is2.4 million tons of steel. Comparing your answers in the previous questions suggests that the opportunity cost of producing 40 million additional gallons of drinking water at point B isgreater than the opportunity cost of producing 40 million additional gallons of drinking water at point A. This reflects thelaw of increasing opportunity costs .

At point A, the economy produces 120 million gallons of drinking water and 10 million tons of steel. At point B, the economy produces 160 million gallons of drinking water (40 million more gallons than at point A) and 8.4 million tons of steel (1.6 million fewer tons than at point A). Therefore, at point A, the opportunity cost of producing 40 million additional gallons of drinking water is 1.6 million tons of steel. At point B, the economy produces 160 million gallons of drinking water and 8.4 million tons of steel. At point C, the economy produces 200 million gallons of drinking water (40 million more gallons than at point B) and 6 million tons of steel (2.4 million fewer tons than at point B). Therefore, at point B, the opportunity cost of producing 40 million additional gallons of drinking water is 2.4 million tons of steel. The opportunity cost of producing 40 million additional gallons of drinking water starting at point A is 1.6 million tons of steel, and the opportunity cost of producing 40 million additional gallons of drinking water starting at point B is 2.4 million tons of steel. Thus the opportunity cost of producing drinking water at point B is greater than the opportunity cost of producing drinking water at point A. This reflects the law of increasing opportunity costs: In general, not all resources are equally well suited to produce both drinking water and steel. When the economy starts producing drinking water, it uses those resources that are most suitable to drinking water production as opposed to steel production. To produce additional drinking water, resources not as well suited to drinking water production must be used. Therefore, the opportunity cost of producing additional gallons of drinking water grows as an economy decides to produce more of it. As a result, the PPC acquires its familiar, outward-bowing shape.

Suppose the following graph shows the market supply for gasoline. Congress and the president enact a subsidy for gasoline refineries.

Rightward shift in supply

Suppose you are an analyst in the oil refinery industry and are responsible for estimating the equilibrium price and quantity of home heating oil. To do so, you must consider factors that can affect the supply of and demand for heating oil. Determinants of the demand for heating oil include household income, the price of an oil furnace (a complementary good for heating oil), and the price of natural gas (a substitute good for heating oil). Determinants of the supply of heating oil include the cost of crude oil and the cost of refining crude oil into home heating oil.

The equilibrium quantity in this market is 80 thousand barrels of heating oil per day, and the equilibrium price is $40.00 per barrel. Suppose that the cost of refining oil increases from $15 to $25 for each barrel of heating oil produced. Assuming that the rest of the determinants of supply and demand for heating oil remain equal to their initial values, the market will eventually reach a new equilibrium price of $46.00 per barrel. Suppose that instead of a change in the cost of producing heating oil, there was an increase in the price of an oil furnace from $2,000 to $2,100. If the price of heating oil were to remain at the initial equilibrium price you found in the first question, there would be a SURPLUS of heating oil, which would exert DOWNWARD pressure on prices.

in the following table, categorize each statement as positive or normative.

- The financial crisis was caused by faulty mathematical models that encouraged excessive risk taking. = Positive - The lack of effective regulation contributed to a risk-seeking culture in the financial services industry. = Positive - Central banks should have imposed tighter regulations on banks to prevent the financial crisis. = Normative - Executives of banks that received financial assistance from the government should not have received bonuses. = Normative

Indicate whether each question in the following table is classified as a microeconomics issue or as a macroeconomics issue.

- What will cause the nation's inflation rate to fall? = Macroeconomics - How will an increase in the price of lemonade affect the quantity of soda sold? = Microeconomics - Does a large federal budget deficit reduce the rate of unemployment in the economy? = Macroeconomics - How does a quota on textile imports affect the textile industry? = Microeconomics (Macroeconomics examines economy-wide variables and "big picture" policies. Inflation and unemployment are macroeconomics concepts. Microeconomics examines decision making by a single individual, household, firm, industry, or level of government. The price of any single product and the workings of a single industry are microeconomics concepts. See section: "Macroeconomics" and "Microeconomics.")

Demand Curve

A graphical representation of the relationship between the price of a good and the amount of the good that buyers are willing and able to purchase at various prices

Suppose that the earrings market consists of several suppliers like Hubert who are skilled at making both earrings and bracelets. Which of the following is likely to happen to the supply curve of earrings when the price of a bracelets increases?

