Micro

Refer to Figure 19.2. The total utility of two apples is

11 utils. The total utility derived from consuming a product comes from the marginal utilities of each successive unit. The total utility of two apples is 6 + 5 or 11 utils.

Suppose income falls 5 percent in a year, and as a result, housing construction falls from 10 million to 5 million units annually. Based on this information, housing starts are

A normal good. A normal good is a good for which demand increases when income rises.

How much food production is sacrificed when North Korea moves from point A to point B?

A0

In a market economy, producers will produce the goods and services that

Consumers demand. Price signals in the marketplace move factors of production from one industry to another in response to consumer demands.

According to the text, which of the following does the United States import?

Electronics, cars, and food. The United States imports many items from many countries, with electronics, cars, and food being a few of the imports.

Which of the following is an example of a public good?

Flood control. One person cannot prevent others from benefiting from flood control.

Which of the following is a factor of production for the Little Biscuit Bread Company?

Flour. Factors of production are resources used to produce goods and services. Productivity is a measurement of how much output we get from an input such as labor.

Ceteris paribus, if income increases and as a result, the demand for good X increases and the demand for good Y falls,

Good X is a normal good and good Y is an inferior good. A normal good is a good for which demand increases when income rises, while an inferior good is a good for which demand falls when income rises.

A rightward shift in a demand curve and a rightward shift in a supply curve both result in a

Higher equilibrium quantity. An increase in demand causes equilibrium price and equilibrium quantity to increase. An increase in supply causes equilibrium price to fall and equilibrium quantity to increase.

Cross-price elasticity refers to

How responsive consumers of one good are to a change in the price of another good. Cross-price elasticity looks at how responsive consumers of one good, say Pepsi, are to a change in the price of another good-Coke.

The most desirable rate of output for a firm is the output that

Maximizes total profit. The most desirable rate of output is the one that maximizes total profit-the difference between total revenue and total costs.

Monopolies

May be beneficial to society if they are natural monopolies and are regulated. A natural monopoly can achieve economies of scale over the entire range of market output and therefore may be economically desirable. The government may have to regulate the behavior of a natural monopoly, however, to ensure that consumers realize the benefits of that greater efficiency.

Which of the following products will have more inelastic demand?

Medicines. Demand is more inelastic if there are fewer substitute goods; medicines are necessities and will have more inelastic demand.

If the price elasticity of demand is 1.0, and a firm raises its price by 10 percent, the total revenue will

Not change. If price elasticity of demand is unitary elastic, higher prices result in no change in total revenue.

The market

On its own may not always provide the optimal mix of goods and services. Market forces might produce a mix of output different than the optimal mix.

The federal government's role as the provider of national defense is justified by considerations of

Public goods. National defense is a public good because consumption by one does not exclude consumption by others.

Total revenue is

Quantity sold times price. A firm's total revenue is equal to price times quantity sold. It is the company's income from sales. Total profit is equal to total revenue minus cost of production.

The In the News article titled "Men vs. Women: How They Spend" differentiates the spending habits of women and men: "Men spend almost twice as much as women do on electronic equipment ... young women spend twice as much money on clothing, personal care items, and their pets." Which determinant of demand is most likely involved?

Tastes. Even though young men have a little more after-tax income than do young women, the spending habits of women and men reflect differences in tastes where men enjoy entertainment items and women enjoy personal items.

Which of the following is considered a service in the calculation of GDP?

Tax preparation. Any consumption spending on intangibles is for services.

The article "SUV Sales Drop with Gasoline Price Rise" states

That gasoline and SUV sales have a cross-price elasticity that is negative. SUVs and gasoline are complementary goods in that they are purchased together. For complementary goods the cross-price elasticity is negative. If gasoline prices rise, the quantity demanded for SUVs will fall.

Which of the following statements is true for the two countries illustrated in Figure 35.1?

The United States has a comparative advantage in DVD players. The United States has comparative advantage in producing DVD players since it can produce them at a lower opportunity cost than Japan can (1 motorcycle per DVD player).

According to the text, which of the following is true?

The United States imports paper and exports corn. The United States exports and imports an enormous variety of goods and services; paper is one such import and corn is one such export.

When the relationship between two variables changes,

The entire curve shifts. This would be caused by a change in a variable that is not on either axis.

Which of the following produces external benefits?

The inoculation of college students against the flu. Inoculation of college students helps protect the entire community from the flu.

A monopoly occurs when

There is only one producer of a particular good or service. A monopoly is a firm that produces the entire market supply of a particular good or service.

If there is no budget constraint, utility maximization is achieved when marginal utility is zero.

True As long as marginal utility is positive, total utility must be increasing; but when marginal utility is negative, consumption of one more good will decrease total utility. Therefore total utility is maximized at the consumption level where marginal utility is neither positive nor negative.

Every time we use scarce resources in one way, we give up the opportunity to use them in other ways.

True. The cost is always involved in any activity.

The United States is capable of producing many goods and services that it imports, but it does not because

We can import those goods at a lower opportunity cost than if we make them ourselves. There are many goods that we can produce, and even have an absolute advantage in producing, but we do not have a comparative advantage in producing them. This means that another country can produce those goods at a lower opportunity cost than we can.

Which of the following events would cause a rightward shift in the market supply curve for automobiles?

A technological improvement that reduces the cost of production. Technological improvements that reduce the cost of production will improve profit margins at every price level, which increases supply. An increase in wages and a decrease in the number of sellers will decrease supply, and a higher sales tax will decrease demand.

Complete Table 19.3 below. Assume the price of cola is $8 per unit and the price of pretzels is $4 per unit. Picture In Table 19.3, what is the marginal utility of the fifth unit of cola?

12 Marginal utility is the change in total utility obtained by consuming one additional good or service. Total utility increases from 112 to 124 when the fifth unit is consumed, an increase of 12 utils.

At 2 units of output in Table 21.4, the average variable cost is

13 AVC is equal to VC ($42 - $16) divided by quantity (2), which is $13.

What is the opportunity cost (in civilian output) of a defense buildup that raises military spending from 4.2 to 4.4 percent of a $7 trillion economy?

14 billion

The marginal cost of the fourth unit of output in Table 21.4 is

20 Marginal cost is equal to the change in total cost ($78 - $58) divided by the change in quantity (4 - 3), which is $20.

Suppose movie downloads cost $2 apiece and game downloads cost $4. If the marginal utility of movie downloads at the optimal mix of consumption is 10 utils, what is the marginal utility of a game download?

20 units

For the output levels in Table 21.2, the minimum of the average variable cost curve occurs at a production rate of

20 units per day. The AVC is $1.40, $1.10, and $1.33 for 10, 20, and 30 units of output respectively. Therefore, AVC is minimized at 20 units of output.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. If the price per unit of good X is $3, the consumer would maximize utility by consuming

21 units of Y. If the price of Y is $1, one can infer that the maximum spendable income is $30 based on the point where the budget constraint crosses the y-axis. If the price of X is $3, the budget constraint closest to the origin is the limit. Because the optimal consumption combination lies at the point where the budget line is tangent to (just touches) an indifference curve, point A maximizes utility, which is the combination of 3 X and 21 Y.

In Table 19.3 the marginal utility per dollar of the second cola is

4. The marginal utility per dollar is equal to the marginal utility divided by the price of the product. The marginal utility of the second cola is 32, so the marginal utility per dollar is 32/8=4.

If a new home can be constructed for $160,000, what is the opportunity cost of federal defense spending, measured in terms of private housing? (Assume a defense budget of $700 billion.)

4.4 million homes

Refer to Table 19.1. The marginal utility Josh enjoys from the fourth slice of pizza is

5 utils Marginal utility is the change in total utility as a buyer consumers more units of a good. The change in marginal utility from the third to the fourth slice of pizza is 59 - 54 = 5.

The price ceiling that the federal government placed on human organs caused

A shortage. Price ceilings increase the quantity demanded, decrease the quantity supplied, and create market shortages.

The World View "High Gold Price Swells Ranks of Illegal Miners"related to gold prices and gold mining suggests

As the price of gold increases, there is an increase in quantity supplied, indicating that supply is elastic. Miners all over the world are searching for new gold mines because the price of gold is increasing. This indicates that the elasticity of supply for gold is high.

On a demand curve, demand is more elastic

At higher prices. At higher prices demand is more elastic along a linear or straight demand curve. Note that the price elasticity of demand changes along a straight-line demand curve and is more elastic at higher prices, and more inelastic at lower prices.

Technological changes that increase productivity shift the

Average total cost curve downward. Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the production function to shift upward and the production cost curves to shift downward-in particular the ATC curve.

Most goods can yield

Both positive and negative marginal utility. As a rule, the amount of additional utility we obtain from a product declines as we continue to consume it. Not every good ultimately reaches negative marginal utility. Yet the more general principle of diminishing marginal utility is experienced daily, and most goods will have negative marginal utility with high degrees of consumption.

A U.S. firm that outsources jobs would be

Building a factory in Canada and hiring Canadian workers. Buying raw materials from a Chinese firm instead of a U.S. firm. Buying computers assembled in Mexico that used U.S. parts. Basically if you send any money offshore, you are outsourcing jobs.

Choose the letter of the diagram in Figure 3.1 that best describes the type of shift that would occur in each situation for the market listed on the left, ceteris paribus. Figure 3.1 Shifts of Supply and Demand Designer clothes: consumer confidence in the economy improves.

D. An improvement in consumer confidence increases demand for goods and services.

Local governments provide law enforcement, which benefits society, but if the costs of law enforcement exceed the benefits, the result is a situation of

Government failure. Government failure means that government intervention fails to move us closer to our optimal outcomes. Additional public sector activity is desirable only if the benefits from the activity exceed the cost.

Government failure will likely arise if

Government officials attempt to maximize their own utility. If the agendas of public officials give higher priority to personal advancement than to the needs of the public, the probability of attaining the socially optimal mix of output declines.

When demand is elastic, the absolute number for price elasticity will be

Greater than 1. The price elasticity formula is the percentage change in quantity demanded divided by the percentage change in price. When demand is price-elastic, the percentage change in quantity demanded will be greater than the percentage change in price, so the absolute number will always be greater than 1. For example, foreign airline travel tests out to = 3.5.

This is due to the inverse or negative relationship between the two variables.

Greater than 50%. It represents a choice of how to allocate our fully employed resources between solar and carbon based energy.

Assume the price elasticity of demand for MC Pretzel Co. pretzels is 0.8. If the company increases the price of each bag of pretzels, total revenue will

Increase because the percentage increase in price is greater than the percentage change in quantity demanded. Higher prices result in higher total revenue only if the price elasticity of demand is inelastic (price elasticity is less than 1).

A successful advertising campaign will

Increase the demand for the advertised good. A successful advertising campaign is one that changes consumer tastes and creates brand loyalty, thereby shifting the demand curve for a specific product to the right.

As more satisfaction is achieved from consuming a good with diminishing marginal utility, then total utility

Increases at a decreasing rate. As long as marginal utility is positive, total utility must be increasing from consuming a good; but total utility increases by smaller and smaller increments when diminishing marginal utility exists.

The federal government's role in providing aid to the poor and the aged is justified because of concerns about

Inequity. The market mechanism may enrich some people while leaving others without the means to meet their needs. If such outcomes violate our vision of equity, we may want the government to change the market-generated distribution of income.

Over the price range from $180 to $120 in Figure 20.1, ceteris paribus,

Demand is elastic. At price levels greater than $100, a decrease in the price causes revenue to increase, which implies that demand is elastic.

Higher prices will increase total revenue if

Demand is inelastic. When demand is inelastic, this means that the quantity demanded does not fall by much when the price increases. So total revenue will increase with higher prices when demand is inelastic. A few buyers will refuse to pay the higher price, but most of them will continue to purchase the good.

A price decrease will cause total revenue to fall if

Demand is inelastic.Lower prices result in lower total revenue only if price elasticity of demand is inelastic (price elasticity is less than 1).

The price elasticity number for necessities will be greater than 1.

False If a product is a necessity, then demand is inelastic and the elasticity number will below 1. For example, if the price of cigarettes rises by 10 percent and quantity demanded falls by only 5 percent, then the elasticity number is 0.5 > 1.0, indicating inelastic demand.

If the elasticity number (E) is less than 1, a price increase will cause total revenue to fall.

False If the price elasticity is less than 1, demand is inelastic. Inelastic demand causes total revenue to rise when price rises.

Price discrimination only occurs when consumers have only partial information about a product's price and availability.

False It is easier for a seller to engage in price discrimination when consumers do not have full information about the product's price or availability.

