Midterm

A study in the consumption of beverages in Mexico found that: "Overall, for soft drinks a 10% price increase decreases the quantity consumed by 10.6%." Given this information, the price elasticity of demand for soda in Mexico is _____. Is demand price elastic or inelastic? Briefly explain.

-1.06; Elastic, because the percentage change in quantity demanded is greater than the percentage change in price.

Refer to the graph to the right. What is the value of the slope of this line?

-1/5

Rank the following four goods from lowest income elasticity of demand (1) to highest income elasticity of demand (4). a. Bread ___ b. Pepsi ___ c. Mercedes-Benz automobiles ___ d. Laptop computers ___

1, 2, 4, 3

If the income elasticity of SUVs is greater than 1, what is the good considered?

A luxury

What do economists mean by market equilibrium?

A market outcome where quantity supplied is equal to quantity demanded.

Which of the following illustrates the law of supply?

An increase in price causes an increase in the quantity supplied, and a decrease in price causes a decrease in the quantity supplied.

Which of the following would cause a shift in the demand curve from point A to point B?

An increase in the price of a substitute good. A decrease in income (inferior good). An increase in income (normal good). (ALL OF THE ABOVE)

Suppose the demand for premium bottled water increases rapidly during 2018. At the same time, six more firms begin producing premium bottled water. A student remarks that, because of these events, we can't know for certain whether the price of premium bottled water will rise or fall. The student remarks (that, because of these events, we can't know for certain whether the price of premium bottled water will rise or fall) is: The new equilibrium quantity will be:

Correct. When there is an increase in supply and an increase in demand, the new equilibrium quantity increases but whether the equilibrium price increases or decreases is unknown. Either point C or point D.

In a paper written by Bentley College economists Patricia M. Flynn and Michael A.​ Quinn, the authors​ state: ​"We find evidence that Economics LOADING... is a good choice of major for those aspiring to become a CEO​ [chief executive​ officer]. When adjusting for size of the pool of​ graduates, those with undergraduate degrees in Economics are shown to have had a greater likelihood of becoming an​ S&P 500 CEO than any other​ major." A list of famous economics majors published by Marietta College includes business leaders Warren​ Buffet, Donald​ Trump, Ted​ Turner, and Sam​ Walton, as well as former presidents George H.W.​ Bush, Gerald​ Ford, and Ronald Reagan. ​Sources: Patricia M. Flynn and Michael A.​ Quinn, "Economics: A Good Choice of Major for Future​ CEOs," Social Science Research Network​, November​ 28, 2006; and Famous Economics Majors​, Marietta​ College, Marietta​ Ohio, May​ 15, 2012. Why might studying economics be particularly good preparation for being the top manager of a corporation or a leader in​ government?

Economics teaches us how to look at the tradeoffs involved in every decision.

When the demand curve shifts to the right,

Equilibrium price and quantity will both increase

Choco Fantasy is a firm that produces both dark chocolates as well as liquor chocolates. It can produce​ 10,000 bars of dark chocolate per month if all its resources are used to produce only this variety.​ Similarly, using all its resources in the production of liquor​ chocolates, the firm can produce​ 8,000 bars per month.​ However, during a given​ month, the firm produces both varieties. Which of the​ following, if​ true, would suggest that the firm is operating on its​ PPF?

Even though the demand for both liquor and dark chocolate has increased, the company can increase the production of only one variety.

A free market is a market with _____ government restrictions on how a good or service can be produced or sold and with _____ government restrictions on how a factor of production can be employed.

Few; few.

Writing in the New York Times, Michael Lewis argued that " ...a market economy is premised on a system of incentives designed to encourage an ignoble human trait: self- interest." What incentives does a market system provide to encourage self-interest?

Financial reward

In a market system, what determines how goods and services will be produced?

Firms determine how goods and services will be produced.

