ECON 222 Homework Questions

What is the opportunity cost of a small business investing $1 million in a new project that will return $1.5 million in one year? The firm's goal is to end the year with the most assets possible.Its other alternatives are:I. Leave $1 million in a bank account and earn $50,000 in interest.II. Invest $1 million in new equipment that will have a value of $1 million at the end of the year and have earned an additional $100,000 in profits during the year.III. Spend $1 million on an investment opportunity which has an expected value of $3 million in ten years.What is the opportunity cost of the new project?

$1,100,000

i. Adam (who lives in England) shears wool from his sheep and sells it to Karl (who lives in Germany) for $1400ii. Karl uses the wool purchased from Adam to weave into cloth that he then sells to Leon (who also lives in Germany) for $1600.iii. Leon sells the wool to Alfred (who lives in England) for $2000.iv. Alfred then tailors a bespoke suit for John (who lives in England) for $5000.Suppose that transactions i and ii occurred in 2016 and transactions iii and iv occurred in 2017. GDP in the United Kingdom in 2016 and 2017, respectively, are:

$1400 and $3000

Consider Jolly Old England in which there are just three new, domestically produced goods and services: Soused Hog's Face, Porter and Suet Pudding. Listed below are the prices and quantities of these goods in the base year and the current year in dollars rather than pounds. Real GDP in the current year for England is (to the nearest dollar):

$2500

i. Adam (who lives in England) shears wool from his sheep and sells it to Karl (who lives in Germany) for $1400ii. Karl uses the wool purchased from Adam to weave into cloth that he then sells to Leon (who also lives in Germany) for $1600.iii. Leon sells the wool to Alfred (who lives in England) for $2000.iv. Alfred then tailors a bespoke suit for John (who lives in England) for $5000.Suppose that these are the only transactions in the two countries, and that they all take place in the year 2017. The GDPs of the United Kingdom and Germany (measured in dollars), respectively, are:

$4400 and $600

The movie Waterworld (1995), produced by Kevin Costner, envisioned a dystopia beset by mayhem akin to Mad Max but set on vessels floating on the ocean's surface after a flooding of the Earth by Climate Change. The movie famously flopped at the box office because it only generated $130M in revenue despite a then-record cost of $180 million. The studio had anticipated that it would only cost $120M: $60M to build the set and $60M to film the scenes. However, once $70M had been spent on building the set and filming the first few scenes, the set unexpectedly sank into the ocean and had to be rebuilt at a cost of $60M before the remaining $50M of scenes were filmed. Considering the $70M as a sunk cost, the producers of Waterworld made the rational decision to finish the movie; if they finished the movie then their losses would be _____ but those losses would be even larger (_____) if they didn't finish the movie.

$50 million; $70 million If they made the movie, total revenues would be $130 million and total costs were $180 million for a loss of $50 million. If they did not make the movie, revenue would be zero and costs would be $70 for loss of $70 million.

The table below presents the demand and supply curves for microcomputers in Japan and the U.S.If there is no trade between the U.S. and Japan, what is the equilibrium price in the computer market in the U.S.?

$5000

Given the following table, find the current account balance.

-$1400

Consider a subcontractor, Aloo Men Knee 'Em, that die casts specialized aluminum parts in India for the auto industry. There is a bracket that it sells for $2.50 and the following production schedule describes how many brackets it can produce in an hour for the number of workers (N) employed at $10 each. Assuming that the the firm cannot hire a fraction of a worker, how many workers will it lay off if the price of the bracket drops to $2?

1.0

Suppose that the government decides to impose a price ceiling on cars at $10k. What would be the quantity of cars sold (in millions)?

1.5 Subtract 500,000 from each quantity demanded at every price. Figure out where quantity demanded is equal to quantity supplied after this change. ​[4.3, 4.8]

Match the following countries with their respective opportunity cost ratios of producing a barrel of wine in terms of yards of cloth. England

10

Suppose that you are offered a promotion that will pay you $10k more per year but will require an additional 100 hours on the road away from your family. By turning down the promotion, you have revealed to your family that this marginal time spent with them is worth at least $______ per hour.

100.0

You and a buddy have decided to take time off from work (where you earn $20 per hour) to play a sport together. If you play tennis, then you'll only miss 2 hours of work and you can use public courts at no charge. If you play golf, then you'll miss 4 hours of work and you must pay a $60 fee to use the course. If you prefer golf, then you must value the benefits of playing golf at $____ more than playing tennis.