It shifts to the left

Suppose that the bracelets market consists of several suppliers like Nathan who are skilled at making both bracelets and necklaces. Which of the following is likely to happen to the supply curve of bracelets when the price of a necklaces decreases?

It shifts to the right

The resources used to produce goods and services are divided into three categories: land, labor (including the special category of entrepreneurship), and capital. A barley farmer in Kansas irrigates with water from a nearby lake to produce barley. Water is a natural resource rather than a human-made good used in production. Thus water used for irrigation best fits into the resource category of:

Land (Water is a natural resource rather than a human-made good used in production. Thus water used for irrigation best fits into the resource category of land.)

The claim that, other things being equal, the quantity supplied of a good increases when the price of that good rises

Law of Supply

Economists build models to identify relationships between variables and thus help them predict the effects of changes in some variables on others. In the following table, identify the economic model-building process by selecting the appropriate labels from the dropdown menus.

Step 1: Problem Identification (At this stage, the issue to be studied is defined.) Step 2: Model Development (Here, the key variables in the model used to investigate the phenomenon under study are selected.) Step 3: Testing a Theory (In this stage, the researcher collects data that are used to test the model developed in the second step. Upon testing, the researcher either accepts or rejects his or her model.) In order to be useful, models require simplifying assumptions.

Valerie is a hard-working college sophomore. One Tuesday, she decides to work nonstop until she has answered 176 practice problems for her physics course. She starts work at 8:00 AM and uses a table to keep track of her progress throughout the day. She notices that as she gets tired, it takes her longer to solve each problem. Time -- Total Problems Answered 8am -- 0 9am -- 80 10am -- 128 11am -- 160 Noon -- 176 Use the table to answer the following questions.

The marginal, or additional, gain from Valerie's first hour of work, from 8:00 AM to 9:00 AM, is [80] problems. The marginal gain from Valerie's third hour of work, from 10:00 AM to 11:00 AM, is [32] problems.

Some people will pay a higher price for brand-name goods. For example, some people buy Rolls Royce cars and Rolex watches to impress others. Poornima pays $20 for a watch from a local department store. Valerie pays $2,000 for a Rolex watch.

This does not violate the law of demand. (The law of demand states that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus. In this case, it's quite obvious that either Valerie's income is substantially higher than Poornima's income, or these individuals have substantially different preferences toward the brand and quality of watches. So, the ceteris paribus does not hold. However, nothing points to the quantity demanded declining when the price goes up because demand curves are different for cheap watches and Rolexes. See section: "The Law of Demand.")

According to the law of demand, when will higher corn prices reduce the quantity demanded of corn?

When nonprice determinants, like income and the number of buyers, are unchanged.

The following calculator shows the supply curve for sedans in an imaginary market. For simplicity, assume that all sedans are identical and sell for the same price. Two factors that affect the supply of sedans are the level of technical knowledge—in this case, the speed with which manufacturing robots can fasten bolts, or robot speed—and the wage rate that auto manufacturers must pay their employees. Initially, the graph shows the supply curve when robots can fasten 2,500 bolts per hour and autoworkers earn $25 per hour.

Consider the previous graph. Suppose that the price of a sedan decreases from $25,000 to $20,000. This would cause the quantity supplied of sedans to decrease, which is reflected on the graph by a movement along the supply curve. Suppose the workers' union negotiates a pay raise. This causes a leftward shift of the supply curve because the pay raise makes cars more expensive to build.

A graphical object showing the relationship between the price of a good and the amount that sellers are willing and able to supply at various prices

Supply Curve

The equilibrium price in this market is $40 per calendar, and the equilibrium quantity is 250 calendars bought and sold per month.

$48 Price (Dollars per calendar) = Surplus, 70 surplus amount, Downward pressure on prices. $32 Price = Shortage, 70 calendars short, Upward pressure on prices.

Later, the teaching assistant for Valerie's physics course gives her some advice. "Based on past experience," the teaching assistant says, "working on 64 problems raises a student's exam score by about the same amount as reading the textbook for 1 hour." For simplicity, assume students always cover the same number of pages during each hour they spend reading. Given this information, in order to use her 4 hours of study time to get the best exam score possible, how many hours should she spend working on problems and how many should she spend reading?

1 hour working on problems, 3 hours reading (Valerie should make her decision at the margin. Each hour, she should select the option that will improve her exam grade by the largest amount. If she can do more than 64 problems in an hour, working on problems will help raise her grade more for that hour than reading would. If she can do fewer than 64 problems in an hour, reading will help raise her grade more for that hour than working on problems would. The marginal gain from the first hour is 80 problems. She will stop working on problems there, because she will get only 48 problems done if she spends the second hour working on problems. Therefore, she should spend her remaining time reading.)