Total output may continue to rise even though marginal physical product is negative.

False Marginal physical product (MPP) is the change in total output that results from employing one more unit of input. As long as MPP is positive, a firm can add to its total output by employing the worker. If MPP is negative, total output will fall.

Market demand is identical to individual demand.

False Market demand differs from one individual's demand curve in that the quantities are much larger, and market demand is the sum of all the individual demands for the product in the market.

Most goods are normal goods, and their demand shifts to the left when income rises.

False Most goods are normal goods; as incomes rise, the demand for most goods will rise. However, the demand will shift to the right.

Price discrimination occurs with products that consumers buy regularly.

False Price discrimination occurs when buyers do not have full information. That will happen with products that consumers do not buy regularly. Sellers can easily discriminate with products like cars, vacations, and colleges.

Price discrimination occurs when stores mark down products for sale.

False Price discrimination occurs when sellers charge different prices to different individuals. When sales occur, all buyers can enjoy the lower price.

As long as a public sector activity will generate benefits regardless of the costs, the activity should definitely be undertaken.

False Public sector activity should generate benefits that are greater than or equal to the costs of producing them.

State governments receive half of their tax revenue from property taxes.

False State governments rely heavily on sales taxes, while cities depend heavily on property taxes.

The federal personal income tax system is regressive.

False The federal income tax system is progressive.

Micro and macro failures of the marketplace never justify government intervention.

False The potential micro and macro failures of the marketplace provide specific justification for government intervention.

Actual output will always equal the limit described in the production function.

False The purpose of a production function is to tell us how much output we can produce with varying amounts of factor inputs, not necessarily how much we actually produce.

Government intervention in the market

Does not involve an opportunity cost if market outcomes are improved. Only if you move along the production possibilities curve, or you move inside the curve or a government action shifts the curve inward, is there an opportunity cost of a government action. If a government action shifts the curve outward or moves the economy from an interior point to one on the curve in a northeastern direction, then there is no sacrifice or opportunity cost.

If the marginal utility per dollar spent for candy bars is higher than the marginal utility per dollar spent for popcorn, you should buy more popcorn and fewer candy bars in order to maximize utility.

False To maximize utility, the consumer should choose the goods that deliver the most marginal utility per dollar.

Two indifference curves can cross one another.

False Two indifference curves cannot cross. Each indifference curve shows the combinations of two goods that yield the same level of utility. An indifference map for each individual shows successive indifference curves rising from lower to higher levels of utility. If two curves cross, this would violate the assumption of an equal level of utility presented by the combinations on one indifference curve.

Utility maximization is always achieved where total revenue is maximized.

False Utility maximization is determined by the consumption of a good, whereas total revenue is determined by the price and quantity sold of a good.

A U-shaped average total cost curve implies

First marginal cost below average total cost, and then marginal cost above average total cost. So long as the marginal cost of producing one more unit is less than the previous average cost, average cost must fall. Average total costs must increase whenever marginal cost exceeds average cost.

In the short run, when a firm produces zero output, total cost equals

Fixed costs. Fixed costs must be paid even if no output is produced. Variable costs start at zero; therefore when a firm produces zero, total costs are equal to fixed costs.

Which of the following costs do not change when output changes in the short run?

Fixed costs. Fixed costs such as the cost of the basic plants and equipment do not vary with the rate of output.

Which of the following is a merit good?

Food. A merit good is a good or service that society deems everyone is entitled to some minimal quantity of, such as food.

How much food production is sacrificed when North Korea moves from point P to point N?

GC

If Good X has social demand that is less than market demand, then Good X must be a

Good with an external cost. The market responds to consumer demands, not externalities. External costs imply that the social demand is less than (below) market demand.

The World View article on the rise in gold prices indicates that

The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold. The law of supply states that, ceteris paribus, an increase in price will cause an increase in quantity supplied. This is illustrated in the article on gold prices in the World View. As the price of gold has risen, miners around the world have searched for more sources of gold.

Which of the following is the slope of the production function with respect to an input?

The marginal physical product of the input. The slope of the production function shows how output changes as we employ more workers in fixed-resource factory.

Jose goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. He does not go back for a fourth plate of food because

The marginal utility of the fourth plate would be zero or even negative. As long as marginal utility is positive, total utility must be increasing; but when marginal utility is negative or zero, consumption of one more good will decrease total utility or not add to utility at all.

When choosing among products, consumers look at

The marginal utility per dollar and their budget constraint. Rational consumers will want to get the most from their purchases given their limited income. That means they will purchase the items with the highest marginal utility per dollar and that are affordable, given their budget.

Which of the following is possible when the market fails?

The mix of goods and services is on the production possibilities curve. Market failure implies that market forces have not led us to the best point on the production possibilities curve.

The market demand for a product is

The sum of all of the individual demands for that product. The market demand is the sum of all of the individual demands for that product. The market demand is similar to the individual demand, but differs in the quantities demanded.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume that the price of both goods X and Y are $1 each. Point D on the graph.

Is affordable but does not yield the highest utility possible. Point D is affordable because it lies on the budget constraint line. This point intersects with indifference curve I2, which gives a lower level of utility than point C, which lies on indifference curve I3 and gives the consumer a higher level of utility.

Total utility is maximized when

Marginal utility is zero. As long as marginal utility is positive, total utility must be increasing; but when marginal utility is negative, consumption of one more good will decrease total utility. Therefore total utility is maximized at the consumption level where marginal utility is neither positive or negative.

Maximum utility is achieved when

Marginal utility is zero. Without budget constraints, a consumer can add to her or his utility by consuming goods with positive marginal utility. Therefore utility will be maximized when marginal utility reaches zero.

A consumer maximizes total utility from a given amount of income when the

Marginal utility obtained from the last dollar spent on each good is the same. Optimal consumption implies that the utility-maximizing combination of goods has been found if you can't increase your total utility by trading one good for another. Therefore, all goods included in the optimal consumption mix yield the same marginal utility per dollar.

The mix of consumer purchases that maximizes the utility attainable from available income is called the

Optimal consumption. The optimal consumption combination is the one that maximizes the utility of our limited income.

If the price of a good rises by 10 percent and quantity demanded falls by 20 percent, we can predict that

The company's total revenue will decrease. The price elasticity in this case is 20%/10% = 2 (in absolute value). This means that demand is elastic. When demand is elastic, an increase in price will decrease a firm's total revenue.

If demand is perfectly elastic,

The demand curve is horizontal. A perfectly elastic demand curve is horizontal, which means that any increase in price causes quantity demanded to fall to zero.

If the price elasticity of demand for cigarettes is 0.4,

The demand is very inelastic. The basic elasticity of demand formula is the percentage change in quantity divided by the percentage change in price. An absolute value of 0.4 indicates that demand is inelastic (less than 1) and that a 10 percent change in price will cause the quantity demanded to fall by just 4 percent. 0.4 = x/.10.

Which of the following is the best description of the U.S. tax system?

The federal income tax is progressive, but sales, property, and other taxes tend to be regressive. The federal income tax is progressive, but sales, property, and other taxes tend to be regressive.

The World View article on the rise in gold prices indicates that

The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold. The law of supply states that, ceteris paribus, an increase in price will cause an increase in quantity supplied. This is illustrated in the article on gold prices in the World View. As the price of gold has risen, miners around the world have searched for more sources of gold.

Diseconomies of scale are reflected in

The upward-sloping segment of the long-run average total cost curve. When increasing the size (scale) of a plant reduces operating efficiency, the average total cost curve will increase.

World output of goods and services increases with specialization because

The world's resources are being used more efficiently. Specialization and trade allow for greater production worldwide without an increase in resources-an overall improvement in efficiency.

Which of the following is a sound economic reason why the government should subsidize your college education?

There are external benefits associated with education. The students in college are not the only beneficiaries of education; research will yield benefits to the broader community.

When sellers price discriminate,

They are attempting to charge a price that is the maximum price each individual is willing to pay. Sellers test the waters by trying to find a price that is the maximum price each individual will pay for the product.

When a surplus exists for a product,

Producers reduce the level of output and reduce price. A surplus occurs when quantity supplied exceeds quantity demanded. Businesses will decrease their prices to get rid of excess inventories and begin to reduce production.

Suppose that if your income is $20,000, your tax is $4,000, but if your income is $40,000, your tax is $8,000. Such a tax is

Proportional. At income of $20,000, 20% (4,000/20,000) is paid in taxes, and at income of $40,000, 20% (8,000/40,000) is paid in taxes. Because the percentage stays the same when income changes, this is a proportional tax.

If DVD players and DVDs are complementary goods, an increase in the price of DVDs will, ceteris paribus,

Reduce the demand for DVD players. Complementary goods are frequently consumed in combination; when the price of DVDs rises, fewer will be purchased and therefore the demand for DVD players will fall.

Government intervention can serve to stabilize the macro economy by

Reducing inflation and encouraging economic growth. The goal of government macro intervention is to foster economic growth, get us on the production possibilities curve, maintain a stable price level, and increase our capacity to produce.

The free-rider problem

Reflects the inability to exclude an individual from the benefits of someone else's purchase. The communal nature of public goods creates the opportunity for an individual to reap direct benefits from someone else's purchase of a public good without paying for the good.

In general, state and local taxes tend to be

Regressive. In general, cities depend heavily on property taxes, and state governments rely heavily on sales taxes-both of which are regressive taxes because lower-income people devote a larger portion of their incomes to taxable goods and housing costs.

Suppose that if your income is $50,000, your tax is $5,000, but if your income is $100,000, your tax is $8,000. Such a tax is

Regressive.At income of $50,000, 10% (5,000/50,000) is paid in taxes, but at income of $100,000, 8% (8,000/100,000) is paid in taxes. Because the percentage decreases with income, this is a regressive tax.

In the long run, which of the following is likely to be a variable cost?

Rent, wages, and all other costs are variable in the long run. In the long run, all costs are variable.

The point where the budget constraint and an indifference curve are tangent

Represents the optimal consumption point. The objective is to reach the highest indifference curve that is compatible with our budget constraint. We can afford only those consumption combinations that are on or inside the budget line. Therefore, the optimal consumption combination-the one that maximizes the utility of spendable income-lies at the point where the budget line is tangent to (just touches) an indifference curve.

Which of the following is an example of government failure?

Required use of pollution control technology that is obsolete.Inefficient incentives.Bureaucratic delays. There are costs to government action, which in this case prevent an improvement in the outcome.

Income elasticity measures the

Responsiveness of quantity demanded to a percentage change in income. Income elasticity measures how responsive quantity demanded is to a change in incomes.

Productivity

Rises when the ratio of output to input increases. The amount we can produce with our inputs in a given time frame is what productivity is measuring. It measures how much output can be produced with a certain amount of inputs.

The production possibilities curve illustrates which two of the following essential principles?

Scarce resources and opportunity cost. The production possibilities curve illustrates scarce resources and opportunity cost as essential principles.

Which of these examples is an example of price discrimination?

Seniors pay one price at the movie theater and adults pay more. If seniors pay one price at the movie theater, and adults pay a different price, this is an example of price discrimination. Price discrimination occurs when individuals pay different prices for the same good.

When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage stamps and Internet service are therefore

Substitutes. If the cross-price elasticity of demand is positive, an increase in the price of postage causes an increase in demand for Internet service, and the goods must be substitutes.

When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage stamps and Internet service are therefore

Substitutes. If the cross-price elasticity of demand is positive, an increase in the price of postage causes an increase in demand for Internet service, and the goods must be substitutes.

If there is a surplus at a given price, then

That price is greater than the equilibrium price. At prices above equilibrium, quantity supplied will be greater than quantity demanded, so a market surplus will exist.

A buyer is said to have a demand for a good only when

The buyer is both willing and able to purchase the good. Demand is the ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus

If the marginal cost curve is rising, which of the following must be true?

Total costs must be rising. Marginal cost is the increase in total cost associated with a one-unit increase in production. So as long as MC is positive, the total costs must be rising. Average total cost can be decreasing and can be either above or below the marginal cost curve when the marginal cost curve is upward-sloping.

If the price is reduced from $100 to $80 in Figure 20.1, ceteris paribus,

Total revenue will decrease. Revenue is equal to price times quantity. Revenue is $10,000 at a price of $100 and $9,600 at a price of $800.

If marginal utility is negative, then

Total utility will decrease with additional consumption. As long as marginal utility is positive, total utility must be increasing; but when marginal utility is negative, consumption of one more good will decrease total utility.