100.0

Given the transactions noted in the previous question, what is the growth rate in Real GDP in the United Kingdom between 2016 and 2017?

114% From above, you found that GDP in the UK was $1400 in 2016 and $3000 in 2017. This is 114%.

Suppose the supply and demand schedules for Japanese cars in the U.S. are as follows: What is the equilibrium price? (Please answer in the thousands)

14.0 The equilibrium price is the price where quantity supplied is equal to quantity demanded. It is the price where firms have a proper incentive to produce a quantity of goods that is exactly equal to the quantity of goods demanded by individual consumers at that price. ​[4.8]

Consider Jolly Old England in which there are just three new, domestically produced goods and services: Soused Hog's Face, Porter and Suet Pudding. Listed below are the prices and quantities of these goods in the base year and the current year in dollars rather than pounds. The growth rate in England's price level is:

15% inflation

At what level of output is the marginal cost greater than the marginal benefit?

150

If the Consumer Price Index for one year was 150.0 and the rate of inflation from that year to the next was 10 percent, what would be the Consumer Price Index in the second year?

165.0

How much (if any) does each of the following transactions raise GDP? The Jones family sells its old house to the Reynolds family for $130,000. The Jones family then buys a newly constructed house from a builder for $175,000. __

175000.0

Match the following countries with their respective opportunity cost ratios of producing a barrel of wine in terms of yards of cloth. Poland

2

Suppose that the government offers a subsidy of 2 (in thousands of $ per car) to car buyers. How large of a tax on car sellers (in thousands of $ per car) would the government have to levy in order for the quantity of cars sold to be unchanged?

2.0 Subtract 500,000 from each quantity demanded at every price. Figure out where quantity demanded is equal to quantity supplied after this change. ​[4.3, 4.8]

What is the equilibrium quantity? (Please answer millions per year)

2.0 The equilibrium quantity is the quantity where quantity demanded is equivalent to the quantity supplied. There are no extra units produced nor are there any individuals that demand the good that cannot receive one. ​[4.8]

Consider Jolly Old England in which there are just three new, domestically produced goods and services: Soused Hog's Face, Porter and Suet Pudding. Listed below are the prices and quantities of these goods in the base year and the current year in dollars rather than pounds. Real GDP growth in England is:

25%

A friend has won the state lottery and comes to you and asks which choice he should take: $105M now and $105M in 1 year or a single payment of $205M paid now. If the state is indifferent between these 2 options, then the state's implicit interest rate is _____%.

5.0

Consider a country with a population of 300M. There are 10M people under the age of 16, 10M who are active in the military, and 30M who are institutionalized. There are an additional 100M who are gladly not employed (because they are retired and/or home-makers) and 50M who are not employed but have given up looking for a job. There are 95M people who are employed but 15M do not have full-time jobs. The unemployment rate is ________%?

5.0

If the Consumer Price Index for one year was 120 and for the next year was 180, what was the approximate rate of inflation?

50%

If you placed $5k in a certified deposit for 1 year (during which the inflation rate was 0) to earn 4% nominal interest, then the real value of that fund (at the end of that 1 year is $_________.

5200.0

Which of the following will result in a decrease in the supply of money in the economy?

A customer repaying a loan

If prisoners did not have dollars to use to purchase goods and services in prison but they had access to cigarettes that are then used as money by the prisoners, then cigarettes become:

A medium of exchange A store of value A unit of account

An increase in the price of the good

A movement along a demand curve¸ no change in demand

Ignoring the effects on prices, which of the following is accurate?

An increase in GDP created by an increase in aggregate demand will likely cause a decrease in a trade surplus.

Assuming we are producing near full capacity, an increase in demand (a shift to the right in AD) will result in which of the following?

An increase in real GDP An increase in the price level Movement along the AS curve

Since 1950, the labor force participation rate of women with young children has increased dramatically. In accordance with this trend, one would predict that there has been _______________.

An increase in the demand for child care services We can interpret the increase in labor force participation as a rise in the opportunity cost of caring for children. In other words, many women are willing to pay more for childcare than they were prior to 1950. This is an example of the number of buyers in the market increasing over time. ​[4.2, 4.3]

Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?

