AREC 202
Several students are discussing the concept of price elasticity while standing in line at the campus bookstore. Which of the following quotations describes a price-inelastic demand for a product? ("overall spending" is the same as expenditures)
"A price increase really scares me. It wouldn't reduce my purchases of school supplies very much, but I know for sure that I'll end up spending a lot more than I was before."
Consider a market for skateboards in which there are 3 potential buyers. The first has a reservation price of $100, the second has a reservation price of $200, and the third has a reservation price of $300. If skateboards sell for $150 and if each potential buyer only wants one skateboard, then what will be total consumer surplus in this market?
$200
The opportunity costs for Tom to make one pound of coffee is
1 pound of nuts
If George, Barbara, and Dan are the only three buyers in the market, and the price of a bag of chocolate-covered peanuts is $0.70, the total quantity demanded in this market is ________ bags per month.
140 (=20+20+100)
Assume the price for a can of Red Bull is $3. When you enter the supermarket you are willing to pay $4 for the first can, $3.50 for the second can, $2.75 for the third can and $1 for the fourth can. How many cans should you buy?
2
The opportunity costs for Susan to make one pound of coffee is
2 pounds of nuts
If the price of chocolate-covered peanuts is $0.70 the quantity demanded by George is ________ bags per month.
20
Suppose that when the price of a sandwich from Dagwood's Deli is $5, there are 200 people who buy 1 sandwich per week and 100 people who buy 2 sandwiches per week. Thus, at a price of $5, the market demand each week for sandwiches from Dagwood's Deli is _______
400
Imagine the following two situations. In the first situation, you are about to buy a $25 computer game at the nearby campus store when a friend tells you that the same game is on sale at a downtown store, which is a 30-minute walk away, for only $15. In the second situation you are about to buy a $2,020 laptop computer at the nearby campus store when a friend tells you that the same computer is on sale at a downtown store for only $2,010. Assume that your opportunity costs of making the trip to the downtown store are in both situations $5. Which one of the following statements is correct?
A rational decision-maker should make the same decision in both situations
How does the situation in question 4 change if your opportunity costs of making the trip to the downtown store are now in both situations $15?
A rational decision-maker would not make either trip.
According to a recent New York Times article, the number of car producers in China has gone up dramatically over the last decade. At the same time, Chinese consumers' incomes have risen, and cars are a normal good in China What has happened to demand in the Chinese market for cars?
Demand has gone up (the demand curve has shifted to the right).
Anna, Bertha and Carina agree on meeting at "Fresh Choice," an all-you-can-eat-buffet restaurant, for dinner. Anna and Bertha are already inside and paid, whereby Anna used a coupon for a free dinner and Bertha paid $9. Carina is still outside and has not paid. Suddenly all three of them get sick, so sick that they really don't feel like eating at all anymore. If all three understand the difference between sunk costs and opportunity costs, which of the following statements is true:
If Anna and Bertha are too sick to eat anything then they shouldn't do it and instead leave, because the $9 (for Bertha) and the foregone opportunity to use the fee coupon some other time (for Anna) are sunk costs and should not matter for the decision whether to eat something or not.
Assume the market for wine grapes in California was in equilibrium in 2020. 2021 was a very good year for California wine-grape growers, who produced a bumper crop. What would have occurred now at the original 2020 equilibrium price, and thus what happened to the equilibrium price 2021 itself?
In 2021, there would have been excess supply (a surplus) at the old 2020 equilibrium price, and thus the new 2021 equilibrium price is lower than the 2020 equilibrium price.
When are people willing to pay higher prices for Christmas presents, on September 24 or on December 24? Why?
On December 24, because their demand for presents is highly price-inelastic on that day.
Coke and Pepsi +0.63 High-fuel-consuming sport-utility vehicles (SUVs) and gasoline -0.28 McDonald's burgers and Burger King burgers +0.82 Butter and margarine +1.54 Which of the pairs above are complements?
SUVs and gasoline
Find the flaw in reasoning in the following statement: "A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end" Using correct reasoning, what happens to supply following the technological innovation?
Supply goes up
According to a recent New York Times article, the number of car producers in China has gone up dramatically over the last decade. At the same time, Chinese consumers' incomes have risen, and cars are a normal good in China What has happened to supply in the Chinese market for cars?
Supply has gone up (the supply curve has shifted to the right)
An Arizona student claims to have spotted a UFO over the desert outside of Tucson. How will this claim affect the supply (not the quantity supplied) of binoculars in Tucson stores?
Supply will not change. The demand for binoculars is likely to increase, leading to an increase in price and quantity supplied (but no change in supply
Which statement is true
Susan can achieve combination B if she specializes on making nuts and then trade.