Which of the following correctly explain why money is not considered capital in economics? Check all that apply.

1. Money can only be used to produce privately owned capital, not publicly owned capital. 2. Money is used to purchase land, labor, or capital. (In the study of economics, capital does not refer to money assets. Capital in economics means a factor of production, such as a factory or machinery. Capital includes the physical plants, machinery, and equipment used to produce other goods. Capital can be privately owned by private companies (factories, office buildings, warehouses, and so on) or publicly owned infrastructure provided by government through taxes (roads, bridges, dams, airports, harbors, and public universities and other government buildings). Money is not a resource and is, therefore, not capital. Instead, money is used to purchase land, labor, or capital as well as many consumer goods and services. See section: "Capital.")

Three of the four following questions are indicative of the three fundamental economic questions. Leaving out the irrelevant question, rearrange the three relevant questions in the order an economy must answer them. - Should electricity be produced from oil, solar, or nuclear power? - Should corn be produced in the North or in the South? - Who drives a Mercedes? - Should more hybrid cars and fewer SUVs be produced?

1. Should more hybrid cars and fewer SUVs be produced? 2. Should electricity be produced from oil, solar, or nuclear power? 3. Who drives a Mercedes?

How would a decrease in consumer income affect the market for new automobiles, a normal good?

Demand would decrease, leading to a reduction in price and a reduction in quantity sold.

If the demand for a good decreased, what would be the effect on the equilibrium price and quantity?

Price would decrease, and quantity would decrease.

Rajiv was willing to contribute $20 this year to his local college radio station. However, after learning that the radio station already had met its goal of raising $100,000, he decided not to contribute, because he knew he could listen to it without contributing. This is an example of:

The free-rider problem (Rajiv is free riding. A free rider receives a benefit without paying his or her share of the cost of providing that benefit. An external cost is a cost imposed on a third party not directly involved in the activity in question. A deadweight loss is the reduction in consumer and producer surplus due to a deviation from the efficient output. An opportunity cost is the value of the best alternative forgone.)

The law of demand refers to the:

inverse relationship between the price of a good and the quantity of a good that people will buy.

When economists say scarcity, they mean:

the human desire for goods exceeds the available supply of time, goods and resources.

The law of demand shows that:

there is an inverse relationship between price and quantity demanded

Scarcity:

means we are unable to have as much as we would like to have.

The following graph shows the market for donuts in Philadelphia, where there are over a thousand donut shops at any given moment. Suppose Congress passes a new tax that decreases the income of Philadelphia residents. (Assume that donuts are a normal good.)

Demand curve shifts left (The demand for normal goods increases when income increases; that is, an increase in income causes an increase in the demand for donuts. Conversely, a decrease in income causes a decrease in the demand for the good. Because you are told that the new tax decreases the income of Philadelphia residents, you should have shifted the demand curve to the left.)

Suppose that the hypothetical country of Andesland suffers a chronic scarcity of its staple grain, quinoa. True or False: Andesland must be a developing country, since scarcity is not a problem in developed countries.

False (Scarcity is the condition in which human wants forever exceed the supply of time, goods, and available resources to satisfy those wants. Because resources are scarce, and wants are unlimited, choices must be made. Economics is the study of how society makes decisions on allocating its limited resources for the production of goods and services to best satisfy unlimited wants. Although scarcity may have more severe and life-threatening effects in developing countries, developed countries face scarcity, as well. This is because individuals and countries always desire more goods and services, regardless of their level of material well-being.)

When economists say goods are scarce, they mean:

the desire for goods and services exceeds our ability to produce them with the limited resources available.

-The following graph shows the labor market in the fast-food industry in the fictional town of Supersize City. -Suppose a senator introduces a bill to legislate a minimum hourly wage of $12 per hour. This type of price control is called a ________. -True or False: A minimum wage below $10 per hour would not prevent the labor market from reaching equilibrium.

-In this market, the equilibrium hourly wage is $10, and the equilibrium quantity of labor is 450 thousand workers. -Price floor -True (In order for a minimum wage to be effective—that is, for it to prevent the labor market from reaching equilibrium—it must be set above the equilibrium wage. In this case, you found that the equilibrium wage rate was $10 per hour. Therefore, any minimum wage above $10 per hour would be effective, and any minimum wage set at or below $10 per hour would have no effect.)