An increase in the price of a good only changes the quantity demanded of a good (which is represented by a movement along the existing demand curve). An increase in income means that buyers are able to buy more goods, resulting in an increase in demand for normal goods. If two goods are substitutes for one and other, buyers will purchase the cheaper option (all else equal). Therefore, a decrease in the price of a substitute good, leads to a decrease in demand. If buyers expect their income to fall in the future, they tend to save more money in the present, causing a decrease in demand. If buyers expect prices to increase in the near future, demand will increase in the present to take advantage of lower prices now. ​[4.2, 4.3]

An increase in the price of a good due to increased demand will cause which of the following?

An increase in wages and an increase in employment

Workers in an industry experience an increase in productivity. This causes what?

An increase in wages and an increase in employment

Which of the following represents movement along the aggregate demand curve? Select all that apply.

As the average price level falls¸ consumers have more financial wealth and decide to increase spending. Falling prices decreases the demand for money¸ decreasing interest rates¸ and investment spending rises. People from around the world want to buy more Teslas as the price level in the U.S. falls.

If the Fed is targeting a constant interest rate, then how should it respond to a short-run increase in spending around the holidays?

Buy Treasury Bonds from Banks

Match the following goods with the country that possesses a comparative advantage in its production. Apples

Canada

If income decreases and, at the same time, a new technology is discovered that lowers the cost of producing the good, which of the following will happen?

Cannot tell the change in equilibrium quantity. The equilibrium price will decrease.

An increase in income tax rates will affect a labor market in which of the following ways? The equilibrium quantity of workers will ______________ and the equilibrium wage will ______________.

Decrease; increase

New technology lowering the costs of production will cause the equilibrium price to ______________ and the equilibrium quantity to ______________.

Decrease; increase An improvement in technology increases supply. ​[4.5, 4.6, 4.8]

Oprah Winfrey made comments about the possibility of contracting mad-cow disease from eating beef. Some observers said that those comments had negative effects on the beef market. In the same period of time, changes in production to address mad-cow may have been the real culprit. If only Oprah's comments affected the market, then the equilibrium price would have ______________ and the equilibrium quantity would have ______________.

Decreased; decreased

Which of the following best describes the immediate effect of an increase in U.S. tariffs on goods and services manufactured abroad? The balance of trade:

Deficit will decrease

Assume that tastes change so that tennis is no longer as desirable to play as it is now. What would happen to the market for tennis balls?

Demand shifts inwards, the equilibrium quantity is smaller, and the price is lower. The change in tastes causes the demand for tennis balls to decrease. The quantity demanded is now less than quantity supplied. There is a surplus. Given the surplus, sellers will lower their prices to get rid of extra product. As prices fall, the quantity demanded will begin to increase and the quantity supplied to decrease and thus the surplus gets smaller. This downward pressure will continue until there is no longer a surplus and a new lower equilibrium price and lower equilibrium quantity are reached. ​[4.2, 4.8]

If nominal wages have increased over time, then workers are ______________ ; if real wages rise over time, then workers are ______________.

Either worse or better off; better off.

Indicate where, if at all, the following should appear in the balance of payments: A Korean company builds a new factory in the U.S.

Export of an asset, financial account, in subcategory, internationally owned assets in the U.S.

Indicate what category would the purchase of services of a U.S. lawyer in the U.S. by a Japanese citizen in Japan would fall under in regards to the U.S. GDP.

Exports

Okra was $13.00 per bushel in 2015, and 1.5 million bushels were sold. Okra was $14.00 per bushel in 2016, and 2.0 million bushels were sold. "If in both cases the okra market was in equilibrium, this must be an example of an exception to the law of demand."

False The quote is incorrect. Increasing demand for okra from 2015 to 2016 would cause an increase in price and equilibrium quantity. The law of demand holds only if everything else remains the same. The results in the okra market must represent a shift in demand rather than a movement along a demand curve. An increase in demand will cause an increase in the equilibrium quantity and price. ​[4.2, 4.8]

Which type of unemployment is due to job search?

Frictional

Economists are shy about normative statements and tend to fall back on only advocating for Pareto Improvements due to

Heterogeneity

When the CPI is used to compute inflation, which of the following is happening in the computation?

Hold quantities constant

Suppose wages increase, ceteris paribus. The marginal product of labor will do which of the following?

Increase because the firms no longer find it worthwhile to hire as many workers.