According to consumer choice theory, rational behavior requires that consumers compare the marginal utility of each purchase with its price.

True Rational behavior requires one to compare the anticipated utility of each expenditure with its price. The smart thing to do, then, is to choose those products that promise to provide the most pleasure for the amount of income available.

If you burn garbage in your backyard and the smoke damages a neighbor's house, the damage is considered an externality.

True The externality is the cost of the house damage paid by the neighbor (third party).

Sometimes the response to price signals, rather than the signals themselves, may be flawed.

True The market may fail even when the price signals are accurate. The response to price signals, rather than the signals themselves, may be flawed. For example, there may be externalities present.

Government waste implies that the public sector is not producing as many services as it could with the resources at its disposal.

True. Government waste causes an economy to produce less than its potential.

If the economy relies entirely on the market mechanism to answer the WHAT, HOW, and FOR WHOM questions, it tends to

Underproduce goods that yield external benefits and overproduce those that generate external costs. The market fails by overproducing goods that have external costs and underproducing goods that have external benefits.

A price change will have no effect on total revenue if demand is

Unitary. A price hike has no effect on total revenue if the price elasticity of demand is equal to 1.

The demand will be _______________ if the consumer has _________ substitute goods to choose from

elastic; more The more substitutes available to the consumer, the more elastic the demand. This means if the price of one good goes up, the consumer does not have to keep purchasing that good and switches to another good.

Assume that store brand cereal is an inferior good. If income rises, then the price of store brand cereal will ________ and the quantity sold of store brand cereal will _______.

fall; fall When incomes rise, people demand fewer inferior goods such spaghetti, discount clothes, and generic brand items. When demand for a good decreases, the price and equilibrium quantity will decrease.

If the price of gasoline rises by 10 percent and new car sales fall by 5 percent, this indicates that these two goods are complementary.

true The formula for cross-price elasticity is the percentage change in quantity demanded for new cars divided by the percentage change in gasoline prices. For complementary goods, the sign on the cross-price elasticity formula will be negative.

The rational consumer chooses a combination of two goods that is on the budget constraint and is tangent to the highest indifference curve possible.

true The goal of the consumer is to purchase a combination of two goods that is affordable (lies on the budget constraint line) and that yields the highest utility (is tangent to the highest indifference curve).

The long-run ATC curve is simply a composite of the best short-run ATC possibilities.

true The long-run cost curve is just a summary of our best short-run cost possibilities, using existing technology and facilities.

What is the marginal cost of the 120th unit of output in Figure 21.2?

$288.00.According to the graph, marginal cost is equal to $288 at the quantity 120.

Which of the following statements best captures the concept of consumer surplus?

"I was willing to pay $30 for a dozen roses, but I bought them for $20." Consumer surplus is the difference between the maximum a consumer was willing to pay for a good and the actual price paid.

Price per hour Quantity Supplied by Ann Quantity Supplied by Bob Quantity Supplied by Carlos Market Quantity Supplied Market Quantity Demanded $50 94 35 19 148 5 45 93 33 14 140 8 40 90 30 10 130 11 35 81 27 6 114 16 30 68 20 2 90 22 25 50 12 0 62 30 20 32 7 0 39 39 15 20 0 0 20 47 10 10 0 0 10 57 Instructions: Enter your response rounded to the nearest whole number. What would the new equilibrium price of tutoring services be if Carlos decided to stop tutoring?

$ 20 per hour.

If workers are paid $10, what is the labor cost per unit of output in Table 21.1 when output is increased from 15 to 35 units of output?

$0.50 per unit. The wage rate divided by the marginal physical product is equal to the unit labor cost. When the wage rate is $10 per hour and the MPP is 20 units, the unit labor cost is $0.50 (10/20).

If an additional unit of labor costs $20 and has a MPP of 15 units of output, the marginal cost is

$1.33. Marginal cost is the increase in total cost associated with a one-unit increase in production and can be found by dividing the change in total cost by the MPP. If an additional unit of labor costs $20 and has a MPP of 15 units of output, the marginal cost is 20/15 or $1.33.

The marginal cost between 20 and 30 units of output in Table 21.2 is

$1.80. Marginal cost is equal to the change in total cost ($80 - $62) divided by the change in quantity (30 - 20), which is $1.80.

What is the unit labor cost in Table 21.3 for the second unit of labor if the MPP represents daily output and the wage rate is $72 per day?

$2.00 per unit of output. The wage rate divided by the marginal physical product is equal to the unit labor cost. When the wage rate is $72 per day and the MPP is 36 additional units per day, the unit labor cost is $2.00 (72/36).

Refer to Figure 19.1. The total consumer surplus in this market is equal to

$900. The total consumer surplus is the total of the differences between each individual's maximum willingness to pay and the actual price. The total for the three consumers is ($600 - $100) + ($400 - $100) + ($200 - $100) = $900.

In Figure 1.9, the slope of the line between points K and L is

.8 The slope is calculated as the change in the vertical variable divided by the change in the horizontal variable (0.80 = 20/25).

A World View article titled "Secondhand Smoke Kills 600,000 People a Year: Study" claims what percentage of all deaths worldwide are caused by secondhand smoke?

1 percent. According to the article, secondhand smoke is responsible for 1 percent of all deaths worldwide.

Assume the market demand for cigarettes is depicted in the table below: Price per pack $10 $9 $8 $7 $6 $5 $4 $3 Quantity demanded (millions of packs per year) 2 4 6 8 10 12 14 16 (a) If cigarettes are priced at $6 a pack, how many packs will smokers buy? (b) Assume cigarettes are still priced at $6 a pack. If secondhand smoke creates $2 of harm per pack, what is the optimal rate of smoking? (c) How large a tax is needed to achieve this outcome?

10 correct million packs per year 6 correct million packs per year $ 2 correct per pack

Table 1.2 shows the hypothetical trade-off between different combinations of Stealth bombers and B-1 bombers that might be produced in a year with the limited U.S. capacity, ceteris paribus. Complete the table by calculating the required opportunity costs for both the B-1 and Stealth bombers. On the basis of your calculations in Table 1.2, what is gained by producing at point B rather than point A?

15 B-1 bombers. Reallocating resources to B-1 bombers will allow 15 (35 - 20) B-1 bombers to be produced.

Total fixed costs in Table 21.5 are equal to

15 The total fixed cost is $15 at any unit of output because total cost is $15 at 0 units of output.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. If the price per unit of good X is $1, the consumer would maximize utility by consuming

15 units of Y. If the price of Y is $1, one can infer that the maximum spendable income is $30 based on the point where the budget constraint crosses the y-axis. If the price of X is $1, the budget constraint farthest from the origin is the limit. Because the optimal consumption combination lies at the point where the budget line is tangent to (just touches) an indifference curve, point C maximizes utility, which is the combination of 15 X and 15 Y.

Suppose movie downloads cost $2 apiece and game downloads cost $3. If the marginal utility of movie downloads at the optimal mix of consumption is 10 utils, what is the marginal utility of a game download?

15 utils

At 4 units of output in Table 21.4, total fixed costs are

16 The total fixed cost is $16 at any unit of output because total cost is $16 at 0 units of output.

Refer to Table 19.3. If Michael has $40 to spend on cola and pretzels, what is his maximum utility possible?

174. To maximize utility, the consumer should choose the goods that deliver the most marginal utility per dollar at each step. With $40 Michael would consume three colas and four pretzels, which would bring him a total of 174 utils.

Calculate the size of the labor force. The size of the adult population is 30,000. The number working is 17,700 and the number of unemployed actively looking for work is 1,600.

19300

If the price of sandals increases by 10 percent and the quantity demanded falls by 20 percent, then the price elasticity of demand in absolute value is

2 The formula for the price elasticity of demand is the absolute value (drop the negative sign) of the percentage change in quantity demanded divided by the percentage change in price. 20%/10%=2.

If it takes 15 farmworkers to harvest 1 ton of strawberries and 3 farmworkers to harvest 1 ton of wheat, what is the opportunity cost of 5 tons of strawberries?

25 tons of wheat

The marginal cost of the third unit of output in Table 21.5 is

3 Marginal cost is equal to the change in total cost ($30 - $27) divided by the change in quantity (3 - 2), which is $3.

For the output levels in Table 21.4, the minimum of the average total cost curve occurs at a production rate of

3 units per day. ATC is equal to TC divided by quantity. The ATC is $30, $21, $19.3, and $19.5 with output levels of 1 through 4 respectively. Therefore, ATC is minimized at 3 units of output.

For product XYZ, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by

3.5 percent for each 1 percent decrease in price, ceteris paribus. The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore a 1 percent decrease in price will cause a 3.5 percent increase in quantity demanded.

The marginal utility per dollar of the third pretzel is

4. The marginal utility per dollar is equal to the marginal utility divided by the price of the product. The marginal utility of the third pretzel is 16 and the price of a unit of pretzel is $4. So 16/4 = 4.

Refer to Table 19.1. What is Josh's total utility from consuming the third slice of pizza?

54 utils. Total utility is the sum of all of the marginal utilities. If you add the 15 marginal utility units that Josh received from consuming the third slice of pizza to the total utility units of 39 he enjoyed from the second slice, 39 + 15 = 54.

In Table 19.2, the marginal utility of the third unit is

6 Marginal utility is the change in total utility obtained by consuming one additional good or service. Total utility increases from 24 to 30 when the third unit is consumed, an increase of 6 utils.

The average variable cost of the second unit of output in Table 21.5 is

6 AVC is equal to VC ($12) divided by quantity (2), which is $6.00.

Suppose the following table reflects the total satisfaction derived from consumption of pizza slices and Pepsis. Quantity consumed 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Total units of pleasure from pizza slices 0 47 92 132 166 196 224 251 271 288 303 313 315 312 300 Total units of pleasure from Pepsis 0 111 200 272 336 386 426 452 456 444 408 340 217 92 -17 Assume that pizza costs $1 per slice and a large Pepsi costs $2. With $20 to spend, what consumption mix will maximize satisfaction?

6 Pepsis and 8 slices of pizza

Suppose the following table reflects the total satisfaction derived from consumption of pizza slices and Pepsis. Quantity consumed 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Total units of pleasure from pizza slices 0 47 92 132 166 196 224 251 271 288 303 313 315 312 300 Total units of pleasure from Pepsis 0 111 200 272 336 386 426 452 456 444 408 340 217 92 -17 Assume that pizza costs $1 per slice and a large Pepsi costs $2. With $20 to spend, what consumption mix will maximize satisfaction?

6 Pepsis and 8 slices of pizza Explanation: We know we've reached maximum utility when we've satisfied the following rule: Utility-maximizing rule: formula19.mml In this case, the optimal mix is achieved when marginal utility of pizza/price of pizza = marginal utility of Pepsi/price of Pepsi, constrained by the fact that we have only $20 to spend. The following table lays out the process of finding this optimal combination: Quantity Consumed Total Pleasure from Pizza Slices Marginal Pleasure of Pizza per Slice Marginal Pleasure of Pizza per Dollar 0 0 0 0 1 47 47 47 2 92 45 45 3 132 40 40 4 166 34 34 5 196 30 30 6 224 28 28 7 251 27 27 8 271 20 20 Quantity Consumed Total Pleasure from Pepsi Marginal Pleasure of Pepsi Marginal Pleasure of Pepsi per Dollar (Marginal Pleasure/2) 0 0 0 0 1 111 111 55.5 2 200 89 44.5 3 272 72 36 4 336 64 32 5 386 50 25 6 426 40 20 The above table shows that the utility maximizing rule is satisfied at 8 pieces of pizza and 6 units of Pepsi, given the $20 budget ($12 spent on Pepsi and $8 spent on pizza).

Tuition (per year) $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Enrollment demanded (in millions per year) 8 7 6 5 4 3 2 1 (a) If tuition is set at $3,000, how many students will enroll? (c) What is the socially optimal level of enrollment at the same tuition price of $3,000 (d) How large of a subsidy is needed to achieve this optimal outcome?

6 million students 7 million students $ 1,000 per student

In Table 19.3, what is the total utility of two units of cola?

72 The total utility when one unit is consumed is 40, and the second unit adds 32 additional utils, which causes total utility to increase to 72.

Calculate the Unemployment Rate (Round your answer to one decimal place):

8.2%

If a product has a high marginal utility, then

A consumer is willing to pay a high price for it. One's desire for a good, or taste, will impact the utility or satisfaction received from the consumption of that good.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. In Figure 19.3, given an income of $30 and a price for good Y of $1, which of the following two points represent optimal consumption?

