Exam (Assignment 01-04b) Principals of Economics

04b True or false? Individual business decisions cannot contribute to macroeconomic growth.

False Individual firms and businesses can contribute to macroeconomic growth by investing in technology, human capital, and physical capital.

04b True or false? Technology is only limited to the invention of new products, such as smartphones, wonder drugs, and lasers.

False Technology is the combination of invention and innovation. It is comprised of all the advances that make the existing machines and other outputs produce more, and at a higher quality, as well as new products.

02a Use the graph below to determine the best answer to the question. What is the equilibrium price and quantity in this market?

P=$160 q=50 thousand Equilibrium occurs where quantity supplied equals quantity demanded, in this case where quantity is 50 thousand and price is $160.

02a Using the graph below, on curve D0, what is the price when quantity demanded is 17?

$22,000 If the quantity is 17, the corresponding price for curve D0 is at $22,000.

02a Suppose that the price of coal falls in the market. According to the law of supply, what will happen?

A lower quantity of coal will be supplied in the market. The law of supply states that a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied. Since the price of coal falls, the law of supply predicts that the quantity of coal supplied will also decrease.

02c Which of the following is the definition of price floor?

A price floor is the minimum amount that can legally be charged for a good or service. A price floor is defined as the minimum amount that can legally be charged for a good or service. An effective price floor is set above equilibrium and is meant to help the producer. At a price floor set above equilibrium quantity supplied is greater than quantity demanded which results in a surplus.

02c Assume that the market equilibrium price is 50 cents for a pound of bananas, and the quantity sold is roughly 10 pounds. What kind of price control could generate an excess supply of bananas?

A price floor of 75 cents per pound A basic lesson of a price floor is that when it is set above the market equilibrium price, this will lead to excess supply. Setting a price for a pound of bananas at 75 cents will generate a surplus since the quantity demanded will be lower than the quantity supplied.

02b In the graph below, demonstrate the impact of a cigarette tax on the supply of cigarettes by shifting the appropriate curve.

A tax on cigarettes increases production costs for cigarette producers. An increase in production cost decreases supply, or causes a leftward shift in the supply curve. A leftward shift in supply means that at every given price, the quantity supplied is lower.

04b Which of the following are true statements about the benefits of a special economic zone?

All of the above are possible benefits of a special economic zone. A special economic zone (SEZ) is an area of the country, generally with access to a port, where the government does not tax trade. SEZs are government supported and aim to promote economic growth via increased trade and investment, job creation, and effective administration.

01 Which of the following is not an example of scarcity?

Amanda can play a song as many times as she likes with no additional cost to her. Explanation: Scarcity means that human wants for goods, services and resources exceed what is available. Amanda being able to play a song as many times as she likes with no additional cost to her is not an example of scarcity.

02b An online celebrity was seen using a fidget spinner during a video, which caused a significant jump in popularity. In the graph below, show how demand for fidget spinners is impacted by this change by shifting the appropriate curve.

An increase in popularity results in an increase or rightward shift in demand for fidget spinners. A rightward shift in demand means that at any price, the quantity demanded will be higher than it was before.

03b The quantity of sugar demanded increased from 2,350 to 2,550 when the price of flour decreased from $3.85 to $3.15. What is the estimated cross-price elasticity of demand for sugar? Round your answer to the nearest hundredth. Note: If your answer is a negative number, enter it as a negative number in the answer space.

Cross-price elasticity of demand for good A is the percentage change in quantity demanded of good A divided by the percentage change in price of good B. The quantity of sugar increased by 200, so the percentage change in quantity is 2,550−2,350/2,550+2,350/2×100≈8.163% The price of flour decreased by $0.70, so the percentage change in price is 3.15−3.85/3.15+3.85/2×100≈−20% Therefore, the cross-price elasticity of demand is, 8.163%/−20%=−0.41

03b The quantity demanded of photo prints increased 8.4% when the price of picture frames decreased 7.6%. What is the estimated cross-price elasticity of demand for photo prints? Round your answer to the nearest hundredth. Be sure to include a negative sign in your answer, if necessary.

