Econ 2nd Midterm

Suppose Smith and Jones begin by producing 0 computers and 220 calculators per hour. If they wish to produce 2 computers and 200 calculators per hour efficiently, then Smith should spend ______, and Jones should spend ______

12 minutes making computers and 48 minutes making calculators; 1 hour making calculators Smith has a comparative advantage in producing computers, so he should make the 2 computers. It takes him 6 minutes to make a computer, so making 2 computers will take him 12 minutes. He can use the remaining 48 minutes to make 80 calculators (80 = (48/60) × 100). Jones should spend the entire hour making the remaining 120 calculators.

A graph that illustrates the maximum amount of one good that can be produced for every possible level of production of the other good is called a

production possibilities curve

Suppose that Cathy spends all of her income on 20 units of good X and 25 units of good Y. Cathy's marginal utility from the 20th unit of good X is 9 utils, and her marginal utility from the 25th unit of good Y is 19 utils. If the price of good X is $0.50 per unit and the price of good Y is $1.00 per unit, then to comply with the rational spending rule, Cathy should

purchase less than 20 units of good X and more than 25 units of good Y Since MUX/ PX = 18 and MUY/ PY = 19, to comply with the rational spending rule, Cathy should reallocate her spending away from good X and towards good Y

Suppose that at your current consumption of two goods, A and B, MUA/ PA = 25 and MUB/ PB = 20. In order to maximize, your utility you should

purchase more of A and less of B

The goal of utility maximization is to allocate your ______ in order to maximize your ______

resources; satisfaction

An increase in an economy's productive resources will lead the production possibilities curve to

shift outward

The tendency for marginal utility to decline as consumption increases beyond some point is called

the law of diminishing marginal utility

In a two-person, two-good economy, the gains to specialization will be larger when

there are large differences between the individuals in their opportunity costs of producing the two goods

One reason that variable factors of production tend to show diminishing returns in the short run is that

there is only so much that can be produced using additional variable inputs when some factors of production are fixed Diminishing returns results from trying to increase output when some factors of production are fixed

Average variable cost is defined as

variable cost divided by total output

If you have a comparative advantage in a particular task, then

you give up less to accomplish that task than do others

According to economists, the satisfaction people get from their consumption activities is called

Utility

The long run is best defined as

a period of time sufficiently long that all factors of production are variable

The short run is best defined as

a period of time sufficiently short that at least one factor of production is fixed

Total Utility

any given number of units of a good can be computed by adding the marginal utilities of all the units consumed

In general, individuals and nations should specialize in producing goods ______ other individuals or nations

for which they have a lower opportunity cost compared to

A price-taker faces a demand curve that is

horizontal at the market price A perfectly competitive firm faces a horizontal demand curve at the market price because it need not lower its price to sell more output, and it would sell no output if it raised its price above the market price

One implication of the shape of the demand curve facing a perfectly competitive firm is that

if the firm increases its price above the market price, it will earn zero revenue A perfectly competitive firm cannot raise its price without losing all of its customers to the many rival firms that produce the same product.

Economic growth can result from a(n)

increase in the amount of productive resources

Sejal's reservation price for her economics textbook is $100. The week before the semester begins, Sejal finds a copy of her textbook online for $75. Sejal's consumer surplus from buying the textbook online is

$25

Suppose the current market price for wheat is $12 per bushel and there are 150,000 bushels sold each day. If the supply curve is a straight line that intersects the price axis at $1 per bushel, what is the total amount of producer surplus in this market?

$825,000 Since the supply curve is a straight line, the producer surplus is equal to the area of the triangle created by the vertical axis, the price, and the supply curve. The height of the triangle is equal to the difference between the price at which the supply curve hits the price axis and the equilibrium price. The producer surplus is equal to ½ × base × height, or in this case, ½ × 150,000 × ($12 - $1) = ½ × 150,000 × $11 = $825,000

A firm's total profit equals

( P − ATC) × Q

Suppose Smith and Jones begin by producing 16 computers and 0 calculators per hour. If they wish to produce 14 computers and 40 calculators per hour efficiently, then Smith should spend ______, and Jones should spend ______.

1 hour making computers; 40 minutes making computers and 20 minutes making calculators Jones has a comparative advantage in producing calculators, so he should make all 40 calculators. He can make 2 calculators per minute, so this will take him 20 minutes. He can use the remaining 40 minutes to make 4 computers (since it takes him 10 minutes to make a computer). Smith should spend the whole hour making the 10 other computers

Refer to the accompanying table. If the price of a t-shirt is $6 and the price of a sweater is $80, then the rational spending rule is satisfied when the consumer purchases _____ t-shirts and ______ sweaters.