A when the price of X is $3 and C when the price of X is $1. If the price of X is $3, the budget constraint closest to the origin is the limit; but if the price of X is $1, the budget constraint farthest from the origin is the limit. Because the optimal combination lies at the point where the budget line is tangent to an indifference curve, point A or point C maximizes utility depending on the price of X.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. If the price per unit of good X is $3, the consumer would maximize utility at point

A. If the price of Y is $1, one can infer that the maximum spendable income is $30 based on the point where the budget constraint crosses the y-axis. If the price of X is $3, the budget constraint closest to the origin is the limit. Because the optimal consumption combination lies at the point where the budget line is tangent to (just touches) an indifference curve, point A maximizes utility.

If demand is elastic, then

An increase in price will reduce total revenue. Total revenue equals price times quantity. With elastic demand, an increase in price will cause a large fall in quantity demanded that is greater than the price increase. The result is that total revenue will fall as the price rises if demand is elastic.

Ceteris paribus, which of the following is most likely to cause a decrease in the supply of skateboards?

An increase in the cost of materials used to produce skateboards. An increase in costs of production causes supply to decrease. An increase in price causes a decrease in the quantity supplied, whereas an improvement in skateboard-making technology would increase supply.

Ceteris paribus, which of the following is most likely to cause an increase in the quantity supplied of perfume?

An increase in the price of perfume. If the price of a product is the only variable changing, then we can track changes in quantity supplied along the supply curve.

Government intervention to alter market structure or prevent abuse of market power is the basic purpose of

Antitrust policy. Antitrust is government intervention to alter market structure or prevent abuse of market power.

When voting mechanisms substitute for the market mechanism in allocating resources, we are relying on

Ballot box economics. Ballot box economics occurs when we rely on political mechanisms to decide what to produce in the public sector and how to redistribute income.

Carter has budgeted $40 per month for candy bars. No matter how the price of candy bars changes, he spends exactly $40 per month. Carter's price elasticity of demand for candy bars must

Be unitary. Prices changes will not cause the total amount spent on a good (revenue) to change if the demand is unitary elastic.

According to the World View article titled "United States Gains Cost Advantage," during the last decade, unit labor costs in the United States declined

Because productivity advances were greater than wage increases. Global competitiveness depends on unit labor costs. U.S. unit labor costs have declined in the last decade or so, increasing America's competitiveness in world markets.

Suppose Caesar allocates his entire budget to the purchase of soft drinks and chips. The marginal utility of the last bottle of soft drink purchased is 12 utils, and each bottle costs $1.20. The marginal utility of the last bag of chips purchased is 8 utils, and each bag costs $1. In order to maximize his utility, Caesar should

Buy more soft drinks and fewer chips since he gets more marginal utility per dollar from soft drinks. To maximize utility, the consumer should choose the good that delivers the most marginal utility per dollar. The marginal utility per dollar from the soft drink is 10 while the marginal utility per dollar from the bag of chips is 8; therefore Caesar should buy more soft drinks and fewer chips.

Price discrimination works best when

Buyers do not have perfect information about the price. A seller is most successful in practicing price discrimination when buyers do not have full information about the prices of the good or the different prices charged to different individuals.

Price discrimination works best when

Buyers do not have perfect information about the price. A seller is most successful in practicing price discrimination when buyers do not have full information about the prices of the good or the different prices charged to different individuals.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. If the price per unit of good X is $1, the optimal consumption is found at point

C If the price of Y is $1, one can infer that the maximum spendable income is $30 based on the point where the budget constraint crosses the y-axis. If the price of X is $1, the budget constraint farthest from the origin is the limit. Because the optimal consumption combination lies at the point where the budget line is tangent to (just touches) an indifference curve, point C maximizes utility.

In economics, a public good

Cannot be denied to consumers who have not paid. A public good is a good or service whose consumption is nonexcludable.

Which of the following is most likely a private good?

Cars. One person's use of a car can exclude the use by others.

A decrease in the price of bubble gum below equilibrium will

Cause a shortage of bubble gum. A decrease in the price of bubble gum below equilibrium will cause a shortage. It will not move the respective supply and demand lines.

Sellers can gain profits from price discrimination because

Charging different prices based on willingness to pay can increase revenues without increasing costs. If a seller can charge the maximum price each individual is willing to pay, it can raise its total revenues. Revenue is price times quantity.

Which of the following would most likely have a price elasticity coefficient less than 1?

Coffee. The greater the availability of substitutes, the higher the price elasticity of demand. Most bleary-eyed coffee drinkers can't imagine any other product that could substitute for a cup of coffee. As a consequence, when coffee prices rise, consumers don't reduce their purchases much.

What is the combined consumer surplus for the customers who buy the Porsche Spyders when the market price is $835,000?

Combined Consumer Surplus: $ 360,000 Explanation: The only people who purchase a product are those whose maximum price equals or exceeds the market price. Therefore, all consumers buying the good reap some consumer surplus. The market price of a Spyder is $835,000. Carlos's maximum price threshold is $850,000. His consumer surplus is $850,000 - $835,000 = $15,000. Hua's maximum price threshold is $900,000. Her consumer surplus is $900,000 - $835,000 = $65,000. Michel's maximum price threshold is $950,000. Her consumer surplus is $950,000 - $835,000 = $115,000. Fred's maximum price threshold is $1,000,000. His consumer surplus is $1,000,000 - $835,000 = $165,000. The combined consumer surplus for these four individuals is: $15,000 + $65,000 + $115,000 + $165,000 = $360,000

Assume peanut butter and jelly are complements. Ceteris paribus, an increase in the price of peanut butter will cause the equilibrium price of jelly to

Decrease and the equilibrium quantity of jelly to decrease. An increase in the price of peanut butter will cause a decrease in the demand for jelly. A decrease in demand causes equilibrium price and equilibrium quantity to decrease.

If the price of Good X falls and total revenue rises, then

Demand for Good X is elastic. Lower prices result in higher total revenue only if price elasticity of demand is elastic (price elasticity is greater than 1).

Supply is very elastic when The quantity supplied has a large increase in response to an increase in price.

Elasticity of supply looks at how responsive quantity supplied is to changes in price. If supply is very elastic, it can change quickly in response to a change in price. For example, if the price of pizza is rising, pizza restaurants can easily produce more. The supply curve is flatter and upward-sloping.

The purpose of the World Trade Organization (WTO) is to

Enforce the rules of free trade. The WTO is a forum for enforcement of the rules of free trade, and a place to file complaints against violators of free trade.

Which of the following products will have elastic demand?

European travel.Products that have elastic demand have a lot of substitutes for consumers and take a larger percentage of their income. European travel has a very high elasticity of demand.

Ceteris paribus, which of the following is most likely to shift both the demand and the supply curves?

Expectations. Expectations cause both demand and supply to change.

A public good

Experiences the free-rider dilemma. The communal nature of public goods creates the opportunity for an individual to reap direct benefits from someone else's purchase of a public good without paying for the good.

Refer to the production table for jeans below: Capital Input (Sewing Machines per Day) Labor Input (Workers per Day) 0 1 2 3 4 5 6 7 8 Jeans Output (Pairs per Day) 0 0 0 0 0 0 0 0 0 0 1 0 15 34 44 48 50 51 51 47 2 0 20 46 64 72 78 81 82 80 3 0 21 50 73 83 92 99 103 103 Suppose a firm has two sewing machines and can vary only the amount of labor input. (a) Compute the production function for jeans given the two sewing machines in the table below and (b) Compute the marginal physical product in the table below. Instructions: Enter your responses as a whole number. Indicate a negative response with a (-) negative sign. Labor Input (Workers per Day) Jeans Output (Pairs per Day) Marginal Physical Product 0 0 ------- 1 20 20 2 46 26 3 64 18 4 72 8 5 78 6 6 81 3 7 82 1 8 80 -2 (c) At what amount of labor input does the law of diminishing returns first become apparent in the table of marginal physical product? 3 units (d) Is total output still increasing when MPP begins to diminish? Yes (e) When total output stops increasing, what is the value of MPP? -2

Explanation: (a) A production function is the technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs. Given two sewing machines, the production function is the number of jeans that can be produced with various numbers of workers. Refer to the given information in the table, jean output for two sewing machines with labor inputs of 0 to 8 workers. (b) Marginal physical product is the change in total output associated with one additional unit of input. For example, the marginal physical product associated with the second worker is 26 (= 46 - 20). (c) The law of diminishing returns says that the marginal physical product of any factor of production, such as labor, will diminish at some point as more of it is used in a given production setting. In this case marginal physical product is increasing with both one and two workers; however, with the addition of the third worker, marginal physical product is smaller (or diminishes) compared to the marginal physical product of the second worker. (d) Marginal physical product diminishes at three units of labor, yet at three units of labor total output is increasing. Diminishes means simply to get smaller - it does not mean to become negative. As long as marginal physical product is positive, total physical product is increasing. (e) Total output stops increasing with the eighth worker. Total output decreases from 82 units to 80 units. In this case, marginal physical product is -2.

(a) Complete the following cost schedule by computing average fixed cost and average variable cost. Instructions: Enter your responses rounded to the nearest whole number. Output Total Cost Average Fixed Cost Average Variable Cost 0 $600 ----- ----- 1 800 600 200 2 1,050 300 225 3 1,400 200 267 4 1,800 150 300 5 2,300 120 340 (b) Complete the following cost schedule by computing average total cost and marginal cost. Instructions: Enter your responses rounded to the nearest whole number. Output Total Cost Marginal Cost Average Total Cost 0 $600 ----- ----- 1 800 200 800 2 1,050 250 525 3 1,400 350 467 4 1,800 400 450 5 2,300 500 460 (c) At what output rate is average total cost minimized? Instructions: Enter your response as a whole number. 4 units

Explanation: (a) Average fixed cost is total fixed cost/total output. In this case the total fixed cost is $600 or, more specifically, it is the total cost when production is zero. At an output level of 2, for example, average fixed cost is $300 or $600/2. Average variable cost is total variable cost divided by the quantity produced. Total variable cost is total cost minus total fixed cost or in the case where output is 2, total variable cost is $450 (= $1,050 - $600). Therefore, average variable cost is $450/2 = $225. (b) Marginal cost is change in total cost/change in output. For example, at an output level of 2, marginal cost is $250 or ($1,050 - 800) / (2 - 1). Average total cost is total cost divided by total output. Once again at an output level of 2, average total cost is $525 or ($1,050 / 2). (c) Average total cost is minimized when average total costs are at their minimal or smallest level. In this case, the smallest average total cost is $450 for an output level of 4.

If the cross-price elasticity of demand between printed textbooks and e-books is +0.30, (a) Are e-books and textbooks complementary or substitute goods? Substitute (b) If textbook prices increase by 6 percent, by how much will e-book demand change? Instructions: Enter your response as a percent rounded to one decimal place. Indicate negative answers with a (-) negative sign. 1.8 percent

Explanation: (a) If the cross-price elasticity is positive, the two goods are substitutes. If the cross-price elasticity is negative, the two goods are complementary. (b) Cross-price elasticity = Percentage change in quantity demanded of good X (at given price)/ percentage change in price of good Y. 0.30 = percentage change in quantity demanded of e-books / 6% Thus: percentage change in quantity demanded of e-books = 0.3 × 6% = 1.8% This shows that an increase in textbook prices brings about an increase in demand for e-books, and therefore the two goods are substitutes.

If the cross-price elasticity of demand between printed textbooks and e-books is 0.5, (a) Are e-books and textbooks complementary or substitute goods? Substitute (b) If textbook prices increase by 6 percent, by how much will e-book demand change? Instructions: Enter your response as a percent rounded to one decimal place. Indicate negative responses with a (-) negative sign. 3.0 percent

Explanation: (a) If the cross-price elasticity is positive, the two goods are substitutes. If the cross-price elasticity is negative, the two goods are complementary. (b) Cross-price elasticity = percentage change in quantity demanded of good X (at given price)/ percentage change in price of good Y. 0.5 = percentage change in quantity demanded of e-books / 6% Thus: Percentage change in quantity demanded of e-books = 0.5 × 6% = 3.0% This shows that the increase in textbook prices brings about an increase in demand for e-books, and therefore the two goods are substitutes.