According to a recent New York Times article, the number of car producers in China has gone up dramatically over the last decade. At the same time, Chinese consumers' incomes have risen, and cars are a normal good in China Without additional information, what can you conclude from these two developments about what has happened to the equilibrium price in the Chinese market for cars?
The equilibrium price change cannot be determined without additional information.
Find the flaw in reasoning in the following statement: "A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end" Using correct reasoning, what happens to the equilibrium price following the technological innovation?
The equilibrium price goes down
Assume the same situation as in question 7, except that now the coupon can only be used for the spring break trip to Florida and nothing else since it expires right after spring break. Should you now use your frequent-flyer coupon for your trip to Florida?
Yes, since $1,350 > $1,000.
With trade and specialization,
a country can consume a combination of goods that is on the right of the production possibilities curve.
State whether the following pairs of goods are complements, substitutes, or both. a. Washing machines and dryers b. Tennis rackets and tennis balls c. Birthday cake and birthday candles d. Cloth diapers and disposable diapers
a. Complements b. Complements c. Complements d. Substitutes
Indicate how you think each of the following would shift demand in the indicated market: a. The income of buyers in the market for Adirondack vacations increase b. Buyers in the market for pizza read a study linking pepperoni consumption to heart disease. c. Buyers in the market for gas-powered cars learn of an increase in the price of electric cars (a substitute for gas-powered cars). d. Buyers in the market for electric cars learn of an increase in the price of electric cars.
a. The demand curve would shift to the right b. The demand curve would shift to the left c. The demand curve would shift to the right d. The demand curve would remain unchanged
How would each of the following affect the U.S. market supply curve for corn? a. A new and improved crop rotation technique is discovered b. The price of fertilizer falls c. The government offers new tax breaks to farmers d. A tornado sweeps through Iowa
a. supply curve shifts to the right b. supply curve shifts to the right c. supply curve shifts to the right d. supply curve shifts to the left
The law of demand states that people do _____ of what they want to do as the cost of doing it rises a. more b. less
b. less
If people demand less of product A when the price of B rises, then A and B are:
complements
The difference between a buyer's reservation price for a product and the price a buyer actually paid is _____
consumers surplus
The law of _____ states that people do less of what they want to do as the cost of doing it rises.
demand
In the 1980s television commentators were claiming that pretty soon the "United States would have no comparative advantage in anything compared to Japan." This statement
does not make sense; a country might not have an absolute advantage in anything but must have a comparative advantage somewhere.
What can you conclude about the price elasticity of demand from this statement: "The pizza delivery business in this town is very competitive. I'd lose half of my customers if I raised the price by as little as 10%." Demand is
elastic (but not perfectly elastic).
Economists believe that our preferences for different goods and services do not change over time.
false
In general, individuals and nations should specialize in producing those goods _________ other individuals or nations.
for which they have the lowest opportunity cost compared to
In the example in class, opium farmers in Afghanistan lost half their crops. They were
happy because demand for opium is very price-inelastic and so their revenues went up.
How will an increase in the birth rate affect the equilibrium price of land? (Assume the supply of land is fixed.) The equilibrium price of land will ______ because_____ for land shifts to the ____.
increase; demand; right
If the income elasticity of demand is negative, then the good is a(n)
inferior goods
Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States. Because Picasso is dead and the likelihood of finding hidden paintings by him is very small, the supply curve for Picasso paintings, at least in a certain price range
is perfectly vertical
To decide whether to increase an activity by one unit you should compare
marginal benefits and marginal costs
The true opportunity cost of your college education consist of
only the explicit and implicit costs you would not have accrued had you chosen a full-time job instead of a college education.
The affordable combination of goods that yields the highest total utility for a consumer is known as the _____ combination of goods
optimal
What can you conclude about the price elasticity of demand from this statement: "My economics professor has chosen to use the Frank et al. textbook for this class. I have no choice but to buy this book, no matter what the price is." This student's demand for the Frank et al. textbook is, at least within a certain price range,
perfectly inelastic
What does the following statement indicate: "I would never buy a Monster Drink! You couldn't even give me one for nothing." The demand curve is
perfectly vertical at quantity 0.