4;1 The rational spending rule maintains that a consumer's total utility is maximized if the ratio of marginal utility to price is the same for all goods the consumer purchases. Here, the rational spending rule is satisfied when the consumer purchases 4 t-shirts and 1 sweater because the ratio of marginal utility to price would be 5 for both goods. That is, MUT/ PT = 30/6 = 5, and MUJ/ PJ = 400/80 = 5

Last year, Amada grew fresh vegetables, which she sold at her local farmers market, but this year, Amada did not plant any vegetables and went to work at a bank instead. Which of the following best explains Amada's career change?

Amada's opportunity costs of gardening exceeded Amada's opportunity costs of working at the bank The opportunity cost of gardening is the benefit of working at the bank. Amada will work at the bank if the benefit of working at the bank is greater than her opportunity cost of working at the bank.

Which of the following is NOT a characteristic of a perfectly competitive market?

Each firm in the market sells a somewhat different variant of the good

During Thanksgiving, you participated in a pumpkin pie-eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. Your total utility ______ with the first three pies you ate

Increased Since you enjoyed the first three pies, they must have added to your total utility

If a consumer reallocates his or her spending away from Good A and towards Good B, then the consumer's total utility will increase if

MUA/PA < MUB/PB If MUA/ PA < MUB/ PB, then the loss in utility from spending a dollar less on Good A will be more than compensated for by the increase in utility from spending a dollar more on Good B.

You have noticed that your next-door neighbor, Arya, always works in the garden, and her husband, Suresh, always walks the dog. You conclude that if Suresh and Arya are efficient, then it must be the case tha

Suresh has a comparative advantage in walking the dog Everyone does best when each person specializes in the activity in which he or she has a comparative advantage.

Suppose that Nepal invests less in new factories and equipment than does the United States. This will likely cause

The U.S.'s production possibilities curve to shift outward faster than Nepal's

Points that lie beneath the production possibilities curve are

attainable but inefficient Points that lie beneath the production possibilities curve are attainable because they can be produced with currently available resources, but they are inefficient because it is possible to increase the production of one good without a reduction in the production of the other

Consider a graph of a production possibilities curve. If a producer is operating at an inefficient point, then that producer

can produce more of one good without producing less of the other good

An individual has an absolute advantage in producing pizzas if that individua

can produce more pizzas in a given amount of time than anyone else

If a given production combination is known to be attainable, then it

could be either an inefficient or efficient point

If a firm shuts down in the short run, then its

economic loss will equal its fixed costs When a firm shuts down, its total variable costs and its total revenue shrink to zero, but the firm still must pay fixed costs whether it operates or not. So, if a firm shuts down, its economic loss is equal to its fixed cost

The tendency for consumers to purchase more of a good or service as its price falls is captured by the

law of demand

Suppose Suzanne allocates her spending on apples and bananas according to the rational spending rule. If the price of apples is less than the price of bananas, then at Suzanne's optimal consumption bundle, her marginal utility from apples will be

less than her marginal utility from bananas

The additional utility gained from consuming an additional unit of a good is called

marginal utility

When plotting marginal and average cost curves, the ______ cost curve always crosses the ______ cost curve at its ______

marginal; average total; minimum he marginal cost curve must intersect both the average variable cost and average total cost at their respective minimum points

The primary objective of most private firms is to

maximize profit

For two goods, coffee and scones, suppose that MUcoffee / Pcoffee = 4 and MUscones / Pscones = 3. To maximize your total utility from these two goods, you should purchase

more coffee and fewer scones

Suppose 30 employees can produce 50 units of output per day. Assuming the presence of diminishing marginal returns, producing 100 units of output per day would require

more than 30 additional employees If production exhibits diminishing returns, then it takes ever-larger increases in the variable input to increase output by a given amount

The slope of a production possibilities curve is ______ because ______

negative; producing more of one good requires producing less of the other

Consumer surplus measures

the difference between the most a buyer would be willing to pay for a product and the price actually paid

Which of the following is the most likely to be a fixed factor of production at a pizza restaurant?

The size of the seating area The size of the seating area would take more time to alter than the other inputs listed, so it is the most likely to be a fixed factor of production

If a firm spends $400 to produce 20 units of output and spends $880 to produce 40 units, then between 20 and 40 units of output, the marginal cost of production is

Total cost increased by $480 (= $880 − $400) and the number of units increased by 20, so the increase in cost per unit is $480/20, or $24

If a consumer buys two different goods, the rational spending rule requires that the

ratio of marginal utility to price be equal for the two goods