Instructions: Enter your response as a percent rounded to one decimal place. 18.2 ± 0.1 percent (b) By what percentage will cigarette sales decline in the short run? (See the table below for a clue.) Product Price Elasticity Relatively elastic ( E > 1 ) Airline travel, long run 2.4 Restaurant meals 2.3 Fresh fish 2.2 New cars, short run 1.2 - 1.5 Unitary elastic ( E = 1) Private education 1.1 Radios and televisions 1.2 Shoes 0.9 Movies 0.9 Relatively inelastic ( E < 1 ) Cigarettes 0.4 Coffee 0.3 Gasoline, short run 0.2 Electricity (in homes) 0.1 Long-distance phone calls 0.1 Instructions: Enter your response as a percent rounded to one decimal place. 7.3 ± 0.1 percent (c) Refer to the "In the News" below: In the News: Professor Becker Corrects President's Math President Clinton has seized upon the cigarette excise tax as an expedient and politically correct means of increasing federal revenue. In 1994 the federal government took in $12 billion from the present 24-cents-per-pack tax. If the tax were quadrupled to $1 a pack, Clinton figures tax revenues would increase by more than $50 billion over three years. Those added revenues would help finance the health care reforms the president so dearly wants. Professor Gary Becker, a Nobel Prize-winning economist at the University of Chicago, says Clinton's math is wrong. The White House assumed that cigarette sales would drop by 4 percent for every 10 percent increase in price. Professor Becker says that reflects only the first-year response to higher prices, not the full adjustment of smokers' behavior. Over a three-year period, cigarette consumption is likely to decline by 8 percent for every 10 percent increase in price—twice as much as Clinton assumed. As a result, the $1-a-pack tax will bring in much less revenue than President Clinton projected. Source: Gary S. Becker, "Warning: A Higher Cigarette Tax May Be Hazardous to Health Financing," BusinessWeek, August 15, 1994, p. 18. According to Gary Becker, by how much will sales decline in the long run? Instructions: Enter your response as a percent rounded to one decimal place. 14.6 ± 0.1 percent

Explanation: (a) Percentage change in price = change in price/average price = (6 - 5) / ((5+6) / 2 = 1 / (5.5) = 0.182, or 18.2%. (b) Given the information in the table, we know that price elasticity (E) = 0.40 for cigarettes. We also know from the information given in the question that the percentage change in price will be 18.2 percent (using midpoint elasticity calculations). The elasticity formula is: E = percentage change in quantity demanded/percentage change in price. Solving for percentage change in quantity demanded we find 0.40 × 0.182 = 0.073, or about 7.3 percent. Therefore, the $1 tax on cigarettes will reduce sales by 7.3 percent in the short run. (c) According to Becker, the long-run (over a three-year period) elasticity of demand is 0.80 (E = 8% / 10% = 0.80). Once again, we need to solve for percentage change in quantity demanded: 0.8 × 0.182 (from answer a) = 0.1456 or approximately 14.6 percent decline in quantity.

What is the total revenue (price × quantity) received by the car dealer in the figure if he charges Instructions: Enter your response as a whole number. (a) A uniform price of $780,000? $ 3,900,000 (b) Maximum individual prices to Fred, Michel, Hua, Carlos, John, and Marty? $ 5,250,000

Explanation: (a) The car dealer decides to charge a uniform price of $780,000.In this case only five people have a price threshold above the uniform price of $780,000. Fred, Michel, Hua, Carlos, John, and Marty are the only individuals who are willing and able to buy the car. Therefore, the total revenue for the dealer is price x quantity, or $780,000 x 5 = $3,900,000. (b) The most a car dealer could charge a customer is her or his maximum price threshold. This is known as price discrimination, or charging individual consumers different prices for the same good. Fred's maximum price threshold is $1,000,000. Michel's maximum price threshold is $950,000. Hua's maximum price threshold is $900,000. Carlos's maximum price threshold is $850,000. John's maximum price threshold is $800,000. Marty's maximum price threshold is $750,000. The total revenue received by the car dealer who has the ability to perfectly price discriminate is the combined total revenue from these six individuals if they are each charged their maximum price threshold. Total Revenue =1,000,000 + $950,000 + $900,000 + $850,000 + $800,000 + $750,000 = $5,250,000

If Bob's maximum price threshold increased by 50 percent, (a) Would he buy a Spyder at a market price of $825,000? Yes (b) How much consumer surplus would he have? Instructions: Enter your response as a whole number. (Note: consumer surplus is never a negative number.) $ 225,000

Explanation: (a) The maximum price a consumer is willing and able to pay for a good determines where an individual is positioned on the market demand curve. A person will buy a product only if its price is at or below the maximum price that person is willing and able to pay. Bob's maximum price threshold is $700,000 and because the price of a Spyder is $825,000 he will choose not to buy it. If his maximum price threshold is increased by 50 percent, then his maximum price is $1,050,000, and he will purchase the car. (b) The difference between Bob's maximum price threshold and the price paid is his consumer surplus. In this scenario, consumer surplus is $1,050,000 - $825,000 = $225,000.

(a) What is total revenue at the price of $24? Instructions: Enter your responses as a whole number. $ 120,000 (b) If the price drops to $12, how many tickets would consumers purchase? 9,000 tickets (c) What is total revenue at that point? $ 108,000 (d) If the team has a losing streak that shifts the demand curve and the price is still $24, at what point do we end up? Point T (e) What is total revenue at that point? $ 48,000

Explanation: (a) Total Revenue = Price x Quantity. At a price of $24 (point A), the quantity of football tickets demanded is 5,000. Thus, Total Revenue = $24 x 5,000 = $120,000. (b) A downward-sloping demand curve expresses the law of demand: the quantity of a good demanded increases as its price falls. According to the figure, at a price of $12 (point G), the quantity of football tickets demanded is 9,000. (c) Total Revenue = Price x Quantity. When the price drops to $12, customers will now purchase 9,000 tickets. Thus total revenue is now= $12 x 9,000 = $108,000. (d) When the team is on a losing streak, the fans are less enthusiastic about attending the games to cheer on their team, and they are less satisfied with their ticket purchase. As a result, many students prefer not to go to the game and demand decreases (shifts to the left). The demand for the tickets falls at every price level, so we end up at point T on the graph. (e) Total Revenue = Price x Quantity. When the price stays at $24, but demand decreases, customers will now purchase 2,000 tickets. Thus total revenue has decreased = $24 x 2,000 tickets = $48,000.

Suppose the accompanying graph depicts the demand for football tickets at Grand University: (a) What is total revenue at the price of $24? Instructions: Enter your responses as a whole number. $120,000 correct (b) If the price drops to $12, how many tickets would consumers purchase? 9,000 correct tickets (c) What is total revenue at that point? $108,000 correct (d) If the team has a losing streak that shifts the demand curve and the price is still $24, at what point do we end up? Point T correct (e) What is total revenue at that point? $48,000 correct

Explanation: (a) Total Revenue = Price x Quantity. At a price of $24 (point A), the quantity of football tickets demanded is 5,000. Thus, Total Revenue = $24 x 5,000 = $120,000. (b) A downward-sloping demand curve expresses the law of demand: the quantity of a good demanded increases as its price falls. According to the figure, at a price of $12 (point G), the quantity of football tickets demanded is 9,000. (c) Total Revenue = Price x Quantity. When the price drops to $12, customers will now purchase 9,000 tickets. Thus total revenue is now= $12 x 9,000 = $108,000. (d) When the team is on a losing streak, the fans are less enthusiastic about attending the games to cheer on their team, and they are less satisfied with their ticket purchase. As a result, many students prefer not to go to the game and demand decreases (shifts to the left). The demand for the tickets falls at every price level, so we end up at point T on the graph. (e) Total Revenue = Price x Quantity. When the price stays at $24, but demand decreases, customers will now purchase 2,000 tickets. Thus total revenue has decreased = $24 x 2,000 tickets = $48,000.

Suppose the hourly wage rate is $10 in the United States and $4 in China, and productivity is 20 units per hour in the United States and 10 units per hour in China. What are unit labor costs in Instructions: Enter your responses rounded to two decimal places. (a) The United States? $ 0.50 ± 0.01 (b) China? $ 0.40 ± 0.01

Explanation: (a) Unit labor costs are simply wage rates divided by marginal physical product (or productivity). For the United States this implies that unit labor costs equal the [hourly wage rate in the United States]/[productivity in the United States] or more specifically $10 / 20 = $0.50. (b) Unit labor costs are simply wage rates divided by marginal physical product (or productivity). For China this implies that unit labor costs equal the [hourly wage rate in China]/[productivity in China] or more specifically $4 / 10 = $0.40.

In the News: Samsung Stung by Apple Moves Samsung reported a staggering 20 percent drop in sales of its flagship smartphone, the Galaxy S5, for the last three months. Profits declined even more—a 49 percent collapse from last year. The reason for this collapse: Apple's introduction of its large-screen iPhone 6 and price cuts on the iPhone 5. Apple dropped the price of the 16GB iPhone 5s from $199 to $99 and the 8GB iPhone 5s from $99 to a cool $0, with contract. Source: News reports, October 2014. By changing the denominator in each case, compute the percentage change in the 16GB iPhone 5s price, as computed from Instructions: Enter your responses as a percent rounded to one decimal place. (a) The initial price. 50.3 ± 0.1 percent (b) The final price. 101.0 ± 0.1 percent (c) The average price. 67.1 ± 0.1 percent

Explanation: A percentage change is calculated by taking the ratio of this change and some base value, that is: the price $99, another price $199 or an average of the two. The problem is that the resulting percentage-change value depends on the price used in the denominator. Thus the percentage change in price could be calculated in a variety of ways (as suggested in this problem): (a) Percentage change in price = change in price/initial price = ($199-$99)/$199 = 0.503 x 100% = 50.3% (b) Percentage change in price = change in price /final price = ($199-$99)/$99 = 1.010 x 100% = 101% (c) Percentage change in price = change in price /average price = ($199-$99)/[($199+$99)/2] = ($100/$149) = 0.671 x 100% = 67.1%

Refer to the "In the News" below: In the News: Samsung Stung by Apple Moves Samsung reported a staggering 20 percent drop in sales of its flagship smartphone, the Galaxy S5, for the last three months. Profits declined even more—a 49 percent collapse from last year. The reason for this collapse: Apple's introduction of its large-screen iPhone 6 and price cuts on the iPhone 5. Apple dropped the price of the 16GB iPhone 5s from $199 to $99 and the 8GB iPhone 5s from $99 to a cool $0, with contract. Source: News reports, October 2014. By changing the denominator in each case, compute the percentage change in the 16GB iPhone 5s price, as computed from Instructions: Enter your responses as a percent rounded to one decimal place. (a) The initial price. 50.3 ± 0.1 percent (b) The final price. 101.0 ± 0.1 percent (c) The average price. 67.1 ± 0.1 percent

Explanation: A percentage change is calculated by taking the ratio of this change and some base value, that is: the price $99, another price $199 or an average of the two. The problem is that the resulting percentage-change value depends on the price used in the denominator. Thus the percentage change in price could be calculated in a variety of ways (as suggested in this problem): (a) Percentage change in price = change in price/initial price = ($199-$99)/$199 = 0.503 x 100% = 50.3% (b) Percentage change in price = change in price /final price = ($199-$99)/$99 = 1.010 x 100% = 101% (c) Percentage change in price = change in price /average price = ($199-$99)/[($199+$99)/2] = ($100/$149) = 0.671 x 100% = 67.1%

To increase U.S. energy independence, prices must be lowered on gasoline and electricity.

False Higher gasoline and electricity prices would give consumers and businesses incentives to be more efficient in their energy usage, and thus would reduce U.S. dependence on foreign oil.

In the News: Federal Cigarette Tax Going Up Again In his fiscal year (FY) 2015 budget proposal, President Obama envisions another hike in the federal excise tax on cigarettes. He engineered a tripling of the tax - from 39 cents to $1.01 per pack - in 2009. Now he wants to hike the tax by another 94 cents, to $1.95 per pack. It's easy to see why Obama (himself a smoker) likes the idea. The 2009 tax hike brought an extra $9 billion a year into the U.S. Treasury. It also reduced smoking and smoking-related health costs. This time around, the Congressional Budget Office projects a 94 cent tax hike will increase federal revenue by $78 billion over ten years, helping to bring down project deficits. The CBO also projects that the higher price will reduce the number of smokers by 2.5 million and the number of smoking-related deaths by 18,000 over the same period. Smokers don't like the idea at all, of course. Nor do the states, which will see their own tax revenues decline along with the cigarette sales. And convenience stores like 7-Eleven will see a big part of their profits go up in smoke. If the price of a pack of cigarettes (including taxes) was $6 before the proposed 2015 tax hike was appoved, (a) What was the price after the tax hike? Instructions: Enter your response rounded to two decimal places. $ 6.94 ± 0.05 (b) What was the (average) percentage increase in price? Instructions: Enter your response rounded to one decimal place. 14.5 ± 0.1 percent. (c) If cigarette sales decline by 7.2 percent, what is the price elasticity of demand? Instructions: Enter your response rounded to two decimal places. 0.50 ± 0.05

Explanation: Price Elasticity = (% change in Quantity Demanded) / (% change in Price) (a) According to the article, the tax hike added $0.94 per pack. The price after the tax hike was therefore $6.00 + $0.94 = $6.94. (b) Average percentage increase in price = change in price/average price = ($6.94 - $6.00)/[($6.94 + $6.00)/2] = $0.94/$6.47 = 0.1453, or about 14.5%. (c) Percentage change in quantity/percentage change in price = price elasticity of demand. We are told cigarette sales decline by 7.2 percent. Therefore, E = 7.2% / 14.5% = 0.50.

