micro chapter 1

When economists say that people act rationally in their self-interest, they mean that individuals

look for and pursue opportunities to increase their utility.

The issues of inflation, unemployment, and business cycles are

major topics of macroeconomics

Macroeconomics approaches the study of economics from the viewpoint of

the entire economy

A student will decide to attend class when

the marginal benefit of attending exceeds the marginal cost of attending

Economics may best be defined as the

the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity

Any combination of goods lying outside of the budget line

is unattainable, given the consumer's income.

Pham can work as many or as few hours as she wants at the college bookstore for $9 per hour. But due to her hectic schedule, she has just 15 hours per week that she can spend working at either the bookstore or other potential jobs. One potential job, at a café, will pay her $12 per hour for up to 6 hours per week. She has another job offer at a garage that will pay her $10 an hour for up to 5 hours per week. And she has a potential job at a daycare center that will pay her $8.50 per hour for as many hours as she can work.

4 hours

Suppose that you are on a desert island and possess exactly 20 coconuts. Your neighbor, Friday, is a fisherman, and he is willing to trade 2 fish for every 1 coconut that you are willing to give him. Another neighbor, Kwame, is also a fisherman, and he is willing to trade 3 fish for every 1 coconut. a. On the diagram below, draw budget lines for trading with Friday and for trading with Kwame.

A. 20 Coconuts blue to 60 Fish 20 Coconuts purple to 40 Fish B. -0.5C. -0.3 D. The budget line from trading with Kwame E. Kwame

Refer to the graphs. Assume that pizza is measured in slices and beer in pints. In which of the graphs is the opportunity cost of a pint of beer equal to one slice of pizza?

D, 10 pizza 10 beer

Opportunity costs exist because

the decision to engage in one activity means forgoing some other activity.

Point G is an example of an inefficient point, while F is an example of an unattainable point. Does the economy above demonstrate the law of increasing opportunity cost?

Point G outside the graph & is inefficient, f inside and is unattainable // yes

#2 production possibilities

Suppose that we want to increase production of consumer goods to a total of 6 units. Is it also possible to continue producing 7.5 units of capital goods? No b. This combination of 6 consumer goods and 7.5 capital goods is: Unattainable c. How would you define the combination of 4 consumer goods and 4 capital goods? Inefficient

Production possibilities a. to get 1 more unit of X (Consumption Goods), there must be some Y (Capital Goods) given up; in this case movement from 10 to 9.8: 0.2 units given up. b. to get 1 more unit of X (Consumption Goods), there must be some Y (Capital Goods) given up; in this case movement from 9.4 to 8.6: 0.8 units given up. c. to get 1 more unit of X (Consumption Goods), there must be some Y (Capital Goods) given up; in this case movement from 7.5 to 6.1: 1.4 units given up. d. to get 1 more unit of X (Consumption Goods), there must be some Y (Capital Goods) given up; in this case movement from 4.4 to 2.3: 2.1 units given up. e. we are having to give up more and more capital goods for each additional consumer good. Opportunity costs are increasing. f. moving in the opposite direction, we find that we have to give up more and more consumer goods to produce additional units of capital goods. f. the slope of the PPC would be a straight line if the opportunity cost was equal for the entire PPC

The first unit (from A to B) 0.2 units of capital goods b. The third unit (C to D) 0.8 units of capital goods c. The fifth unit (E to F). 1.4 units of capital goods d. The seventh unit (G to H) 2.1 units of capital goods e. Are these opportunity costs increasing, constant or decreasing as we produce more consumer goods? increasing f. As more capital goods are produced, what happens to the opportunity cost in terms of consumer goods (moving in the opposite direction)? it increases g. If the opportunity costs were constant for the entire PPC, what shape would the curve have? straight

graph The shift of the budget line from cd to ab in the figure is consistent with

a decrease in money income

Refer to the production possibilities curve. At the onset of the Second World War, the United States had large amounts of idle human and property resources. Its economic adjustment from peacetime to wartime can best be described by the movement from point

a to b

Janice really likes potatoes. Potatoes cost $1.00 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. Suppose she feels that the first pound of potatoes is worth $1.50, the second pound is worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth $0.30. How many pounds of potatoes will she purchase? What if she only had $2.00 to spend?