Cross-price elasticity of demand of good A is the percentage change in quantity demanded of good A divided by the percentage change in price of good B: Cross-price elasticity of demand=% change in quantity supplied of good A /% change in price of good B The cross-price elasticity of demand is 8.4%/−7.6%=−1.11

04b _______ is a common measure of productivity used to track growth of GDP per capita.

Dollar value of output per worker hour A common measure of U.S. productivity per worker is dollar value per hour the worker contributes to the employer's output, which helps measure productivity growth and growth rate of GDP per capita.

03a __________ measures the responsiveness of one variable to changes in another variable.

Elasticity Elasticity measures the responsiveness of one variable to changes in another variable. Typically, responsiveness is measured as the percent by which one variable changes in response to a percent change in another variable.

02a _________ is where the amount of the product consumers want to buy is equal to the amount producers want to sell.

Equilibrium quantity Equilibrium quantity is defined as the amount of product which results where the demand and supply curves intersect. It occurs where quantity demanded is equal to quantity supplied.

01 True or false?Graphs are rarely used to express economic models.

False Explanation Graphs and mathematic equations are often used to express economic models. However, models do not need to be expressed graphically or mathematically to be valid.

04b True or false? Because low-income economies have less technology, they cannot grow as quickly as high-income economies.

False Low-income countries actually may find it easier to improve their technologies than high-income countries. High-income countries must continually invent new technologies, whereas low-income countries can often find ways of applying technology that has already been invented and is well understood.

02b The U.S. Government imposes a regulation requiring chemical plants to safely discard their wastes in a way that does not harm the environment. How does this regulation affect the supply of chemicals produced? On the graph below, demonstrate the impact on the supply of chemicals by shifting the appropriate curve.

Government regulations require firms to spend more money in order to comply with those regulations. This increases production costs, which results in a decrease, or leftward shift, in supply. A leftward shift in supply means that at every given price, the quantity supplied is lower.

03b As the average hourly wage increases from $18 per hour to $20 per hour, the quantity of frozen dinners demanded decreases from 3,550 to 3,350. What is the income elasticity of demand for frozen dinners? Round your answer to the nearest hundredth. Your answer may be a positive or negative number.

Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. The quantity decreased by 200, so the percentage change in quantity is: 3,350−3,5503,350+3,5502×100≈−5.7971 The income increased by $2, so the percentage change in income is: 20−1820+182×100≈10.5263 Therefore, the income elasticity of demand is: −5.797110.5263≈−0.55

02b Word leaks to consumers that a large sale will begin one week from today for a furniture store. As a result, the store's manager gives some employees the day off tomorrow in anticipation of weaker demand in the short term. Is this a wise move? Why?

It is a good decision, since consumers will defer buying now in anticipation of the sale later. Consumers expecting a price drop in the future will likely respond by decreasing their demand in the short run and waiting until prices are lower, when the sale goes into effect. For example, think about consumer interest in delaying major purchases until Black Friday or a tax holiday.

03a The data in the table shows the price and quantity supplied for snow shovels. Using the Midpoint Method, what is the price elasticity of supply from point C to point D ? Note: Remember to take the absolute value of the result and round to the nearest hundredth. If using a calculator, rounding should be done at the end of your calculation.

Price elasticity of supply is the percentage change in quantity divided by the percentage change in price. Using the Midpoint Method, the percentage change in quantity from point C to point D is shown. Rounding at each step of the solution is shown for simplicity in reporting. If you are using a graphing calculator, rounding should be done at the end of your calculation. Q2−Q1/Q2+Q1/2×100= 13,000−12,000/13,000+12,000/2×100=8.00 The percentage change in price is: P2−P1/P2+P1/2×100=13−12/13+12/2×100=8.00 Divide the percentage change in quantity by the percentage change in price to find the price elasticity of supply:8.00/8.00=1.00. Note: If you are using a graphing calculator to solve these fractions as one equation, your final answer will be 1

02b Suppose that there is a tax on soda. What action do the sellers take when there is a reduction in the soda tax? Demonstrate the change in the graph below by shifting the appropriate curve.