Refer to the table below: Points on Demand Curve Price (per ounce) Quantity Demanded (ounces per show) C $0.40 4 D $0.35 6 H $0.15 20 I $0.10 25 (a) Compute the price elasticity between point C to point D and point H to point I. Instructions: Enter your responses rounded to two decimal places. Do not include a minus sign. Use the mid-point formula. C to D = 3.00 ± .01 H to I = 0.55 ± .01 (b) Compute the total revenue at point C, point D, point H, and point I. Instructions: Enter your responses rounded to two decimal places. Point C = $ 1.60 ± .01 Point D = $ 2.10 ± .01 Point H = $ 3.00 ± .01 Point I = $ 2.50 ± .01

Explanation: Price Elasticity = (% change in Quantity Demanded) / (% change in Price) (a) C to D Price Elasticity: 3.00 Percentage change in quantity = (2)/ [(4+6)/2] = 2/5 = 0.40 Percentage change in price = (0.05)/ [(0.40+0.35)/2] = 0.05/0.375 = 0.1333 0.40 / 0.1333 = 3.00 H to I Price Elasticity: 0.55 Percentage change in quantity = (5)/ [(20+25)/2] = 5/22.5 = 0.22 Percentage change in price = (0.05)/ [(0.15+0.10)/2] = 0.05/0.125 = 0.4 0.22 / 0.4 = 0.55 (b) Total Revenue = Price x Quantity. At point C price = $0.40 and quantity = 4. Therefore, $0.40 x 4 = $1.60. At point D price = $0.35 and quantity = 6. Therefore, $0.35 x 6 = $2.10 At point H price = $0.15 and quantity = 20. Therefore, $0.15 x 20 = $3.00. At point I price = $0.10 and quantity = 25. Therefore, $0.10 x 25 = $2.50.

The Congressional Budget Office (CBO) has estimated the following responses over a 10-year period to a 10 percent rise in cigarette prices. Long-Run Price Elasticities for Cigarettes Age Group Percent Decline in Smoking 12-17 years 5% 18 years 4.5% 19-39 years 4% 40 years and older 1.5% What is the long-run price elasticity of demand for cigarettes among 18-year olds? 0.45 ± 0.1

Explanation: Price elasticity (E) = (percentage change in quantity demanded) / (percentage change in price) = 4.5% / 10% = 0.45

The Congressional Budget Office (CBO) has estimated the following responses over a 10-year period to a 10 percent rise in cigarette prices. Long-Run Price Elasticities for Cigarettes Age Group Percent Decline in Smoking 12-17 years 5% 18 years 4.5% 19-39 years 4% 40 years and older 1.5% What is the long-run price elasticity of demand for cigarettes among 12-17-year olds? Instructions: Enter your response rounded to two decimal places. 0.50 ± 0.1

Explanation: Price elasticity (E) = (percentage change in quantity demanded) / (percentage change in price) = 5% / 10% = 0.50

By how much will popcorn sales increase if average income goes up by 12 percent? (Assume the income elasticity of popcorn is 3.29.) Instructions: Enter your response as a percent rounded to two decimal places. 39.48 correct percent

Explanation: The income elasticity of popcorn is provided as 3.29, which means that when income increases 1 percent, popcorn sales increase 3.29 percent. When income rises by 12 percent, popcorn sales increase by 3.29 x 12% = 39.48%.

By how much will popcorn sales increase if average income goes up by 20 percent? (Assume the income elasticity of popcorn is 3.29.) Instructions: Enter your response as a percent rounded to two decimal places. 65.80 correct percent

Explanation: The income elasticity of popcorn is provided as 3.29, which means that when income increases 1 percent, popcorn sales increase 3.29 percent. When income rises by 20 percent, popcorn sales increase by 3.29 x 20% = 65.80.

What is the combined consumer surplus for the five consumers who buy Spyders when the price drops to $800,000? Instructions: Enter your response as a whole number. Combined Consumer Surplus: $ 500,000 correct

Explanation: The only people who purchase a product are those whose maximum price equal or exceed the market price. Therefore, all consumers buying the good reap some consumer surplus. The market price of a Spyder is $800,000. John's maximum price threshold is $800,000. His consumer surplus is $800,000 - $800,000 = $0. Carlos's maximum price threshold is $850,000. His consumer surplus is $850,000 - $800,000 = $50,000. Hua's maximum price threshold is $900,000. Her consumer surplus is $900,000 - $800,000 = $100,000. Michel's maximum price threshold is $950,000. Her consumer surplus is $950,000 - $800,000 = $150,000. Fred's maximum price threshold is $1,000,000. His consumer surplus is $1,000,000 - $800,000 = $200,0000. The combined consumer surplus for these five consumers is: $0 + $50,000 + $100,000 + $150,000 + $200,000 = $500,000

One characteristic that has allowed the U.S. economy to change the mix of output in response to consumer demand is the

Factor mobility which is the increased ease with which resources move from one industry to another. Economies will be more responsive to change when resources can be easily reallocated to more productive uses.

When workers move from one industry to another in response to demand changes, this is an example of

Factor mobility. Economies will tend to grow faster when they are more dynamic.

If the cross-price elasticity of demand for SUVs with respect to the price of gasoline is -0.10, and gasoline prices rise by 18 percent, then SUV sales should, ceteris paribus,

Fall by 1.8 percent. To determine the percentage change in SUV sales, multiply the percentage change in gasoline prices by the cross-price elasticity of demand. SUV sales should fall by 1.8 percent (-0.10 �18 percent).

Suppose the income elasticity of demand for used jet skis is 3.5. If the level of income decreases by 1 percent, the number of used jet skis sold will, ceteris paribus,

Fall by 3.5 percent. The income elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in income. If income falls by 1 percent and income elasticity of demand is equal to 3.5, the demand will fall 3.5 percent.

A consumer can purchase a product that is outside her or his budget constraint if it is on a higher indifference curve.

False A consumer cannot purchase any good that is outside the budget constraint; it is unaffordable. The rational consumer will purchase a combination of goods that lies on the budget constraint but meets the highest indifference curve, or highest utility.

When a rational consumer has stopped buying, she or he will have allocated a limited budget so that the marginal utility per good will be the same.

False A rational consumer will allocate spending so that the marginal utility per dollar is the same.

Better management shifts the production function downward and the total cost curve upward.

False Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the production function to shift upward and the production cost curves to shift downward-in particular the MC curve.

Consumer surplus does not exist because some consumers cannot afford to purchase the product at all.

False Consumer surplus is defined as the benefit some buyers get when they are actually willing to pay more for a good than the actual price. Remember that demand is the willingness and ability of consumers to purchase a good; there are individuals who cannot afford a good at the market price, but this does not negate the fact that some buyers still enjoy a surplus.

All consumers in the market enjoy a consumer surplus.

False Consumers who are willing to pay the equilibrium price or more enjoy a consumer surplus. Buyers who are willing to pay less than the equilibrium price do not enjoy a consumer surplus.

Diseconomies of scale imply that the average total cost curve is downward-sloping in the long run.

False Diseconomies of scale imply that the average total cost curve is upward-sloping in the long run.

Cross-price elasticity refers to

How responsive consumers of one good are to a change in the price of another good. Cross-price elasticity looks at how responsive consumers of one good, say Pepsi, are to a change in the price of another good-Coke. References

Elasticity of supply looks at

How responsive sellers are to a change in price. The elasticity of supply looks at the degree to which the quantity supplied changes as the price changes. The focus here is on how steep or how flat the supply curve for a good is.

Differences in size of real GDP across countries are best explained by

Human capital. Real GDP growth is determined not by quantity of factors of production but by quality of factors of production such as human capital.

Which of the following is the best explanation of why the law of diminishing returns does not apply in the long run?

In the long run, firms can increase the availability of space and equipment to keep up with the increase in variable inputs. The problems of crowded facilities apply to most production processes in the short run because of fixed resources. In the long run, all resources can be changed.

a) Assuming an 8 percent sales tax is levied on all consumption, complete the following table: is the sales sax progressive or regressive?

Income Consumption Sales Tax Percentage of Income Paid in Taxes $10,000 $11,000 $ 880 9% 20,000 20,000 1,600 8 40,000 36,000 2,880 7 80,000 60,000 4,800 6 Regressive

If a good is inferior, its

Income elasticity of demand is negative. For an inferior good demand increases when income falls; therefore the ratio of the percentage change in quantity demanded divided by the percentage change in income will always be negative.

If a good is normal, its

Income elasticity of demand is positive. For a normal good demand increases when income rises; therefore the ratio of the percentage change in quantity demanded divided by the percentage change in income will always be positive.

Which of the following is the best measure of the effects of a recession?

Income elasticity of demand. The income elasticity of demand measures the response of demand to a change in income, which changes significantly during a recession.

Assume Amanda always maximizes her total utility given her budget constraint. Every morning for breakfast she has two eggs and three sausages. If the marginal utility of the last egg is 10 utils and the price of eggs is $1 each, what can we say about the marginal utility of the last sausage if the price of each sausage is $2?

It must be equal to 20 utils. Optimal consumption implies that the utility-maximizing combination of goods has been found if you can't increase your total utility by trading one good for another. Therefore, all goods included in the optimal consumption mix yield the same marginal utility per dollar. Amanda's marginal utility per dollar from eggs is therefore 10, and the sausage utils should be 10 as well.

Market failure implies that the market mechanism

Leads the economy to the wrong mix of output. Market failure is an imperfection in the market mechanism that prevents optimal outcomes.

Intel's chief executive says the company might expand the technology it is using in its planned $2.5 billion chip-manufacturing factory in China if the U.S. government allows it, underscoring the technology giant's ambitions in the world's fourth-biggest economy. The Intel executive is making a

Long-run decision, and therefore an investment decision. In the long run, a firm has no fixed costs and can select any desired plant size, which is an investment decision. Once a plant is built, leased, or purchased, a firm has fixed costs and focuses on short-run output or production decisions.

Based on export ratios, which of the following countries is closest to being a closed economy?

Myanmar. With a trade to GDP ratio of only 2 percent, Myanmar is closest to being a closed economy.

Which of the following is an indicator of how much output the average person would get if all output were divided up evenly among the population?

Per capita GDP. Per capita GDP is an important measure of living standards.

Using Figure 4.1, assume that point C represents the best possible mix or optimal level of output for this society. If the market fails and produces a suboptimal mix of output, then it could produce at

Point A, B, D, or E. Market failure occurs if the market produces any possible output other than the optimal mix.

The total revenue effect of a movement along a demand curve can best be predicted using the

Price elasticity of demand. Once the price elasticity of demand is known, one can predict how consumers will respond to changing prices. It can also be predicted what will happen to the seller's total revenue when price is increased or reduced.

In a market economy, which of the following determines the answer to the WHAT to produce question?

Prices and profit. The prices and profits of alternative goods and services determine WHAT gets produced in a market economy.

If a person literally had "nothing else to do," (a) What would be the opportunity cost of doing this homework? (b) What is the likelihood of actually having nothing else to do?

The opportunity cost would be the person's time, and the likelihood is zero or close to zero

If the demand for a product is elastic, then

The percentage change in quantity demanded is greater than the percentage in price. When demand for a product is elastic, the percentage change in quantity demanded is greater than the percentage change in price.

The In the News article titled "Seafood Prices Rise after BP Oil Spill" suggests that seafood prices increased because of a decrease in supply. When the availability of seafood worsens, the supply curve of seafood shifts to the left, causing

The price of seafood to move up along the market demand curve. A decrease in supply causes equilibrium price to increase and equilibrium quantity to decrease.