-The following graph shows the annual market for Florida oranges, which are sold in units of 90-pound boxes. -True or False: A price ceiling below $25 per box will prevent the market from reaching equilibrium.

-In this market, the equilibrium price is $25 per box, and the equilibrium quantity of oranges is 350 million boxes. -True (In order for a price ceiling to be effective—that is, for it to prevent the market from reaching equilibrium—it must be set below the equilibrium price. In this case, you found that the equilibrium price was $25 per box. Therefore, any price ceiling below $25 per box would be effective, and any price ceiling set at or above $25 per box would have no effect.)

Indicate whether each example is classified as microeconomics or macroeconomics.

- Price of a gallon of gasoline = Microeconomics - The money supply = Macroeconomics - Inflation = Macroeconomics - A consumer's response to changes in the price of ice cream = Microeconomics (Macroeconomics is the branch of economics that studies decision making for the economy as a whole. It examines economy-wide variables and "big picture" policies. Inflation and the money supply are macroeconomics concepts. Microeconomics is the branch of economics that studies decision making by a single individual, household, firm, industry, or level of government. A consumer's response to changes in the price of ice cream and the price of a gallon of gasoline are microeconomics examples. See sections: "Macroeconomics" and "Microeconomics.")

Negative Externality

A cost that a third party incurs from someone else's economic activity.

Suppose that this year, the economy is operating at point A, but then a hurricane destroys more capital than is being produced during the year. On the following graph, the PPC that best describes the Tinville economy next year isPPC3PPC3 . (Note: PPC1PPC1 and PPC2PPC2 are the same as on the previous graph.)

An economy faces a tradeoff between current production of consumer goods and current production of capital goods. The more resources an economy devotes to producing consumer goods, the higher the standard of living now, but the fewer capital goods it can produce today. Greater capital, however, is one of the major sources of economic growth. Therefore, you can expect an otherwise identical economy to grow more slowly when it produces less capital. Because capital is itself a resource, this economy will have fewer resources in the future as a result of the hurricane destroying more capital than is produced at point A. Therefore, the appropriate PPC is the one that lies farther in than PPC1PPC1—namely, PPC3PPC3.

Now, suppose that Ana moves away, leaving Yakov as the only consumer in the market. As a result, there will be a shift of the market demand curve because there will be a change in quantity demanded at every price.

As can be seen in the graph, if Ana moves away, the market demand curve will shift to the left because there will be fewer ice cream cones demanded at every price. A movement along the demand curve only occurs when a change in price causes the change in quantity demanded. Knowing when a curve shifts and when there is only movement along it is a key not only to understanding demand and supply but many of the other topics in economics.

The following graph shows the current market demand for coffee. Suppose that people expect the price of coffee to rise in the near future.

Demand shift right

If we observe a decrease in the price of a good and an increase in the amount of the good bought and sold, this could be explained by a(n):

increase in the supply of the good.

Positive Externality

A benefit that a third party receives from someone else's economic activity. When the third party experiences a beneficial effect, it is called a positive externality.

The government copayment plan might lead to an efficient outcome if visits to the doctor's office generate external ________.

Benefits (Without the copayment, consumers spend a total of $400 million per month on 4 million visits to the doctor. With the copayment, consumers and the government spend $840 million per month on 6 million visits to the doctor. Consumers spend far less on visits when they incur all of the costs themselves. The additional government outlays can only be efficient if visits to the doctor generate external benefits. It's possible that doctor's office visits generate external benefits by limiting the spread of preventable disease or treating mild ailments that, left untreated, would lead to significant emergency medical costs later on. If a visit to the doctor generates an external benefit, the additional social benefit from the 4 millionth visit to the doctor will be greater than the extra cost of providing the 4 millionth consultation. So long as the additional social benefits from a visit to the doctor's office exceed the extra costs, policies that encourage additional visits to the doctor can lead to a more efficient outcome.)

Suppose that the economy enters a prolonged recession, causing average incomes to decline. Show the effect of the change in average incomes on the market for health care by shifting one of the curves in the following graph, holding all else constant.

Demand curve shifts left (Health care is a normal good. Other things being equal, as incomes decline during a recession, the demand for health care will shift to the left.)

