Econ 2000 Exam 1 (HW and Quizzes)

Consider Paul's decision to go to college. If he goes to college, he will spend $90,000 on tuition, $15,000 on room and board, and $7,000 on books. If he does not go to college, he will earn $22,000 working at a construction job and he will spend $11,000 on room and board. Paul's cost of going to college is (ignore any other possible cost that is not mentioned here)

$123,000.

Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method, the cross-price elasticity of demand is

-1.0, and X and Y are complements.

Juanita is deciding whether to buy a suit that she wants, as well as where to buy it. Three stores carry the same suit, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $114 for the suit. Store Travel Time Each Way (Minutes) Price of a Suit (Dollars per suit) Local Department Store 15 114 Across Town 30 86 Neighboring City 60 60

129

Consider Mandy's decision to go to college. If she goes to college, she will spend $20,000 on tuition, $10,000 on room and board, and $2,000 on books. If she does not go to college, she will earn $18,000 working in a store and spend $8,000 on room and board. Mandy's cost of going to college is

42,000

A decrease in the price of pizza will shift the supply curve for pizza to the left. True or False

False

A linear, downward-sloping demand curve has a constant elasticity but a changing slope. True or False

False

Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic. (Here, we are assuming that drug-related crime is proportional to the total amount spent on drugs.) True or False

False

Amy's happiness from chocolate bars Number of Chocolate bars consumed 1 2 3 4 Benefit (Happiness in $) 4 7 9 10 Marginal Benefit 4 3 2 1

Find the range of prices that the first chocolate bar will be consumed. [0,4] Find the range of prices that the second chocolate bar will be consumed. [0,3] Find the range of prices that excactly two chocolate bars will be consumed. (2,3]

East Lansing is a small college town in Michigan. At the end of August each year, the market demand for fast food in East Lansing

Increases

Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $6200. Bill discovers that he needs to do an additional $2400 of work to make the car worth $6200 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do?

It does not matter if Bill sells the car now or completes the work and then sells it at the higher price because the outcome will be the same either way.

A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?

People respond to incentives.

Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate?

People respond to incentives.

Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight. Then the average cost per seat is $500. There is one passenger on the standby list. You would be willing to take this passanger on the plane only if he is willing to pay more than

This cannot be determined from the information given.

Suppose the government is concerned about firms in the United States importing illegal caviar. As a result, the government increases border patrols to catch illegal shipments. U.S. Customs agents perform DNA testing on the caviar to determine if it comes from endangered species of fish. If so, the government destroys the caviar. What would we expect to observe in the caviar market?

Total revenues to caviar firms will increase if the demand for caviar is inelastic.

Amy's happiness from chocolate bars Number of Chocolate bars consumed 1 2 3 4 Benefit (Happiness in $) 4 7 9 10 Marginal Benefit

What is the marginal benefit of the first chocolate bar? 4 What is the marginal benefit of the second chocolate bar? 3

If the United States decides to trade with Yemen, we know that

Yemen and the United States can both benefit.

According to a recent article in the Wall Street Journal, the president of Delta Airlines stated "Although by lowering our airline fares (prices) we increased the number of passengers (quantity) by 17 percent, our total revenue fell by 10 percent." On this basis of this statement assuming no other factors affecting demand or supply changed, one could conclude that Delta Airlines was:

a good with an inelastic demand

Water pollution from pulp and paper mills harms plants, animals, and humans. This is an example of

a market failure caused by an externality.

A competitive market is one in which there

are so many buyers and so many sellers that each has a negligible impact on the price of the product.

A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect

both the value of a good to society and the cost of making it.

Ashley eats two bananas during a particular day. The marginal benefit she enjoys from eating the second banana

can be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana.

Which of the following will not shift the demand curve for hotdogs sold at LSU football games?

decrease in the price of hotdogs sold at LSU football games

Good news for farming can be bad news for farmers because the

demand for basic foodstuffs is usually inelastic, meaning that factors that shift supply to the right decrease total revenues to sellers.

In a market economy, who makes the decisions that guide most economic activity?

firms and households

Soup is an inferior good if the demand

for soup falls when income rises.

For a market for a good or service to exist, there must be a

group of buyers and sellers.

Economics is best defined as the study of

how society manages its scarce resources.

A rightward shift of a demand curve is called a(n)

increase in demand.

If muffins and bagels are substitutes, a higher price for bagels would result in a(n)

increase in the demand for muffins.

A decrease in the price of a good will

increase quantity demanded.

According to Adam Smith, the success of decentralized market economies is primarily due to

individuals' pursuit of self-interest.

Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth

is more equal but less efficient for society.

Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will

lower both price and total revenues.

A rationale for government involvement in a market economy is

markets sometimes fail to produce a fair distribution of economic well-being, markets sometimes fail to produce an efficient allocation of resources, property rights have to be enforced. (All of the above are correct)

Guns and butter are used to represent the classic tradeoff between spending on

national defense and consumer goods

Billie Jean has $120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that

people face trade-offs.

A market demand curve shows how the total quantity demanded of a good varies as

price varies.

A perfectly inelastic demand implies that buyers

purchase the same amount as before when the price rises or falls.

The phenomenon of scarcity stems from the fact that

resources are limited.

When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing,

scarcity

You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a rational consumer you should make your choice by comparing

the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs.

A very hot summer in Atlanta will cause

the demand for jackets to decrease.

A downward-sloping demand curve illustrates

the law of demand.

Which of the following does not affect an individual's demand curve?

the number of buyers

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the mid point method,

the price elasticity of demand of good A is 0.67.

Barb's aunt gave her $100 for her birthday with the condition that Barb buy herself something. In deciding how to spend the money, Barb narrows her options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally she decides on Option B. The opportunity cost of this decision is

the value to Barb of the option she would have chosen had Option B not been available.

England can benefit from trade

with any nation.