If the elasticity of demand is 3, and the price rises by 15 percent, then

The quantity demanded will fall by 45 percent. The basic formula for price elasticity is the price elasticity of demand number = the percentage change in quantity demanded divided by the percentage change in price. 3 = x/.15 =.45, so quantity demanded falls by 45 percent.

Supply is very inelastic when

The quantity supplied changes little when the price increases. Inelastic supply means that the quantity supplied by producers will change little when the price increases. For example, if natural gas prices rise, it may take producers a while to produce more if labor or equipment is scarce. References

Supply is very inelastic when

The quantity supplied changes little when the price increases. Inelastic supply means that the quantity supplied by producers will change little when the price increases. For example, if natural gas prices rise, it may take producers a while to produce more if labor or equipment is scarce. References

Supply is very elastic when

The quantity supplied has a large increase in response to an increase in price. Elasticity of supply looks at how responsive quantity supplied is to changes in price. If supply is very elastic, it can change quickly in response to a change in price. For example, if the price of pizza is rising, pizza restaurants can easily produce more. The supply curve is flatter and upward-sloping.

The theory of public choice examines

The role of self-interest in public decisions.Public choice is the theory of public sector behavior emphasizing rational self-interest of decision makers and voters.

The market demand for a product is

The sum of all of the individual demands for that product. The market demand is the sum of all of the individual demands for that product. The market demand is similar to the individual demand, but differs in the quantities demanded.

If MPP declines with greater output, then MC must increase.

True At the point of diminishing marginal returns, the marginal physical product declines, the marginal cost increases, and the marginal cost curve will be upward-sloping.

Technically the elasticity number is negative because

When price falls quantity demanded will rise, but for simplicity economists take the absolute value of the elasticity number. If there is a percentage change increase in price, the percentage change in quantity demanded will fall, so the elasticity number is always negative. For simplicity, economists take the absolute value of the elasticity number (they drop the negative sign).

From an economic standpoint, government intervention is justified

When the market mechanism fails to achieve the optimal mix of output. The government may be able to push market outcomes closer to the ideal when the market fails to yield optimal outcomes.

All of the possible combinations of two goods that lie on one indifference curve

Yield the same level of utility. Each indifference curve represents a certain level of total utility. The consumer is indifferent to the combinations that lie on the same utility curve. That means that all of the combinations on the curve yield the same level of total utility.

MP3 players and MP3 files are complementary goods. The cross-price elasticity of demand between MP3 players and MP3 files is expected to be

negative The cross-price elasticity of demand is equal to the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. The cross-price elasticity of demand will be negative for complements because a decrease in the price of MP3 players will cause an increase in demand for MP3 files.

Business firms supply goods and services to ____ and purchase factors of production in ____.

product markets; factor markets A factor market is where the factors of production (land, labor, or capital) are bought and sold. A product market is where finished goods and services are bought and sold. A pair of shoes is a finished good.

(a) How many organs are supplied at a zero price? (b) How many people die in the government-regulated economy where the government-set price ceiling is p = 0? (c) How many people die in the market-driven economy?

qa The quantity qd - qa. The quantity qd - qE.

According to the table below, Popcorn Consumption Marginal Utility (in Units) Total Utility 0 0 0 First box 20 20 Second box 15 35 Third box 9 44 Fourth box 5 49 Fifth box 1 50 Sixth box -10 40 (a) With which box of popcorn does marginal utility first diminish? (b) With which box does marginal utility become negative?

second, sixth (a) Marginal utility equals the change in total utility obtained by consuming one additional (marginal) unit of a good or service, = (change in total utility) / (change in quantity). As a rule, the amount of additional utility we obtain from a product declines as we continue to consume it (law of diminishing marginal utility). In this case the marginal utility of the first box of popcorn is higher than the additional or marginal utility derived from the second box. (b) The situation changes significantly with the sixth box of popcorn. The good sensations associated with popcorn consumption are completely forgotten by the time the sixth box is consumed. The sixth box is distasteful, and stomach discomfort takes over, as reflected in the negative value for marginal utility.

The farther an indifference curve is from the origin, the more total utility it yields.

true An indifference map depicts all the combinations of goods that would yield various levels of satisfaction. As the indifference curves move farther from the origin, the level of total utility increases.

Consumers who actually purchase a good either were willing to pay that price or more.

true All consumers who purchase the good at the equilibrium price either were willing to pay more or were willing to pay the actual price.

Along a linear or straight-line demand curve, demand is more elastic at higher prices.

true Elasticity changes its value along a linear demand curve. At the top of the demand curve, a small change in price will be result in an elastic response. Consumers are more sensitive to prices the higher they are, which results in elastic demand. At lower prices, moving down a linear demand curve, because these purchases are very cheap, consumers are not as sensitive to a price change.

If demand is elastic, a price reduction will lead to an increase in total revenue.

true If demand is elastic, a decrease in price will cause a larger increase in quantity demanded. Consumers respond in a big way to sales if demand is elastic, increasing revenues for sellers.

If choosing a larger plant will reduce minimum average costs, there are economies of scale.

true If the minimum average costs that come about through increases in the size (scale) of plants and equipment decrease, then economies of scale exist.

A successful advertising campaign will make demand for a product less price-elastic.

true Increasing brand loyalty will reduce consumers' responsiveness to price increases, which allows a firm to increase prices and revenues.

For inferior goods, when incomes rise the demand for these goods falls.

true Inferior goods, like used cars or bus passes, are not as desirable when consumers earn more income.

Supply is very inelastic if the quantity supplied cannot respond quickly to an increase in price.

true It is true that inelastic supply indicates that producers cannot quickly increase production after a price increase. An inelastic supply curve is very steep. This means even though price is rising, quantity supplied increases slightly.

If demand is inelastic, a reduction in price will lead to a drop in total revenue.

true It is true that total revenue will fall when a company puts an item on sale and demand is inelastic. For example, a grocery store can put salt on sale, but so few consumers will respond to the sale that the percentage change in price outweighs the percentage change in quantity, pulling down revenues.

The marginal cost curve intersects the minimum of the average total cost curve and also the minimum of the average variable cost curve.

true The MC curve will always intersect both the ATC and AVC curves at their lowest points.

Suppose Canada can produce either 300 tons of paper or 200 HDTVs, and India can produce either 200 tons of paper or 100 HDTVs. The terms of trade between the two countries will lie between

1/2 and 2/3 of an HDTV per ton of paper. The terms of trade should be between domestic and foreign opportunity costs of 1/2 and 2/3 of an HDTV per ton of paper since India can produce at the lower cost of 1/2 while Canada can produce at the higher cost of 2/3.

Table 1.3 shows the hypothetical trade-off between different combinations of brushes and combs that might be produced in a year with the limited capacity for Country X, ceteris paribus. Complete the table by calculating the required opportunity costs for brushes and combs. On the basis of your calculations in Table 1.3, in the production range of 21 to 23 brushes the opportunity cost of producing one more comb in terms of brushes is

1/2. Shifting resources toward more brushes (2) requires a drop in the production of combs (1). Therefore for each 1 brush, ½ a comb is given up (1 divided by 2).

Table 1.2 shows the hypothetical trade-off between different combinations of Stealth bombers and B-1 bombers that might be produced in a year with the limited U.S. capacity, ceteris paribus. Complete the table by calculating the required opportunity costs for both the B-1 and Stealth bombers. On the basis of your calculations in Table 1.2, if the economy is currently producing at point C, what is the opportunity cost of producing at point B?

10 B-1 bombers.From point C to point B, to get 30 (180 - 150) additional Stealth bombers we must give up 10 (45 - 35) B-1 bombers.

Table 1.3 shows the hypothetical trade-off between different combinations of brushes and combs that might be produced in a year with the limited capacity for Country X, ceteris paribus. Complete the table by calculating the required opportunity costs for brushes and combs. On the basis of your calculations in Table 1.3, what is the opportunity cost of producing at point M rather than point N?

2 brushes. 2 (23 - 21) brushes must be given up in order to get an additional comb (1 - 0).

Using Figure 35.2, the opportunity cost of producing 1 pair of golf shoes in the United States is

3 baseballs. One pair of golf shoes produced in the United States has an opportunity cost of 3 baseballs since 60B = 20G and 1G = 3B.

ACME corporation currently has a 20% market share in a $15 billion industry (measured by sales revenue). EMCA corporation currently has a 17% market share in that same industry. What is the sales revenue for ACME? (round your answer to 2 decimal places), What is the sales revenue for EMCA? (round your answer to 2 decimal places), Calculate the difference (as a percentage) in market share for these two firms.

3 billion, 2.55 billion, 3 billion

The rate of inflation is calculated as a percentage change in the Consumer Price Index 'CPI' from one year to the next. formula31.mml where the subscript 't' means "this year" and 't-1' means last year. If the value of the CPI in 2010 was 218.1 and the value of the CPI in 2011 was 224.9, calculate the annual rate of inflation over that period (round your answer to one decimal place) :

3%

If the two countries are at points A and B in Figure 35.1 and do not trade, what is the total number of motorcycles produced per year?

3,000. In this case 3,000 motorcycles are produced-2,000 in Japan and 1,000 in the United States.

What should happen to the equilibrium price and quantity in a market as a result of a quota on imports?

Equilibrium price should go up, and equilibrium quantity should go down. A quota acts similarly to a tariff: less comes into the country so price rises, and consumers respond to higher prices by purchasing less of the product.

In terms of the world as a whole, imports must equal exports because

Every good exported by one country becomes an import for another country. World trade is balanced since a dollar of spending on exports represents a dollar of income in imports; a circular flow concept confirms that world trade is balanced.

Output combinations that lie inside the production possibilities curve are characterized by efficient use of resources.

False. Efficient levels of production lie on the production possibilities curve.

Which of the following contains the two sectors whose percentage contribution to the real GDP has declined since 1900?

Farming and manufacturing. Farming and manufacturing are less important in the overall economy today compared to the service sector.

In Figure 1.4, a shift of the production possibilities curve from PP1 to PP2 could be caused by

Implementation of training programs that improve the skills of workers. An increase in any resource, including physical or human capital, increases the production possibilities curve.

Outsourcing leads to

Increases in total output, but with temporary job losses for some domestic workers. While outsourcing may eliminate some domestic jobs in the short run, it ultimately creates many more domestic jobs in the long run.

The World View article titled "The Education Gap between Rich and Poor Nations" says that 85 percent of all Americans graduate from high school. This is an example of

Investment in human capital. Human capital includes education received at various levels such as high school and college.

Which of the following is not a macroeconomic statement?

Jenny's wage rate rose, and in response, she decided to work more hours. The wages of a particular worker are a microeconomics topic.

Refer to Figure 1.7. The cost of producing at point D rather than point J is

KM units of clothing. Additional food may be produced by giving up the opportunity to produce clothing.

To an economist, the four factors of production are

Land, labor, capital, and entrepreneurship. The general terms for the four factors of production are land, labor, capital, and entrepreneurship.

As the U.S. economy relies more and more heavily on the production of services rather than goods,

Nearly all future job growth will be in service-producing industries. A service sector that is growing faster than the manufacturing sector will cause growth in service sector jobs relative to manufacturing jobs.

A line that slopes downward from left to right has a

Negative Slope. This is due to the inverse or negative relationship between the two variables.

Which of the following is likely to be most capital-intensive?

Oil refining in the United States. Capital-intensive means there is a high ratio of capital to labor used in production.

Income inequalities are greatest in

Poor countries. Wealthier countries tend to redistribute more income than poorer countries, thereby reducing income inequality somewhat.

Which of the following is not held constant along a given demand curve for a good?

Price of the good itself (own price). The demand curve reflects the quantity demanded at different price levels, which therefore cannot be held constant.

When the government provides a legal framework,

Private market transactions benefit and government market transactions benefit. Without guarantees from both buyer and seller as established in contracts, many private market and government activities would suffer, thereby harming the economy.

As a result of a shortage,

Producers increase output and raise price. If a shortage exists, buyers will compete for goods by offering to pay higher prices, and producers will increase the quantity supplied.

As trade restrictions are eliminated, increased imports

Shift the allocation of resources away from import-competing industries. In perfectly free trade, resources are allocated away from import-competing industries and shifted to export-oriented industries.

If the wages of the workers that harvest corn each fall decreases, then the

Supply curve for corn will shift right. If the cost of production decreases, the supply of the good will increase.

Which of the following is true?

The United States has a very low export ratio. The United States is a very large market where most of production is sold domestically, so it has a low ratio of trade to GDP, while smaller countries such as Belgium have a very high trade to GDP ratio.