The Commerce Ministry of a country conducts regular surveys on goods and services sold within the country. Researchers at the Ministry study consumer behavior through the choices the consumers make while deciding what to buy. Their report on the industry for beverages last year indicated that the price elasticity of demand for fruit juices in the country was​ -0.8, while the price elasticity of demand for a particular brand called Fruit Drops was​ -1.2. According to the​ report, an average consumer spends about 1 percent of his monthly income on fruit juices. A student of​ economics, Julio, however feels that the current price elasticity of demand for Fruit Drops is actually higher than​ -1.2, based on his own experience in purchasing fruit juices. More recent reports on consumer behavior in this market indicate that the price elasticity of demand for fruit juices in general is actually higher than -0.8. Which of the following, if true, would support this claim?

Health experts are encouraging people to consume fruits instead of fruit juices because the latter contain harmful preservatives.

Suppose an increasing number of school districts across the country find themselves with too few teachers at a time of rising enrollments and calls fo improved outcomes in terms of student performance. A market-based remedy for this emerging mismatch between the availability of teachers and school districts' needs would likely emphasis

Higher compensation to elicit both a larger quantity of teacher services and a greater reliance by districts on non-traditional instruction methods

Consider the market for chicken, illustrated in the figure to the right. The market is initially in equilibrium at a price of P1 and at a quantity of Q1. Suppose the supply curve shifts to the right from S1 to S2 and the demand curve shifts to the right from D1 to D2. Note that in the figure the shift in demand is larger than the shift in supply. As a result of these changes, the new equilibrium price will be ____, and the new equilibrium quantity will be ____.

Higher; higher.

The head of the United Kumquat Growers Association makes the following statement. "The federal government is considering implementing a price floor in the market for kumquats. The government will not be able to buy any surplus kumquats produced at the price floor or to pay us any other subsidy. Because the demand for kumquats is elastic, I believe this program will make us worse off, and I saw we should oppose it." Do you agree or disagree with this reasoning?

I agree with this reasoning. Since the demand for kumquats is elastic, the revenues will fall significantly with a price floor.

State government Medicaid programs provide medical insurance to poor and disabled people. A news article described a new prescription drug that costs as much as "$94,000 for one 12-week treatment regimen" to treat hepatitis C, a liver disease. Several states restricted access to the new drug under their Medicaid programs to patients who are most acutely ill (stage 3 or stage 4) with hepatitis C. State Medicaid programs are paid for, in part, out of state budgets. What trade-offs do state governments face when new prescription drugs are introduced with much higher prices than existing drugs? Can you think of any reason when it might be appropriate for states to provide expensive new drugs only to the patients who are most ill from a disease?

Increases in spending on prescription drugs will require reductions in other government programs or services. Yes, it might be appropriate when other uses of those resources have less value.

Harry Fletcher is a market analyst at an automobile firm. He formed a hypothesis that an increase in advertising would increase demand for the​ firm's cars. The ad campaign ran for a period of six months.​ However, the results were not as positive as Harry had anticipated. Which of the​ following, if​ true, can explain this​ outcome?

Interest rates increased substantially during this period.

From 1979 to 2015, China had a policy that allowed couples to have only one child. (Since 2016, couples have been allowed to have two children.) The one-child policy caused a change in the demographics of China. Between 1980 and 2015, the share of the population aged 14 and under decreased from 36 percent to 17 percent. And, as parents attempted to ensure that the lone child was a son, the number of male children relative to female children increased. How has the one-child policy changed the relative demand for goods and services in China?

It has undoubtedly shifted away from goods and services appealing to youthful buyers, particularly youthful female buyers.

Julia Paul, an analyst at a research institute, lives very close to her office and walks to work every day. Meanwhile, her colleague, Amanda Jones, dislikes the fact that it takes her almost an hour to commute to work every day. As a result, when Julia devices to move to a suburb farther away, Amanda is very surprised. What would explain Julia's behavior?

Julia saves more in rent than she spends on commuting to work

Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions?

Macroeconomics

Which of the following steps should you follow when using a formula?

