Microeconomics Chapter 2

Production Possibilities curve

A curve that shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and efficiently used.

Yes, the marginal benefit ($300) is less than the marginal cost ($200).

A taxi company currently has nine cabs in its fleet, and its total daily cost is $4,000. If the company added a 10th cab, its daily total cost would be $4,200, or $420 per cab. Adding the 10th cab will increase the daily total revenue by $300. Should the company add the 10th cab? (Yes/No)

Arrow up

Arrow up or down: An increase in the market interest rate _____ the economic cost of holding a $500 collectible for a year.

Arrow up

Arrow up or down: An increase in the wage for high school graduates _____ the opportunity cost of college.

Up arrow

Arrow up or down: Andy buys and eats one apple per day, and smacks his lips in appreciation as he eats it. The greater his satisfaction with the exchange of money for an apple, the larger the number of smacks. If the price of apples decreases, the number of smacks per apple will ______.

Marginal Marginal

Arrows up or down: The decision about how fast to sail a cargo ship is based on the ____ benefit and the ______ cost.

Current value of the furniture, current rate of return on alternative investment(s)

Colleen owns antique furniture that she bought for $5,000 ten years ago. Your job is to compute Colleen's cost of owning the furniture for next year. To compute the cost, you need two bits of information :______and_______.

Outbidding, $1/hectare

Conservationists have a new strategy for preserving rainforests:____loggers and other developers for the land, paying as little as $_______ per hectare per year.

$15 $15

Consider a transaction in which a consumer buys a book for $15. The value of the book to the buyer is at least $_____, and the cost or producing the book is no more than $______.

10 180

Consider figure 2.1 on page 29, between points C and D, the opportunity cost of ____ tons of wheat is _____ tons of steel.

A.) It made sense if the marginal revenue of $3,100 was greater than the marginal costs B.) Cost, less, 3,100

Continental Airlines Goes Marginal. In the 1960s, Continental Airlines puzzled observers of the airline industry and dismayed its stockholders by running flights with up to half the seats empty. The average cost of running a flight was $4,000, a figure that includes fixed costs such as airport fees and the cost of running the reservation system. A half-full aircraft generated only $3,100 of revenue. A.) Use the marginal principle to explain why Continental ran half-empty flights. B.) It will be sensible to run a half-empty flight if the marginal _____ of flight is ______ than $_______.

A.) The loan cost me the interest I could have earned by investing the $100. B.) The opportunity cost is the current market price, not the historical price. C.) The cost of the stadium is $50 million plus the forgone earnings from renting the land or the interest that could be earned on the proceeds from sale of the land (whichever is higher). D.) The cost would also include the time difference between alternative methods of commuting

Correct the Cost Statements. Consider the following statements about costs. For each incorrect statement, provide a correct statement about the relevant cost. A.) One year ago, I loaned a friend $100, and she just paid me back the whole $100. The loan didn't cost me anything. B.) An oil refinery bought a million barrels of oil a month ago, when the price was only $75 per barrel, compared to $120 today. The cost of using a barrel of oil to produce gasoline is $75. C.) Our new football stadium was built on land donated to the university by a wealthy alum. The cost of the stadium equals the $50 million construction cost. D.) If a commuter rides a bus to work and the bus fare is $2, the cost of commuting by bus is $2.

A.) 26 B.) Yes

How many hours at the barber shop? The opportunity cost of your time spent cutting hair at your barber shop is $20 per hour. Electricity costs $6 per hour, and your weekly rent is $250. You normally stay open 9 hours a day. A.) What is the marginal cost of staying open for one more hour? B.) If you expect to give two haircuts in the 10th hour and you charge $15 per haircut, is it sensible to stay open for the extra hour?

Three officers should be hired, since the marginal benefit of the third officer ($40,000) equals the constant marginal cost of $40,000, but the marginal benefit of the fourth officer would fall below the constant marginal cost.

How many police officers? In your city, each police officer has a budgetary cost of $40,000 per year. The property loss from each burglary is $4,000. The first officer hired will reduce crime by 40 burglaries, and each additional officer will reduce crime by half as much as the previous one. How many officers should the city hire?

Marginal Principle

Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost.

The cost of holding wealth in non-interest-bearing form is higher where the interest rate is higher.

Interest Rates and ATM Trips. Carlos, who lives in a country where interest rates are very high, goes to an ATM every day to get $10 of spending money. Art, who lives in a country with relatively low interest rates, goes to the ATM once a month to get $300 of spending money. Why does Carlos use the ATM more frequently?

A.) Yes, marginal revenue 2500 > marginal cost 2000 B.) No, marginal revenue 1500< marginal cost 2000

Marginal Airlines. Marginal Airlines runs 10 flights per day at a total cost of $50,000, including $30,000 in fixed costs for airport fees and the reservation system and $20,000 for flight crews and food service. A.) If an 11th flight would have 25 passengers, each paying $100, would it be sensible to run the flight? B.) If the 11th flight would have only 15 passengers, would it be sensible to run the flight?

Softer

Sally sells one apple per day to Andy, and say "caching" to show her satisfaction with the transaction. The greater her satisfaction with the exchange, the louder her "caching." If the price of apples decreases, her "caching" will become ________(louder/softer).

Principle of Diminishing Returns

Suppose output is produced with two or more inputs, and we increase one input while holding the other input or inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate.

Principle of Voluntary Exchange

a voluntary exchange between two people makes both people better off.

Yes, the marginal benefit ($50 million) exceeds the marginal cost ($30 million).

Suppose that stricter emissions standards would reduce health-care costs by $50 million but increase the costs of fuel and emissions equipment by $30 million. Is it sensible to tighten the emission standards? (Yes/No).

$86,000 per year

The Cost of a Flower Business. Jen left a job paying $40,000 per year to start her own florist shop in a building she owns. The market value of the building is $200,000. She pays $30,000 per year for flowers and other supplies, and has a bank account 8% interest. The annual economic cost of Jen's business is ______.

Marginal Benefit

The additional benefit resulting from a small increase in some activity.

Marginal Cost

The additional cost resulting from a small increase in some activity.

Scientists and engineers will be used to execute the mission, so part of the opportunity cost might be measured in science and engineering education (or any other non-mission-related scientific productivity) forgone.

The opportunity cost of a Mission to Mars. The United States has plans to spend billions of dollars on a mission to Mars. What resources will be used to execute the mission, and what do we sacrifice by using these resources in a mission to Mars?

Safe drinking water for 5 million people.

What is the cost of a pair of warships purchased by Malaysia?

Real-Nominal Principle

What matters to people is the real value of money or income—its purchasing power—not its "face" value.

Opportunity Cost

What you sacrifice to get something.

False

When two people involved in an exchange say "thank you" afterward, they are merely being polite. _______(True/False)

$22,000

You just inherited a house with a market value of $300,000, and do not expect the market value to change. Each year, you will pay $1,000 for utilities and $3,000 in taxes. You can earn 6% interest on money in a bank account. Your cost of living in the house for a year is $_______.

Nominal Value

the face value of an amount of money

Real Value

the value of an amount of money in terms of what it can buy.