In the absence of the copayment plan, total payments for visits to the doctor amount to [$400.00] million per month. Hint: You can use the green rectangle (triangle symbols) to calculate areas in the graph. You will not be graded on where you place the green rectangle. Under the copayment plan, total payments for visits to the doctor amount to [$840.00] million per month, [$240.00] million of which is paid by consumers and [$600.00] million of which is paid by the government.

In the absence of the copayment policy, the equilibrium price of a visit to the doctor's office is $100, and the equilibrium quantity of visits is 4 million per month. Total payments, therefore, amount to $100 per visit x 4 million visits per month = $400 million per month. With the copayment, the number of office visits is 6 million per month, and each visit costs $140. The total payment for visits to the doctor is, therefore, $140 per visit x 6 million visits per month = $840 million per month. Of this, consumers pay $40 per visit x 6 million visits per month = $240 million per month, and the government covers $100 per visit x 6 million visits per month = $600 million per month. The copayment plan greatly increases the number of visits to the doctor each month.

Suppose the following graph shows the market supply for baseballs. Until recently, the workers who stitch baseballs together were paid a piece rate—that is, they received a certain amount of money for each ball. A recent government regulation has banned piece-rate pay and forced the factory owner to comply with new minimum hourly wage legislation. As a result, the number of baseballs stitched each hour has decreased sharply.

Leftward shift in supply

I sold a used textbook for $43, even though I was willing to go as low as $36 in order to sell it.

Producer Surplus

Suppose that the American Medical Association (AMA) implements looser licensing requirements for new doctors. Show the effect of looser licensing requirements for new doctors on the market for health care by shifting one of the curves in the following graph, holding all else constant.

Supply curve shifts right (Looser licensing requirements for new doctors, such as fewer years of postgraduate training after medical school, will lower the costs of becoming a doctor, leading to an increase in the supply of doctors. The corresponding reduction in doctors' salaries acts as a decrease in the cost of a vital input to the production of health care, causing the supply of health care to shift to the right. (Keep in mind that the benefits of less-expensive health care may be outweighed by the costs associated with less-competent physicians.))

*The following graph shows the market for doctor's office visits. In this market, the central government provides health insurance to all consumers. The government insurance plan stipulates a copayment of $40 per doctor's office visit. That is, consumers pay $40 for each doctor's appointment, and the government pays the remainder.* -In the absence of the copayment plan, the equilibrium price would be [$100.00] per doctor's office visit, and the equilibrium quantity would be [4] million visits per month. -Under the copayment plan, the quantity of visits demanded by consumers is [6] million visits per month. Doctors are willing to supply this number of office visits at a price of [$140.00] per visit. Therefore, the government will pay [$100.00] per visit under the copayment scheme.

Without the copayment, the market for doctor's office visits reaches equilibrium at the intersection of the supply and demand curves for visits. At an equilibrium price of $100 per visit, the quantity of visits supplied is exactly equal to the quantity demanded, 4 million visits per month. The copayment acts as a subsidy to health care consumers, reducing the cost of visiting the doctor. If consumers pay only $40 per visit, the quantity of visits demanded is 6 million per month. At a price of $40 per visit, however, doctors are willing to supply only 1 million office appointments. The shortage of visits is avoided by the copayment policy, which specifies that the government, in its capacity as health insurer, will make up the difference ($100) between the $40 copayment from consumers and the $140 needed to induce doctors to supply 6 million visits.

If we observe a decrease in the price of a good and a decrease in the amount of the good bought and sold, this could be explained by a(an):

decrease in the demand for the good.

-An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a ________. -With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be _____ than the efficient quantity. -Which of the following generate the type of externality previously described? Check all that apply.

-Positive Externality -Less -Edison has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. -A leading electronics manufacturer has discovered a new technology that dramatically improves the picture quality of plasma televisions. Firms of all brands have free access to this technology.

I sold a jersey sweater for $26 on eBay last week. This week, someone offered me $45 for it.

Neither producer or consumer surplus

The following graph shows the market for cereal in Philadelphia, where there are over a thousand stores that sell cereal at any given moment. Suppose the municipal government, in an attempt to attract new residents, issues $1,000 move-in vouchers to each new household that moves to Philadelphia. As a result, many new families move into the city.

Demand curve shifts right (The voucher program causes the population of Philadelphia to increase. With more cereal consumers in Philadelphia, the demand for cereal increases, which shifts the demand curve to the right.)

I paid $70 for a used textbook last week. This week, the same store is selling textbooks for $63.

Neither CS or PS