An increase in the prices of inputs will cause the equilibrium price to ______________ and the equilibrium quantity to ______________.

Increase; decrease An increase in the prices of inputs decreases supply. This leads to a price increase and a quantity decrease in the new equilibrium. ​[4.5, 4.8]

An increase in the price of a substitute good will cause the equilibrium price of its substitute to ______________ and the equilibrium quantity to ______________.

Increase; increase An increase in the price of a substitute good will cause demand for the other good to increase. ​[4.2, 4.8]

A decrease in the price of a complementary good will cause its complement's equilibrium price to ______________ and the equilibrium quantity to ______________.

Increase; increase This leads to an increase in demand for its complement. ​[4.2, 4.8]

Which of the following would an Economist judge to be least likely to be causal?

It's raining because it is your wedding day

If banks suddenly allow unlimited ATM withdrawals from savings accounts and this convenience causes individuals to hold less currency, then how will the money supply be larger or smaller or the same?

Larger, because banks will be able to make more loans given the amount of reserves.

If one job has more prestige than another but both require the same skills, the job with the greater prestige will likely pay ______________ because of a difference in labor ______________.

Less; supply

If nothing else changes, an increase in interest rates will __________.

Lower investment spending because it raises the opportunity cost of funds

Economists characterize the decision of whether to live in suburbs as a trade-off between the benefit of lower housing prices versus the total cost: the direct cost of paying for the transportation and the indirect cost of longer commute times. If the innovation of Autonomous Automobiles may increase urban sprawl because people can spend that commuting time getting work done instead of concentrating on driving, then how would you characterize this innovation in the context of an analysis of the costs and benefits?

Lowers total cost of commuting because the indirect costs of commuting decrease.

Which of the following is true of an economic model?

Makes simplifying assumptions to provide a simpler version of a complex problem so that it may be studied and understood An economic model is anything that makes simplifying assumptions in order to make complex economic ideas or problems more understandable. For A, economic models don't necessarily depend on mathematics formulas, although the use of mathematical formulas to describe an economic model is common. ​[2.1, 2.2]

An economic model makes it easier to understand complex economic problems by doing which of the following?

Making simplifying assumptions An economic model simplifies a problem by making assumptions about the real world to eliminate the complex interactions of individuals, firms, and markets, yet still represent the foundation of economic forces that allow us to understand the economy. ​[2.2]

Which item is included in the calculation of U.S. GDP?

New housing construction

Indicate the immediate effects of the following on the expenditure components of GDP. An increase in the U.S. consumption of foreign-grown bananas as substitutes for U.S. grown oranges will cause:

No change in consumption and an increase in imports

There is an old proverb that "anything worth doing is worth doing well". Would an Economist agree and why?

No. Even though the benefit of doing it at all may exceed the cost of doing it at all, the cost of the extra effort to do it well can exceed the benefit of doing it well

Compare the following two situations. In the first, gasoline prices alone rise from $2.50 per gallon to $4.00 per gallon. In the second, prices of most goods and services - including gasoline prices -- increase by 4 percent. Which of those situations represents inflation in an economy?

Only the second situation

What will an increase in the price of substitute goods produced in foreign countries do?

Raise the level of exports and lower the trade deficit

What principle is assumed when Economists model agents as optimizing some objective?

Rationality

The long-run effect of an increase in investment spending will be a shift of the aggregate demand curve to the __ and __ shift of the aggregate supply curve.

Right; a rightward

High levels of inflation are reflected by a(n) __ of the PPF.

Shift in

A decrease in the price of a substitute good

Shift the demand curve to the left and a decrease in demand.

Expectations of falling income in the near future

Shift the demand curve to the left and a decrease in demand. (If the good is normal.)

An increase in income for a normal good

Shift the demand curve to the right and an increase in demand

Expectations of rising prices in the near future

Shift the demand curve to the right and an increase in demand now.

The broader definition of the money supply (M2) includes

Small time Certificates of Deposit (CD's) Checkable deposits

Which of the following is not considered part of investment in the calculation of GDP?

Stock ownership in a company

When credit markets froze up entirely during the financial crisis of the Great Recession, which of the following unconventional actions would have convinced banks to start lending again?

