Econ Exam 1- Clemson

A person has a comparative advantage in activity X when that person's

opportunity cost is lower than other trading partners

The main incentive for business activity is

profit

Two people benefit from trade

regardless of where they live

If you buy a motorcycle for $1000 and then discover that you hate riding it and will never ride again, the best thing to do is

sell the motorcycle for the best offer you can get

The decision whether to purchase the breakfast "all you can eat" buffet versus ordering from the menu at fixed prices

is a marginal decision

The economic model

is about how people make choices

An article in the newspaper suggest that an Indian tribe should use coal rather than gas power because the tribe owns 114 billion tons of coal reserves. This statement

is false because it ignores opportunity costs

If people are "rational" in the economic sense, they

-make mistakes -dont put making money before any other goal -dont only seek their own welfare

Why are there gains from trade?

-people have different preferences -trade allows specialization, which reduces opportunity costs

If you've bought an $80 sticker to park on campus, and you plan to park on campus eighty times before the semester ends, the marginal cost to you each time you park is

$0

You see this deal at the supermarket: one frozen pizza for $3.00, two for $5.oo. Your marginal cost for the second pizza is

$2.00

You want to purchase two pizzas. The price is $8 per pizza, 2 for $15, 3 for $20. What will be the marginal cost to you of buying a third pizza?

$5

You are given a ticket to a Bob Dylan concert with a face value of $50. You only value the ticket at $40, sell it to a friend for $40, and attend a U2 concert priced at $60. The opportunity cost of attending the U2 concert is

$60 worth of alternative goods and services

How can I raise the price of coming to class?

-charge an admission fee -give extra homework to anyone who shows up -schedule class at inconvenient times

We know that trade makes people better off because

-it is a voluntary activity -people wouldn't engage in it otherwise -it only occurs when there is the potential for gains

After graduating from high school, Steve had three choices, listed in order of preference: (1) attend Clemson University, (2) work in a printed circuit board factory, or (3) attend a rival college. His opportunity cost of going to Clemson includes

-the income he could have earned at the printed circuit board factory -the direct cost of attending Clemson (tuition, textbooks, etc)

The cost of a college education includes

-tuition paid -textbooks purchased -a foregone salary at alternative employment

Quantity: 1 2 3 4 5 Marginal benefit $15 $10 $8 $7 $2 Marginal cost $6 $7 $7 $8 $9 1. Use the marginal principle to predict how much X will be consumed 2. If those benefits and costs are yours, how much would you be willing to pay for a pass that would let you consume all the X you wanted?

1. 3 2. at least $42

Number of widgets: 1 2 3 4 5 6 Marginal Benefit: 20 20 15 15 15 -5 Marginal Cost: 5 8 12 14 18 25 1. You are the production manager for a widget plant. Given the table above, how many widgets should you produce? 2. Suppose you are offered a new machine (the "widget master") that produces as many widgets as you want for no additional cost (i.e. marginal cost equals 0). What is the maximum amount you would pay for that machine? 3. How many widgets would you produce with the widget master?

1. 4 2. 85 3. 5

1. If Armenia can make 500 hats or 200 coats or some combination, and Estonia can make 400 hats or 100 coats or some combination, then 2. Which of the following trades would make both countries better off?

1. Estonia has the comparative advantage in hats and Armenia in coats 2. Armenia makes coats and trades them for hats at a price of 1 coat=3hats

One iPhone Canadian labor units 3 United States labor units 2 One iPod Canada 4 U.S. 2 1. According to the table on iPhone and iPod Production, which of the following is true? 2. The opportunity cost of producing one iPhone is 3. which of the following is true about Canadian and U.S. comparative advantages?