The terms of trade between two countries refer to

The amount of good A given up for good B. The terms of trade are an agreement between two countries engaging in trade as to how much of one good will be traded for another good.

Microeconomics is concerned with issues such as

The demand for bottled water by individuals. The demand for a particular product is a microeconomic topic.

Which of the following is purchased in a factor market?

The labor of a state university professor. A factor market is where the factors of production, in this case labor, are bought and sold.

Two countries will have zero incentive to trade if their production possibilities curves are parallel straight lines because

The opportunity costs for both countries are the same. With parallel, straight-line production possibilities curves, opportunity costs will be identical, meaning a nation cannot purchase what it needs abroad at lower costs than are domestically available.

Tickets to a sporting event go on sale and sell out almost instantly. This suggests that

The price for the tickets is below the equilibrium price. When a price is below equilibrium price, a shortage will occur. Tickets selling almost instantly imply that everyone who is willing and able to go may not be able to obtain tickets.

If corn and wheat are alternative pursuits for a farmer, a change in the supply of corn will take place when, ceteris paribus,

The price of wheat changes. A change in the price of wheat will make corn production relatively more or less profitable, thereby causing the supply of corn to change.

The goal of the business firms in a market economy is to maximize

Total profits. Businesses are motivated by profit.

According to the World View article that compares GDP per capita figures for several nations, which of the following nations has the highest GDP per capita?

United States. The United States has the highest GDP per capita because it produces one-fifth of the world's output with only 5 percent of the world's population.

World View: U.S. Imposes Tariffs on Solar Panels from China Last year, China sold more than $2 billion worth of solar panels and equipment in the United States, about a third of all sales. Domestic producers say those sales were unfairly facilitated by Chinese government subsidies and deliberate "dumping." Chinese solar panels sell for about 70 cents per watt, compared with 83 cents per watt for panels produced in the United States. The market for panels in 2014 is expected to hit 6,000 megawatts. On Friday, the Commerce Department sided with domestic producers, concluding that China's solar equipment was being sold at "unfairly low prices." To offset that unfair price advantage, the department imposed tariffs of 26 percent or more on imported Chinese panels. Several U.S. manufacturers said the move would prompt them to expand production capacity in the United States.(a) What was the price difference between U.S. and Chinese solar panels in 2013? (b) How much money did U.S. consumers save as a result of this price difference if they purchased 2,000 megawatts of Chinese paneling in 2013 (1 megawatt = 1 million watts)? (c) By how much did the price of Chinese solar panels rise in 2014 as a result of the new tariff?

a - .13 per watt b - 260 million c - 26 %

The table below shows Tom's demand schedule for web tutoring before and after winning the lottery. Use the data provided to answer the following questions: Quantity Demanded (Hours per Semester) Price (per Hour) Initial Demand After Increase in Income A $50 1 8 B 45 2 9 C 40 3 10 D 35 5 12 E 30 7 14 F 25 9 16 G 20 12 19 H 15 15 22 I 10 20 27 At what price would Tom buy 12 hours of web tutoring? (a) Without a lottery win. (b) With a lottery win.

a) 20/hour b) 35/hour

Table 3.1 Individual Demand and Supply Schedules In Table 3.1, the equilibrium market price is $4.

$4. Quantity demanded (30) is equal to quantity supplied (30) at a price of $4. Refer to Table 3.1: Answer.

In the News: The Real March Madness: Ticket Prices Ticket prices for Monday's NCAA championship game between UConn and Kentucky look deceivingly cheap - only $47 according to the NCAA's official website. But don't expect to get into AT&T's stadium in Arlington, Texas for that paltry sum. The 79,444 seats are sold out. Scalpers are charging as much as $5,000 for front-row, center-court seats for Monday's finale. Front-row seats in the second tier are going for $866 at on-line resellers; nosebleeds for $325. It's inevitable that one team will lose on Monday - but it won't be the scalpers. (a) What was the initial price of a ticket to the NCAA finals?

$47 per ticket. (b) At that price there is a shortage

Over many years the capital stock in the United States has grown to approximately

$50 trillion. Every year, positive investment spending causes the capital stock to grow.

The equilibrium price and quantity in Figure 3.2 are, respectively, Figure 3.2 Supply and Demand

$9 and 30 units. Demand intersects supply at a price equal to $9 and quantity equal to 30.

Oily shrimp? No thank you! The National Oceanic and Atmospheric Administration (NOAA) has closed a third of the Gulf of Mexico in response to the BP oil spill. The explosion of BP's Deep-water Horizon oil rig has spilled nearly 5 million barrels of oil into the Gulf. Whatever their taste, oily fish and shrimp may be a health hazard. Closure of the Gulf has caused seafood prices to soar. The price of top-quality white shrimp has jumped from $3.50 a pound to $7.50 a pound. Restaurants are jacking up their prices or taking shrimp off the menu.

(a) Was there a change in demand? No (b) Was there a change in suppy? Yes (c) Was there a change in market price? Yes

Average Growth Rate (2000-2009) of GDP Population Per capita GDP High-income countries United States 2.0 1.1 0.9 Canada 2.1 1.0 1.1 Japan 1.1 0.2 0.9 France 1.5 0.5 1.0 Low-income countries China 10.9 0.8 10.1 India 7.9 1.6 6.3 Ethiopia 7.5 2.8 4.7 Burundi 2.7 2.0 0.7 Haiti 0.7 1.8 -1.1 West Bank/Gaza -0.9 3.8 -4.7 Zimbabwe -7.5 0.9 -8.4 By how much does total output (GDP) have to grow in order to raise per capita GDP in the following countries?

(a) Westbank/Gaza GDP must grow by more than 3.8 correct % (a) Canada GDP must grow by more than 1.0 correct %

The price of oil soared $1.99 per barrel yesterday and another 51 cents today, closing at $103.71 per barrel on the New York Mercantile Exchange. The spike in oil prices is in response to the shoot-down of Malaysian Airlines flight MH-17 over Ukraine by Russian-backed separatists. Oil traders expect the United States and Europe to impose tougher sanctions on Russia, which is the world's second-biggest oil exporter. This could cause oil supplies to tighten and push oil prices still higher.

(a) Which curve shifted? supply (b) Which direction did that curve shift? left (c) Did equilibrium price increase or decrease? increase

Table 1.1 shows the hypothetical trade-off between different combinations of Stealth bombers and B-1 bombers that might be produced in a year with the limited U.S. capacity, ceteris paribus. Complete the table by calculating the required opportunity costs for both the B-1 and Stealth bombers.In the production range of 7 to 9 Stealth bombers, the opportunity cost of producing 1 more Stealth bomber in terms of B-1s is

.5 In this production range, 2 additional stealth bombers require us to forgo the opportunity to produce one entire B-1 bomber, or half a B-1 bomber for each Stealth bomber.

Table 1.3 shows the hypothetical trade-off between different combinations of brushes and combs that might be produced in a year with the limited capacity for Country X, ceteris paribus. Complete the table by calculating the required opportunity costs for brushes and combs. On the basis of your calculations in Table 1.3, the highest opportunity cost for brushes in terms of combs is

.50 comb per brush. This is a point where the production possibilities curve touches the axis. The opportunity costs are 0.10, 0.14, 0.25, and 0.5, respectively, as we increase brush production.

Table 1.1 shows the hypothetical trade-off between different combinations of Stealth bombers and B-1 bombers that might be produced in a year with the limited U.S. capacity, ceteris paribus. Complete the table by calculating the required opportunity costs for both the B-1 and Stealth bombers. On the basis of your calculations in Table 1.1, what is the opportunity cost of producing at point S rather than point T?

1 B Bomber. To produce an extra Stealth bomber, we must give up the one B-1 bomber that was being produced at point T.

SEOUL- The rocket launched by North Korea on Sunday is believed to be an upgraded version of the country's Taepodong-2 missile, which was used in a failed missile test in 2006, according to a report by the South Korean military... A researcher at the National Intelligence Service estimated the cost of developing the missile at 300-500 million dollars, based on a previous statement by North Korean leader Kim Jong Il that the Taepodong-1 missile launched in 1998 cost 200-300 million dollars. Insiders close to South Korean President Lee Myung-bak say the launch itself cost around 300 million dollars, enough to break the famine sweeping much of the nation for a year. (a) What is the cost of the North Korean 2009 missile launch, according to South Korea? (b) How many people could have been fed for an entire year (365 days) at the World Bank standard of $2 per day with that money?

300 million, 410959 ppl

Suppose a country can produce a maximum of 5,000 jumbo airliners or 1,000 aircraft carriers. (a) What is the opportunity cost of an aircraft carrier? (b) If another country offers to trade six planes for one aircraft carrier, should the offer be accepted? (c) What is the implied price of the carrier in trade?

6 jumbo airliners yes 6 jumbo airliners

Calculate the Labor Force Participation Rate (Round your answer to one decimal place):

64.3%

Which panel of Figure 3.3 represents the changes in the market for textbooks when the cost of paper decreases and the government increases the number of student loans it grants? Figure 3.3 Shifts of Supply and Demand

A A decrease in the cost of production, such as lower paper prices, will cause supply to increase, and the increase in students will cause the demand to increase.

If the government required the actual market price to be fixed at $6 per unit, Shifts of Supply and Demand

A binding or effective price ceiling would result. A price ceiling will occur when the maximum price is below the equilibrium price and it will cause a shortage.

Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of perfume?

A decrease in the price of perfume. Quantity demanded and price are inversely related. Tastes and income changes would cause a change in demand (a shift), and the price of electricity would impact the supply of perfume.

A technological advance would best be represented by

A shift outward of the production possibilities curve. The shift would move the production possibilities curve away from the origin so that we can get more of both goods.

To calculate market demand, we

Add the quantities demanded for each individual demand schedule horizontally. Market demand represents the combined demands of all market participants, added together horizontally, because the horizontal axis measures quantity.

Which panel of Figure 3.3 represents the changes in the market for cigarettes when the government increases subsidies for the production of tobacco and at the same time bans smoking in public buildings? Figure 3.3 Shifts of Supply and Demand

B. A subsidy will encourage more production, causing supply to increase, and the ban on smoking will cause a decrease in demand.

If a price ceiling is to be effective, it should be set

Below the equilibrium price, and it will create a market shortage. Price ceilings set above the equilibrium price will not be effective because the market price will tend toward the equilibrium price. Therefore, in order for a price ceiling to prevent the attainment of equilibrium, it must be set below the equilibrium price.

Choose the letter of the diagram in Figure 3.1 that best describes the type of shift that would occur in each situation for the market listed on the left, ceteris paribus. Figure 3.1 Shifts of Supply and Demand Candy bars: People become more health-conscious and prefer power bars instead of candy bars.

C. A change in tastes and preferences away from candy bars causes demand to decrease.

An In the News article titled "California Grape Growers Protest Mixing Foreign Wine" discusses foreign wine sold in the U.S. market. California grape growers' main complaint was that

California wineries were blending wines from abroad with domestic ones. The grape growers were upset that California wineries were blending foreign wines with California wines and selling them as American appellation wine.

Specialization in production and then trading with other countries

Change the mix of output for each country and increase total world output. Exporting industries grow while importing industries may shrink, changing the national output mix. The gains in efficiencies lead to more output worldwide without an increase in resources.

Based on the information in Table 35.1, assume China and the United States have the same amount of resources with which to produce soybeans and computers and they produce no other goods. The output of computers and soybeans would be greatest if

China specialized in producing soybeans, and the United States specialized in producing computers. World output is highest when nations specialize and produce according to their comparative advantages; since the United States has the lowest opportunity cost in producing computers, that will be its specialty, while China has the lowest opportunity cost in producing soybeans, so that will be its specialty.

Whenever technology advances, an economy can produce more output with

Current resources. Technological advances are one of the forces that keeps shifting resources from one industry to another; shifting the production possibilities curve outward.

Which panel of Figure 3.3 represents the changes in the market for beef when the price of corn (cattle feed) rises and the people become more fearful of mad cow disease? Figure 3.3 Shifts of Supply and Demand

D. An increase in costs causes supply to decrease, and the fear of disease will cause the demand to decrease.

A leftward shift of the market demand curve for HDTVs, ceteris paribus, causes equilibrium price to

Decrease and quantity to decrease. A decrease in demand causes equilibrium price and equilibrium quantity to decrease.

When the government provides a legal framework,

Domestic market transactions benefit and foreign trade market transactions benefit. Without guarantees from both buyer and seller as established in contracts, both domestic transactions and foreign trade transactions would suffer, thereby harming the economy.