Soda tax is collected from the sellers, which increases production cost for soda. If the tax decreases, production costs decrease. This causes an increase or rightward shift in supply. A rightward shift in supply means that at every given price, the quantity supplied is higher.

02c Demonstrate the effect a decrease in the price of tennis rackets will have on the equilibrium price and quantity of tennis balls. Drag the demand or supply curve to demonstrate this effect.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? A decrease in the price of tennis rackets will increase the demand for tennis balls because they are complementary goods. Step 3: The demand curve will shift to the right. Step 4: A rightward shift in the demand curve results in an upward movement along the supply curve. Equilibrium price and quantity of tennis balls will rise.

02c A main component used in the production of acoustic guitars has risen in price by 11%. Demonstrate the effect this has on the equilibrium price and quantity of acoustic guitars.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? The increase in price will decrease supply because of increased production costs. Step 3: The supply of acoustic guitars will decrease, shifting the supply curve to the left. Step 4: A leftward shift in supply causes a movement up the demand curve, increasing the equilibrium price and decreasing the equilibrium quantity.

02b You are responsible for setting prices of finished clothing items at a major textile manufacturer. In the past year the price of cotton, a critical input, has increased by 20%. What is the likely result?

Supply of clothing will decrease. When a firm faces an increase in production costs, its profits will decline at the given selling price, causing the firm to reduce production and quantity supplied.

02a Given the supply schedule for pistachios, if the quantity supplied decreases from 36 to 30 pounds, what will happen to the price received by pistachio farmers?

The price will go down by $2. The law of supply says that as the price decreases, the quantity supplied will also decrease. Thus as the quantity supplied decreases from 36 to 30 pounds, the price will decrease from $12 to $10.

02b Many American car manufacturers are located in the Southeast. Due to hurricane season, the Southeast has gotten a significant amount of rain, causing vast flooding. How is the supply of cars impacted?

The supply of cars decreases. Significant flooding in the Southeast may cause damage to factories or prevent workers from being able to get to work, resulting in a decrease in the supply of cars. This means that the quantity of cars supplied decreases at any given price.

01 Identify one key takeaway from the Circular Flow Diagram.

There are no free exchanges between firms and households. In a two-sector economy there are firms and households. Firms provide households with goods and services. Households provide firms with labor, land, capital, and entrepreneurship. Households do not receive free goods or services from firms, and households do not provide firms with free labor. Everything has a cost.

02a Look at the supply curve for Product Q. True or false? A $0.30 change in price from $10.30 to $10.60 leads to a greater change in quantity supplied than a $0.30 change in price from $10.60 to $10.90.

True On the supply curve above, a $0.30 change in price from $10.30 to $10.60 leads to a change in quantity supplied of about 1,400, while a $0.30 change in price from $10.60 to $10.90 leads to a change in quantity supplied of only 700.

03b Both demand and supply are generally more elastic in the long run than in the short run.

True Elasticities are often lower in the short run than in the long run. On the demand side of the market, it can sometimes be difficult to change quantity demanded in the short run, but easier in the long run. On the supply side of markets, producers of goods and services typically find it easier to expand production in the long term of several years rather than in the short run of a few months. After all, in the short run it can be costly or difficult to build a new factory, hire many new workers, or open new stores. However, over a few years, all of these are possible.

02a True or false? If price is set at $1.20, the market will experience upward pressure on the price.

True Yes, if a price is set at $1.20 a shortage will occur, resulting in upward pressure on the price to reach equilibrium.