1. The U.S. has an absolute advantage in producing both iPhones and iPods 2. 3/4 of one iPod for Canada, and one iPod for the U.S. 3. Canada has a comparative advantage in producing iPhones, and the U.S. has a comparative advantage in producing iPods

Economic model on how resources are allocated (how people make these choices)

1. they optimize, choosing the best option to meet their objectives given the relevant benefits and costs 2. an equilibrium results

1. If the U.S. can make 10 roses or 40 daffodils and Mexico can make 5 roses or 10 daffodils, then 2. Therefore, 3. Both countries could be made better off by participating in trade at a price of

1. trade would make both countries better off if the U.S. specializes in roses and Mexico in daffodils 2. The U.S. has the absolute advantage in both products and the comparative advantage in daffodils 3. 1 rose for 3 daffodils

Which of the following is an example of a scarce good? -Cocoa-Cola -Insulin -Diamonds -All are scarce goods -Just B and C

All are scarce goods

After Ben agrees to pay Emilio $500 for an old baseball card, it must be the case that:

Both Ben and Emilio are at least as well-off as before

Which of the following statements is incorrect? A) Trade makes people better off when preferences differ. B) Trade increases productivity through specialization and the division of knowledge. C) Non-fraudulent voluntary trade produces both winners and losers. D) Trade increases productivity through comparative advantage.

C) Non-fradulent voluntary trade produces both winners and losers

Which of the following is NOT one of the "Big Ideas" in economic thinking? A) Trade-offs are everywhere. B) Incentives matter. C) Economic decisions balance total costs and total benefits. D) Good institutions align self-interest with the social interest.

C) economic decisions balance total costs and total benefits

Which of the following is a resource allocation question? A) Should the government allow mining or grazing on a parcel of public land? B) Should new houses be built in San Diego or in Las Vegas or both, and how many? C) Should my spouse and I have another child? D) All of the above. E) All except c.

D) All of the above

David sells his car, which he considers worthless, to Cameron for $200. Which of the following statements is true?

David and Cameron must have different preferences for the car

Which of the following is not an assumption of the economic model? A) People respond to incentives. B) Goods are scarce. C) People make decision by comparing marginal benefits and marginal costs. D) The only costs that matter are opportunity costs. E) All are assumptions of the economic model.

E. All are assumptions of the economic model

You buy an all-day ski pass for $50, planning on taking 10 runs and getting $100 worth of enjoyment. After four runs, you find you're not enjoying yourself and want to go home. According to the economic model, you should

Go home

Your comparative advantage as a house painter (as opposed to as a student)

Increases during the summer vacation

Why do grocery stores offer "buy one, get one half off" specials?

It's a way to offer an incentive to consumers (who might not ordinarily buy two units of the same item) to buy the extra item. They are thinking at the margin, and they stand to make additional profit even if they sell the second unit at a lower price than the first unit.

Suppose your teacher finishes class 30 minutes early on the day before an exam. She indicates that you may leave, or stay on for an optional study period which will last for the remaining 30 minutes of the scheduled class time. You should:

Only choose to stay if the benefits gained from the extra study session exceed the cost of another 30 mins in class

The fact that more pedestrians were killed after laws made cars safer demonstrates that

People respond to incentives

The power of trade

both people involved in voluntary exchange are better off- at least in expectation

Suppose you have ordered a value meal at a local fast-food restaurant. The cashier asks if you would like to "super-size" your meal. In order to make an efficient decision, you should compare

The additional cost of the larger meal versus the additional benefits received

Suppose that there are three methods of financing the transportation of prisoners from Point A to Point B

The boats captain is paid $100 by the government for every live prisoner that is unloaded at Point B

Laura is a manager for HP, and must decide whether to produce a few additional printers. She is choosing at the margin when she compares

The extra revenue from selling a few additional printers to the extra costs of producing the additional printers

What is a plausible economic explanation as to why Braille "dots" are commonly found on drive-up automatic teller machines?

The marginal cost of making two different types of keypads is substantial, and the benefit of providing keypads without the Braille dots is a mere inconvenience to ATM users.

Some welfare programs offer assistance to families only if there is no father present in the home. What effect would you expect such programs to have on the number of two-parent, low-income families?

The number of two-parent, low-income families is likely to fall

Conan O'Brien has been a talk show host since 1993, but he began his career in comedy as a writer. Given that he is such an accomplished comedy writer, it might be surprising to learn that his current talk show staff includes over a dozen writers. How can you explain this?