Make sure you understand the economic concept the formula represents. Make sure the number you calculate using the formula is economically reasonable. Make sure you are using the correct formula for the problem you are solving. (ALL OF THE ABOVE STEPS YOOU SHOULD FOLLOW WHEN USING A FORMULA)

Which of the following areas of economics studies issues such as ways to reduce teenage smoking?

Microeconomics

The diagram to the right illustrates a common economic relationship. Economists know this relationship as marginal cost (MC). The diagram illustrates the relationship between the change in total cost and quantity produced. There are three lines (A, B, and C) drawn tangent to the MC curve. At line A, the MC curve has a _____ slope. Where lines B and C touch the MC curve, the slope is _____ and _____.

Negative; positive; increasing

According to a news story about the International Energy Agency, the agency forecast that "the current slide in [oil] prices won't [reduce] global supply." Would a decline in oil prices ever cause a reduction in the supply of oil?

No, a decline in oil prices would reduce the quantity of oil supplied, not the supply of oil.

Assuming that these statistics are available or could be gathered, are they likely to resolve the normative issues in this debate?

No, because normative issues involve value judgements that incorporate an individual's full range of experiences, beliefs, and emotions.

Which of the following statements about normative analysis is correct?

Normative analysis is concerned with what ought to be.

Refer to the graph to the right. A change in Demand is illustrated by the move from ___, and a change in quantity demanded is illustrated by a movement from ___.

Point C to point A; point A to point B

Which of the following statements about positive analysis is correct?

Positive analysis is concerned with what is.

The income elasticity of demand for a normal good is _____ and for an inferior good is _____.

Positive; negative

Refer to the graph to the right, which shows two potential demand curves in the market for photocopies at a printing company. If you start at point A on D1, what is the percentage change in quantity demanded when price falls from $30 to $20? Use the midpoint formula to calculate this percentage change.

Quantity demanded rises by 55 %

The Apply the Concept feature explains that there are both positive and normative aspects to the debate over whether the federal government should enact tariffs on imports of cars from Mexico. What economic statistics would be most useful in evaluating the positive elements in this debate? Assuming that these statistics are available or could be gathered, are they likely to resolve the normative issues in this debate? Which of the following economic statistics would be useful in evaluating the positive elements in this debate?

Revenue the US government could receive from the tariff. Car prices in the US. The number of US jobs in automobile manufacturing. The size of the US government's trade debt. (ALL OF THE ABOVE)

What is the law of demand? The law of demand is the

Rule that, holding everything else constant, when the price of a good falls, the quantity demanded will increase, and when the price of a good rises, the quantity demanded will decrease.

Xylophone Inc., a manufacturer of domestic appliances, lowered the prices of its products, expecting an increase in sales by at least 20%. However, it was observed that sales increased only by 8%. Which of the following, if true, can explain this outcome?

The government increased personal income tax rates earlier this year.

Recent medical research revealed that the presence of gluten in oats can cause celiac disease in the elderly. Since the elderly are an important consumer segment in this market, industry experts predicted a fall in the price of commercially-available oats. However, after the publication of the research, the price of oats actually increased. Which of the following, if true, would explain this outcome?

The supply of oats came down drastically, with some major participants exiting the market.

The demand for wheat in the western region of the country Alaine increased as more people migrated to this prosperous region. The price of wheat increased from $8 per bushel to $12 per bushel. Farmers increased production of wheat this season and anticipated higher profits. At $12 per bushel, farmers were expecting to sell 140,000 bushels of wheat. However, they were able to sell only 120,000 bushels of wheat at the new price. Sugarcane production in the region suffered a pest attack, adversely affecting the production of sugar in Alaine. As sugar prices went up, bakeries reduced their demand for wheat. Which of the following is most supported by this information?

There is a negative cross-price elasticity between sugar and wheat.