The Fed buys new stock issues from banks The Fed purchases toxic assets from banks in exchange for reserves

Indicate which of the following is a Positive Statement and which is a Normative Statement Normative Statement

The United States should legalize Marijuana

I've been studying hard all week and I want to get out of the house tonight! My options are to (1) go somewhere with live music, (2) see the Fireflies game and eat expensive hot dogs, or (3) cook dinner and play games at my friend's house. I'd prefer (1) to (2) and (2) to (3), and only have time for one event tonight. If each of these has the same dollar cost, what is the opportunity cost of going somewhere with live music tonight?

The baseball game and hanging out at my friend's house.

Assume the same number of females and males in a labor market, and both are equally productive and have the same willingness to accept for their labor hours. However, you suspect there is a bias where firms prefer male workers. How might one be able to if firms have a higher willingness to pay for males?

The equilibrium quantity of males hired would be greater than females. Additionally, males are paid higher wages.

If a market is required to provide health care to all full-time workers (but not part-time workers), what would you predict?

The firm will hire more part-time workers and fewer full-time workers.

If a worker is willing to supply less labor as a result of a wage increase, then what is occurring?

The labor supply curve is backward bending because the income effect dominates the substitution effect.

Indicate which of the following is a Positive Statement and which is a Normative Statement Positive Statement

The legalization of Marijuana would lower alcohol and tobacco sales

As a larger number of students are assigned to groups to work on a project, which of the following is true?

The less each additional student will contribute to the project As more students are added to a group, eventually each additional student will make a smaller and smaller contribution than before. Maybe the first students in the group have a skill set that is uniquely suited for the project and each additional student has abilities in something unrelated. ​[2.3]

Consider a restaurant where all employees are paid minimum wage and do not have health insurance provided by the restaurant owner. What will happen to the number of employees at a restaurant if the government passing a new law requiring all restaurants to provide health insurance for all of its employees?

The number of employees will decrease as the cost of hiring a worker exceeds the marginal product of labor.

If you earned more in income than you spent on consumption, then those savings become your wealth. What is the opportunity cost of holding that wealth in its most liquid form if inflation is 2%?

The opportunity cost is the interest that could have been earned if the currency was in the bank.

Suppose that the labor of new immigrants is a perfect substitute for the labor of current residents. A classic argument against new immigrants is that they lower the wages for current residents because the new immigrants shift out the labor supply curve. However, if new immigrants also shift out the labor demand curve, then which of the following can we claim with confidence?

Total employment will increase

Assume that there are only two countries, only two goods, and that labor is the only input. Given the following data on how many hours it takes to produce one bushel of each of these goods, answer the questions. Match the following goods with the country that possesses an absolute advantage in its production. Apples

U.S.

Assume that there are only two countries, only two goods, and that labor is the only input. Given the following data on how many hours it takes to produce one bushel of each of these goods, answer the questions. Match the following goods with the country that possesses an absolute advantage in its production. Oranges

U.S.

Match the following goods with the country that possesses a comparative advantage in its production. Oranges

U.S.

Suppose that the labor supply curve is vertical. The nation allows a huge increase in immigration, which increases the number of workers entering this industry. This will cause ______________ and the marginal revenue product of labor to ______________.

Wages to decrease; decrease

Scarcity

create(s) bounds on our wants such that we must make decisions about what to consume.

Assume that tomatoes are currently imported from abroad at a market price of $ .50 per tomato. Assume that a tariff of $ .25 is placed on imported tomatoes. Also assume that the supply and demand for tomatoes are normal supply and demand relationships. What will be the effect of the tariff on the price of tomatoes in the U.S. and to the price received by foreign exporters of tomatoes? Price received by foreign exporters

decrease

Preferences

determine(s) how we rank choices in a setting with limitations on resources

Assume that tomatoes are currently imported from abroad at a market price of $ .50 per tomato. Assume that a tariff of $ .25 is placed on imported tomatoes. Also assume that the supply and demand for tomatoes are normal supply and demand relationships. What will be the effect of the tariff on the price of tomatoes in the U.S. and to the price received by foreign exporters of tomatoes? Price in the U.S.

increase

Opportunity cost

is/are the value of the best alternative option we forgo when we make limited selections.

Desires

is/are unlimited.

Correctly categorize Bank Balance Sheet items as Assets or Liabilities demand deposits

liabilities

Correctly categorize Bank Balance Sheet items as Assets or Liabilities long-term debts

liabilities

Correctly categorize Bank Balance Sheet items as Assets or Liabilities short-term borrowing

liabilities