02c Which of the following is not a factor that could cause a shift in supply for a certain good?

a change in income A change in income is the only choice that affects demand, which will change quantity supplied due to a shift in the demand curve but not a shift of the supply curve.

04a The GDP deflator is ______________.

a price index measuring the average prices of all goods and services The GDP deflator is a price index measuring the average prices of all goods and services included in the economy.

02b When considering factors that shift demand curves, all of the following will decrease demand except _______________.

a rise in income (for a normal good) A rise in income (for a normal good) will increase demand because people will have more money to spend. For normal goods, higher income causes greater demand at every price.

03b First-class plane tickets (for personal travel) are a product that has a ____________ demand curve.

highly elastic Luxury goods, goods that take a large share of individuals' income, and goods with many substitutes are likely to have perfectly elastic or infinitely elastic demand curves. Examples of such goods are Caribbean cruises, sports vehicles, and first class plane tickets.

01 Which type of an economy, typically agricultural, can be described as where things are done in the same way as they have always been done?

traditional economy Explanation: Traditional economies organize their economic affairs the way they have always done (i.e., tradition). Occupations stay in the family. Most families are farmers who grow the crops using traditional methods. What you produce is what you consume. Because tradition drives the way of life, there is little economic progress or development.

04a What is the term for the point in the business cycle where real GDP reaches its lowest point and begins rising?

trough A trough is the lowest point of a recession, where real GDP stops falling and begins rising.

03a A price elasticity of demand equal to 1 is called __________.

unitary elastic If % change in quantity demanded%/ change in price = 1, then the elasticity is said to be unitary elastic.

03a The formula for price elasticity of demand is:

% change in quantity demanded/ % change in price The price elasticity of demand measures how responsive quantity demanded is to changes in the price of output. Mathematically, it can be defined as:

04a Which of the following examples would support the goals of macroeconomic policy?

*a policy that reduces payroll taxes with the intention of creating jobs *an increase in government spending with the intention of stimulating economic growth *an increase in money supply, which results in a lower interest rate **all of the above The three goals of macroeconomic policy are economic growth, lower unemployment rates, and lower inflation rates. All of these examples support the goals of macroeconomic policy.

04a Of the following scenarios, which does not reflect the goals of macroeconomic policy?

*an unemployment rate of 7% *an economic growth rate of −1% *an inflation rate of 5.5% all of the above scenarios do not reflect the goals of macroeconomic policy The three goals of macroeconomic policy are economic growth of 3% or more, unemployment rates of 5% or lower, and inflation rates of 1−2%.

04b Which of the following factors determine labor productivity?

*technological change *human capital *economies of scale **all of the above Labor productivity is the value that each employed person creates per unit of his or her input. Technological change (invention and innovation), human capital, and economies of scale determine labor productivity.

04a Which of the following is not accounted for in GDP?

*the health of the country's citizens *illegal production *the levels of inequality in society **all of the above GDP can only account for production exchanged in the market, including the value of goods and services, spending, income, and inventories. It does not account for leisure time, worker inequality, quality of goods, unpaid work, wealth distribution, productivity, health, environmental cleanliness, learning, household production, illegal production, and available technology. GDP is defined as the monetary value of all final goods and services produced within a country during a given year. Because GDP does not account for these things, they cannot be used to measure quality of life.

04b Which of the following were outcomes from the Industrial Revolution?

*unequal distribution of wealth between nations *greater social mobility in the U.S. and Great Britain *rapid and sustained economic growth **all of the above The Industrial Revolution led to increasing inequality among nations. Some economies took off, whereas others, like many of those in Africa or Asia, remained close to a subsistence-level standard of living. The new jobs created in rapidly-developing Great Britain and the U.S. allowed for greater social mobility.

04a An oil embargo has raised the price of fossil fuels, decreasing aggregate supply and causing real GDP to decrease from $10,000 to $9,000. What is the percent change in real GDP? If the change is a decrease in GDP, make sure to express your answer as a negative number. If necessary, round your answer to the nearest tenth.