The opportunity cost of his time as a writer is higher now.

Tom is twice as good as Tim at producing widgets and three times as good at producing gadgets. Therefore,

Tom's cost of producing widgets is higher than Tim's cost of producing widgets

If you say that expanding the food stamp program is the right thing to do, and I reply that expanding the program will lead to less spent in other areas, we are unlikely to have a meeting of minds because

You are making a normative argument and I am making a positive argument

Fewer than 2% of Americans are farmers today while 150 years ago most people were farmers. Those individuals who are still farmers today most likely have

a comparative advantage in farming

marginal cost

a cost that arises from a small increase in an activity

sunk cost

a cost that once incurred can never be recovered

Positive Statement

addresses the consequences of an action

Trade makes us better off by

allowing goods to move from lower value uses to higher -we call the result the "gains from trade" on the "surplus"

If a buyer values a product at $19 and a seller's opportunity cost of selling the product is $14, the gains from trade

are $5

Marginal cost and opportunity cost

are the same

Marginal costs are those that

arise from a small increase in an activity

The opportunity cost of winning a free ticket to the Super Bowl worth $950 and attending the game is

at least $950, the lost market value of selling the ticket and the time to go

If you decide to go to a movie this evening rather than study economics, you thereby demonstrate that

at the margin, you value two hours of movie watching more than two hours of studying economics

economics of scale

average cost of producing something falls as the volume of its output increases -specialization allows us to take advantage of economics of scale

The FDA would be making a Type II error if it

banned a drug that turned out to be safe

Economists think that people are self-interested

because they respond to incentive in predictable ways

Adam Smith's metaphor of the "invisible hand" reverts to the notion that

behavior based on self-interest can lead to an overall benefit to society

absolute advantage

can produce a good using fewer resources

Smith accidentally runs his car off the road into deep snow. Jones happens along in a tow truck, and offers to haul Smith out for the outrageous price of $300. Smith, though angered by the high price, considers he has no choice and pays $300. Smith's welfare was ________ and Jones' was ________ as a result of Jones passing by.

enhanced, enhanced

Normative Statement

expresses a value judgement

the marginal principle

if marginal benefits > marginal costs, do it!

In several cities around the country, schools are paying cash awards to students who do well on English and Math tests. This practice highlights the idea of

incentives- the rewards and penalties that motivate behavior

The cost to a cinema owner of letting someone see a movie for free is

likely to be higher on a Saturday night than on a Monday night

Deciding whether to study an additional hour for an exam by comparing the additional benefits to the additional costs of an extra hour of study is an example of

marginal thinking

Imposing the death penalty on shoplifters may increase the number of murders, because

once a store is robbed there is no additional penalty imposed for also killing the store keeper

a production possibility frontier (PPF)

shows all the combinations of goods that a country can produce

In economics, a good is "scare" when

something must be given up to get more of it

The real power of trade lies in people's ability to

specialize and increase production

To benefit from trade, a person should

specialize in an activity for which she has a comparative advantage

the basic notion of comparative advantage is to

specialize in an activity in which you have a lower opportunity cost

comparative advantage

specializing based on differing opportunity cost- underlies trade -can produce a good at lower opportunity cost

If you've purchased an all you can eat ticket to a chicken wings restaurant for $25, economic thinking would tell you to take one last plateful if

the value of that plateful to you is greater than zero

The opportunity cost of a choice is

the value of the opportunities lost

The opportunity cost to college athletes on scholarship who stay in school is

the wages they could make otherwise

The difference between a marginal cost and an opportunity cost is

there is no difference

Every day we rely on the work of millions of other people to provide us with food, clothing, and shelter. People work for our benefit because

they benefit by doing so

In an effort to clean the air, many communities impose restrictions on the burning of garbage. This policy causes more garbage to be buried underground, potentially increasing groundwater contamination. What concept does this example represent?

trade-offs

Economics is the study of

trade-offs when making decisions

Scarcity is a situation in which

we are unable to satisfy all our wants

If you work an additional hour on your homework

you give up an hour you could have spent doing something else