Microeconomics Midterm

Economics

The study of how people make choices under conditions of scarcity and of the results of those choices in society

Average Benefit

The total benefit of undertaking 'n' units of an activity divided by 'n'

Average Cost

The total cost of undertaking 'n' units of an activity divided by 'n'

"As the price of personal computers continues to fall, demand increases." This headline is inaccurate because

falling prices for personal computers increases quantity demanded, not demand.

Amy is thinking about going to the movies tonight. A ticket costs $7 and she will have to cancel her dog- sitting job that pays $30. The cost of seeing the movie is

$37

Opportunity Cost

...of an activity is the value of what must be forgone in order to undertake the activity

Sunk Cost

A cost that is beyond recovery at the moment a decision is to be made

One observes that both the equilibrium price and the equilibrium quantity of coffee fall. The result:

A decrease in demand with supply constant

One observes that the equilibrium price of T-shirts increases and the equilibrium quantity falls. Which of the following best fits the observed data?

A decrease in supply with demand constant

What is NOT a characteristic of a market in equilibrium?

All consumers are able to purchase as much as they wish.

Scarcity Principle

Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs

The logical implication of the scarcity principle is that

Choices must be made

Economic Surplus

Difference between the benefit and the cost of the action

Pitfall 3

Failure to think at the margin

The gains from specialization and exchange are greatest when individuals, or nations...

Have a comparative and absolute advantage in the goods they produce, and the differences in opportunity costs are large

Pitfall 2

Ignoring implicit costs

If both supply and demand increase simultaneously, the new equilibrium price is ___________ and the new equilibrium quantity is _________________.

Indeterminate; Higher

As consumers' incomes decrease, the demand curve for bologna sandwiches shifts to the right. Therefore bologna sandwiches are a(n)

Inferior good

If Leslie can produce two pairs of pants in an hour while Eva can make one pair an hour, then it must be the case that

Leslie has an absolute advantage.

A decrease in the demand for bananas with no concurrent change in the supply of bananas will result in a ___________ equilibrium price and a(n) ___________ equilibrium quantity.

Lower; lower

Pitfall 1

Measuring costs and benefits as proportion rather than absolute dollar amounts

Moe has a big exam tomorrow. He considered studying this evening, but decided to go out with Curly instead. Since Moe always chooses rationally, it must be true that

Moe gets more benefit from spending time with Curly than from studying.

Both supply and demand decrease

Quantity would be lower, but the direction of the price change cannot be determined

Rational Person

Someone with well-defined goals who tries to fulfill those goals as best he or she can

Marginal Benefit

The increase in total benefit that results from carrying out one additional unit of an activity

Marginal Cost

The increase in total cost that results from carrying out one additional unit of an activity

The shape, slope, and position of a demand curve is determined by

consumers' preferences and consumers' wealth.

Economic growth can result from a(n)

increase in the amount of productive resources

If the demand for a good decreases as income decreases, it is a(n) _________ good and if the demand for a good increases as income decreases, it is a(n) _________ good.

normal; inferior

If one fails to account for opportunity costs in decision making, then applying the cost-benefit rule will be flawed because

the costs will be understated.

Supply curves are generally _______ sloping because _______________

upward; of the principle of increasing opportunity costs