-10% To find the real growth rate, we apply the formula for percentage change: New GDP-Old GDP/Old GDP×100= % change In this case, real GDP decreased by 10% or the change in GDP is: 9,000-10,000/10,000×100= −10%

04a A change in relative interest rates causes investment expenditures to decrease within an economy resulting in a decrease of real GDP from $38,000 to $35,000. What is the percent change in real GDP? Round your answer to the nearest hundredth.

-7.89% To find the real growth rate, we apply the formula for percentage change: New GDP - Old GDP/Old GDP×100=% change In this case, real GDP decreased, so the percent change is negative, 35,000-38,000/38,000×100=−7.89%

04a If total GDP for this economy is $18.84 trillion for the year shown in the table below, what was the country's trade balance? Round your answer to the nearest hundredth. Components of GDP on the Demand Side(in trillions of dollars) Consumption 12.84 Investment 3.61 Government spending 2.17 Exports? Imports? Total GDP= 18.84

0.22 trillion GDP=Consumption+Investment+Government spending+Trade balance Trade balance=(Exports−Imports)=(X−M) For this economy, GDP=Consumption+Investment+Government spending+Trade balance 18.84=12.84+3.61+2.17+Trade balance Trade balance=18.84−12.84−3.61−2.17=$0.22 trillion Since the trade balance for this economy is positive, this country is facing a trade surplus.

04a If total GDP for this economy is $16.33 trillion for the year shown in the table below, what was the country's trade balance? Round your answer to the nearest hundredth. Components of GDP on the Demand Side(in trillions of dollars) Consumption 9.91 Investment 2.76 Government spending 3.18 Exports - Imports ? Total GDP=16.33

0.48 trillion GDP=Consumption+Investment+Government spending+Trade balance Trade balance=(Exports−Imports)=(X−M) For this economy, Trade balance=16.33−9.91−2.76−3.18=$0.48 trillion Since the trade balance for this economy is positive, this country is facing a trade surplus.

04b Which of the following applies to economic growth? 1. Economic growth allows people to buy more goods and services. 2. Economic growth is the expansion of the economy's production possibilities. 3. Economic growth is represented by a movement from a point inside the production possibilities curve to a point on the curve.

1 and 2 only We define economic growth as the process through which an economy achieves an outward shift in its production possibilities curve, where people can buy more goods and services.

04a Calculate total GDP for this economy given the following components of demand. Round your answer to the nearest tenth. Components of GDP on the Demand Side(in trillions of dollars) Consumption 10.6 Investment 2.4 Government spending 3.9 Exports 2.8 Imports 3.1 Total GDP ?

16.6 trillion GDP=Consumption+Investment+Government spending+Trade balance GDP=C+I+G+(X−M) For this economy, GDP=10.6+2.4+3.9+(2.8−3.1)=$16.6 trillion

04a Using the information below, determine what percentage of total GDP for this country consists of durable goods. Round your answer to the nearest tenth. Components of GDP on the Supply Side(in trillions of dollars) Durable goods 3.21 Nondurable goods 2.55 Services 11.12 Structures 1.76 Change in inventories 0.56 Total?

16.7% GDP=Durable goods+Nondurable goods+Services+Structures+Change in inventories For this economy, GDP=3.21+2.55+11.12+1.76+0.56=$19.2 trillion To find the percentage of durable goods, 3.21/19.2×100=16.7%

04a Calculate total GDP for this economy given the following components of demand. Round your answer to the nearest tenth. Components of GDP on the Demand Side(in trillions of dollars) Consumption 11.2 Investment 2.8 Government spending 3.1 Exports 2.4 Imports 2.3 Total GDP?