a. 3 pounds of potatoes b. 2 pounds of potatoes Explanation: a. Janice will purchase potatoes until the value of potatoes is less than the cost of potatoes or until her income has been exhausted. For example, assume Janice has $5.00 to spend on potatoes or other items and the cost of a pound of potatoes is $1. Now assume the first pound of potatoes is worth $1.50 to Janice. She will purchase this pound of potatoes, since the value of the pound of potatoes ($1.50) is greater than the cost ($1). If the second pound is worth $1.14 and the third pound is worth $1.05, then Janice will purchase these as well, since the value exceeds the cost of $1. If all remaining pounds are worth $0.30, then Janice will not purchase these because the value is less than the cost. Thus, Janice will purchase 3 pounds of potatoes at a total cost of $3.00. b. Now assume Janice only has $2.00 to spend on potatoes. She will purchase the first pound because it is worth $1.50 to her and it only costs $1. She will purchase the second pound because it is worth $1.14. She has now spent her entire income on potatoes. She would like to purchase the third pound because the value of this pound of potatoes is $1.05, but she does not have the income to make this purchase. Thus, Janice will purchase 2 pounds of potatoes at a total cost of $2.00.

The assertion that "there is no free lunch" means that

all production involves the use of scarce resources and thus the sacrifice of alternative goods.

A person should consume more of something when its marginal

benefit exceeds its marginal cost.

43,277 units at which MC = $99 and MB = $99

current #

Kara was out jogging and, despite being tired, decided to run one more mile. Based on her actions, economists would conclude that Kara

decided the marginal benefit of running one more mile would outweigh the cost of the additional mile.

your budget remains $100, the price of books remains $25, but the price of movie tickets rises to $20

decrease

Specify the typical shapes of marginal-benefit and marginal-cost curves. The marginal benefit curve is ......

downward sloping

Cuba is a command economy that suffered a decline in economic growth because of a cut in the aid provided by the former Soviet Union when the latter collapsed. As a consequence, Cuba

experienced an inward shift of its production possibilities curve.

A reduction in the unemployment rate will cause the nation's production possibilities curve to shift outward.

false

If the marginal benefits are greater than the marginal cost of an activity, then society should allocate fewer resources to this activity.

false

Positive statements are expressions of value judgments

false

11 units at which MC = $4 and MB = $3:

fewer

5 units at which MB < MC:

fewer

If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product?

fewer

PPF Shifts and Pivots When Bill's Diner moves from the production combination of 35 burgers and 25 hot dogs to the combination of 25 burgers and 65 hot dogs, what is the opportunity cost of each additional hot dog? Suppose Bill hires more cooks and installs more grills. Which of the following represents his new PPF? Suppose Bill buys a Burger-O-Matic, a machine that speeds the production of burgers only. Which of the following represents his new PPF?

give up 10 burgers get 40 hotdogs 10/40=.25 b. graph goes upwards and outwards and is bigger than other/previous curve c. only the burger, y axis goes up

you should decide to go to a movie

if the marginal benefit of the movie exceeds its marginal cost.

Suppose that you initially have $100 to spend on books or movie tickets. The books start off costing $25 each and the movie tickets start off costing $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease? Your budget increases from $100 to $150 while the prices stay the same:

increase

Your budget remains $100, the price of movie tickets remains $10, but the price of a book falls to $15

increase

The slope of the typical production possibilities curve

increases as one moves southeast along the curve

Duckistan Production Possibilities ABCDE Civilian Goods 20181480 Military Goods 01234 Herbania Production Possibilities ABCDECivilian Goods403626140Military Goods01234 Refer to the tables. Opportunity costs are

increasing in both Duckistan and Herbania.

With these curves, the optimal allocation of resources to a particular product will occur when

mb=mc

82 units at which MC < MB:

more

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units.'' 3,000 units at which MC = $10 and MB = $13:

more

Economics involves marginal analysis because

most decisions involve changes from the present situation

The Latin term "ceteris paribus" means

other things equal

Purposeful behavior means that

people weigh costs and benefits to make decisions.

For economists, the word "utility" means

pleasure or satisfaction.

The slope of a budget line reflects the

price ratio of the two products

A well-tested economic theory is often called

principle

Any point inside the production possibilities curve indicates

that more output could be produced with the available resources

marginal cost curve

upward sloping

The scientific method is

used by economists and other social scientists, as well as by physical scientists and life scientists, to formulate and test hypotheses.