According to the law of supply,

There is a positive relationship between price and quantity supplied. As the price of a product increases, firms will supply more of it to the market. (A and C only)

During the 1928 presidential election​ campaign, Herbert​ Hoover, the Republican​ candidate, argued that the United States should only import those products that could not be produced here. Do you believe that this would be a good​ policy? Explain.

This is not a good policy because it does not necessarily result in countries producing those goods for which they have a comparative advantage.

Imagine that the next time the New England Patriots play the Miami Dolphins at Gillette Stadium in Foxborough, Massachusetts, Patriots star quarterback Tom Brady has a temporary lack of judgement and plans to sell Patriots memorabilia during the game because he realized that he can sell five times more Patriots products than anyone in the stadium sports gear store. Likewise, imagine that you are a creative and effective manager at work and that you tell your employees that during the next six months, you plan to clean the offices because you can clean five times better than the cleaning staff. Both you and Tom are making an error in judgement by assuming that specialization should be based upon absolute advantage. You shouldn't necessarily do what you are better than anyone else at doing

Unless your advantage in that activity is greater than advantages you possess in other activities.

According to the law of demand, there is an inverse relationship between price and quantity demanded. That is, the demand curve for goods and services slopes downward. Why?

When the price of a good increases, consumers' purchasing power falls, and they cannot buy as much of the good as they did prior to the price change.

An article in the New York Times about the New York Metropolitan Opera (the Met) suggests that the popularity of opera might be increased if the Met reduced its ticket prices. But the article observes that such ticket price cuts would only be possible if the Met received a gift from "a very deep-pocketed donor." The authors of the article are assuming a cut in ticket prices, and assuming there is no gift from a "very deep-pocketed donor," ______ increase the Met's revenue. The authors are assuming the price elasticity of demand for tickets to the Met is

Will not; inelastic.

The primary difference between absolute and comparative advantage is

absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.

What are the key determinants of the price elasticity of demand for a product? The key determinants of the price elasticity of demand for a product are:

availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget

Market price is determined by

both supply and demand

Suppose, in an effort to prevent the population from​ declining, Italy begins offering new mothers extended periods of paid family leave from work​ and, consequently, the birthrate per woman increases. If​ so, then this could best be characterized as an example of people responding to

economic incentives

Amazon allows authors who self-publish their e-books to set the prices they charge. One author is quoted as saying, "I am able to drop prices and, by sheer volume of sales, increase my income." The demand for this author's book was price

elastic because a decrease in price resulted in a higher revenue

Consider an organization that exists to help the poor. The members of the organization are discussing alternative methods of aiding the poor, when a proponent of one particular method asserts that: "If only one poor person is helped with this method, then all our time and money would have been worth it." If you were a member of the organization, what reply best represents clear economic thinking? This attitude

ignores the fact that the cost of helping that one person has an opportunity cost of what those funds could have been used for to help other people.

Firms choose how to produce the goods and services they sell. In many​ cases, firms face a​ trade-off between using more workers or using more machines. For​ example,

many times in the past several​ decades, firms may have chosen between a production method in the United States that uses fewer workers and more machines and a production method in China that uses more workers and fewer machines.

The Food and Drug Administration (FDA) is part of federal government's Department of Health and Human Services. Among its other functions, the FDA evaluates the safety and effectiveness of drugs and medical devices. FDA approval had to be granted before OraSure was allowed to market its home HIV test. In a centrally planned economy, the government decides how resources will be allocated. In a market economy, the decisions of households and firms interacting in markets allocate resources. The regulation of the production and sale of drugs and medical devices in the United States is an example of how resources are allocated in a

market economy because the drug development, and the resources allocated to the development, occurs in the market.

What type of economic analysis is concerned with the way things ought to be?

normative analysis

The production possibilities frontiers depicted in the diagram to the right illustrate

technological advances in the tank industry.

The law of demand is the assertion that

the quantity demanded of a product is inversely related to its price.

An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically

the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers purchasing power

The slope of a straight line equals the change in value on the _____ axis _____ by the change in the value on the other axis between any two points on the line.

vertical, divided