Suppose that in response to a decrease in the price of Hondas, people switch from buying Toyotas to Hondas. This is an example of _____ of a price change
the substitution effect
Suppose that in response to an increase in the price of sugar, people switch from using sugar to corn syrup. This is an example of ____ of a price change
the substitution effect
If an invention improves the technology to make widgets (for all widget producers), then
the supply curve of widgets shifts to the right
Economists refer to the total satisfaction that people derive from all of their consumption activities as _____
total utility
Economists believe that our preferences for different goods and services can be influenced by our peers
true
Once people have acquired the food, shelter, and clothing required to maintain their health, economists refer primarily to the goods and services people "want" rather than those they "need"
true
The satisfaction that people derive from all of their consumption activities is called ______
utility
Provided people have achieved bare subsistence levels of consumption, economists speak mainly in terms of people's ______
wants
Having a comparative advantage in a particular task means that
you give up less to accomplish that task than do others .
Which sentence in this paragraph does not make sense: "A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to demand more garlic. The increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain."
Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic.
Suppose that when milk sells for $4.50 per gallon, the quantity of milk demanded is 3,250 gallons per day and the quantity of milk supplied is 3,860 gallons per day. Will the equilibrium price of milk be greater than, less than, or equal to $4.50 per gallon
The equilibrium price of milk will be less than $4.50.
The publisher of a national newspaper recently lowered the price of the newspaper by 10%. The newspaper sold 5% more issues. The publisher was quoted saying, "the 10% decrease in price generated an increase in revenues." Which of the following statements best describes an economist's reaction to the publisher's claim
The implied price elasticity of demand for the newspaper is 0.5 (=5/10), and the increased revenue claim cannot possibly be true
Residents of your city are charged a fixed weekly fee of $10 for garbage collection. They are allowed to put out as many cans as they wish. The average household disposes of five garbage cans per week under this plan. Now suppose that your city changes to a "tag" system. Each garbage can must have a tag affixed to it; the tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on how many garbage cans will be put out? Think "people respond to incentives".
The number of garbage cans put out will probably be lower under the new "tag" system
Coke and Pepsi +0.63 High-fuel-consuming sport-utility vehicles (SUVs) and gasoline -0.28 McDonald's burgers and Burger King burgers +0.82 Butter and margarine +1.54 How does a 10% decrease in the price of gasoline affect the quantity of SUVs demanded?
The quantity demanded of SUVs goes up by 2.8% (= 0.28 * 10%).
Which of the following states that spending should be allocated across goods so that the marginal utility per dollar is the same for each good?
The rational spending rule
Evaluate the following statement: "I spend more money on orange juice even as the price of orange juice rises."
This indicates a violation of the Law of Demand.
Find the flaw in reasoning in the following statement: "A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end" Using correct reasoning, what happens to demand following the technological innovation?
Demand does not change.
You are considering using a frequent-flyer coupon for a spring break trip to Florida. The regular ticket would cost $500 if you did not use the coupon. All other costs of that trip are $1,000. The most you would be willing to pay for such a vacation is $1,350 (=your value of the trip). Your only alternative use for using the coupon is going to Boston to a wedding after spring break (a trip you will make for sure no matter what you do over Spring Break). The ticket to Boston would cost $400 if you do not use the coupon. Should you use your frequent-flyer coupon for your trip to Florida?
No, because $1,350 < $1,400 (=$1,000 + $400).
Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States. What has happened to the equilibrium price in the market for Picasso paintings because of this change in preferences?
The change in preferences resulted in a higher equilibrium price
When the price of a good or service goes up, consumers will tend to
switch to less expensive substitutes
Consumer surplus is
the difference between a buyer's reservation price for a product and the price a buyer actually paid.
According to the rational spending rule, spending should be allocated across goods so that
the marginal utility per dollar is the same for each good.
The affordable combination of goods that yields the highest total utility for a consumer
the optimal combination of goods for a consumer.
Consider a market for snowboards in which there are 4 potential buyers. The first has a reservation price of $200; the second has a reservation price of $300; the third has a reservation price of $400; and the fourth has a reservation price of $500. If snowboards sell for $250 and if each potential buyer only wants one snowboard, then total consumer surplus in this market will be _______ dollars.
450
Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States. In recent years, wealthy people all over the world started thinking that having a real Picasso is a "must" for them. What happened to demand in the market for Picasso paintings in recent years because of this change in preferences?
Demand went up.
How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and equilibrium quantity in the market for new automobiles
Equilibrium price will fall; equilibrium quantity will fall.
After graduation from college, you will receive a substantial increase in your income. If you decide that you will eat more in "casual-dining"-style restaurants like Chili's and Applebee's and less in fast-food places like McDonald's and Wendy's, then for you eating out at casual-dining style restaurants would be considered a(n):
normal good
When the price of a good goes up, part of the reason consumers purchase less of the good is that they
switch to less expensive substitutes
For making coffee Susan has
the absolute but not the comparative advantage.