17.2 trillion GDP=Consumption+Investment+Government spending+Trade balance GDP=C+I+G+(X−M) For this economy, GDP=11.2+2.8+3.1+(2.4−2.3)=$17.2 trillion

04a Calculate total GDP for this economy given the following components of supply. Round your answer to the nearest hundredth. Components of GDP on the Supply Side(in trillions of dollars) Durable goods 5.21 Nondurable goods 0.75 Services 9.80 Structures 1.85 Change in inventories 0.51 Total? Note: In this scenario, GDP is measured by what is produced, not by components of demand.

18.12 Trillion GDP=Durable goods+Nondurable goods+Services+Structures+Change in inventories For this economy, GDP=5.21+0.75+9.80+1.85+0.51=$18.12 trillion Everything that we purchase somebody must first produce. What a country produces is divided into five categories: durable goods, nondurable goods, services, structures, and the change in inventories.

04a Calculate total GDP for this economy given the following components of supply. Round your answer to the nearest tenth. Components of GDP on the Supply Side(in trillions of dollars) Durable goods 3.2 Nondurable goods 2.8 Services 11.3 Structures 1.9 Change in inventories 0 Total?

19.2 trillion GDP=Durable goods+Nondurable goods+Services+Structures+Change in inventories For this economy, GDP=3.2+2.8+11.3+1.9+0=$19.2 trillion

04a Calculate total GDP for this economy given the following components of supply. Round your answer to the nearest tenth. Components of GDP on the Supply Side(in trillions of dollars) Durable goods 4.2 Nondurable goods 2.0 Services 11.0 Structures 2.1 Change in inventories 0.4 Total?

19.7 trillion GDP=Durable goods+Nondurable goods+Services+Structures+Change in inventories For this economy, GDP=4.2+2.0+11.0+2.1+0.4=$19.7 trillion

02c The table below represents the market for apartments. Suppose there is a price ceiling set at $600 per month. Calculate the shortage caused by the price ceiling.

275 apartments A price ceiling keeps the price for a good from rising above a set maximum. An effective price ceiling is set below equilibrium price. To calculate the shortage caused by the price ceiling, subtract the quantity supplied from the quantity demanded. In this case, the shortage is equal to 650−375, or 275 apartments.

02c The graph below represents the market for baskets of apples. Calculate the surplus caused by the price floor.

35 baskets of apples A price floor keeps the price for a good from falling below a set minimum. An effective price floor is set above equilibrium price. To calculate the surplus caused by the price floor, subtract the quantity demanded from the quantity supplied. In this case, the surplus is equal to 47−12, or 35 baskets of apples.

02c A snow storm hits the Southeastern United States in March. The table below represents the market for loaves of bread. Suppose there is a price ceiling set at $5 per loaf to avoid price gouging. Calculate the shortage caused by the price ceiling.

3500 loaves of bread A price ceiling keeps the price for a good from rising above a set maximum. An effective price ceiling is set below the equilibrium price. To calculate the shortage caused by the price ceiling, subtract the quantity supplied from the quantity demanded. In this case, the shortage is equal to 6,900−3,400=3,500 loaves of bread. Quantity Demanded − Quantity Supplied = The Shortage

02c The graph below represents the market for strawberries. A supply and a demand curve are shown with a price floor at $8.50. Equilibrium price is $5 and the equilibrium quantity is 135 baskets of strawberries. The quantity demanded at the price floor is 75 baskets of strawberries and the quantity supplied is 480 baskets of strawberries. Calculate the surplus caused by the price floor.

405 baskets of strawberries A price floor keeps the price for a good from falling below a set minimum. An effective price floor is set above equilibrium price. To calculate the surplus caused by the price floor, subtract the quantity demanded from the quantity supplied. In this case, the surplus is equal to 480−75, or 405 baskets of strawberries

02c During a back to school shopping frenzy, a price ceiling of $5 is put on a pack of pencils. Calculate the shortage caused by the price ceiling.

500 packs of pencils A price ceiling keeps the price for a good from rising above a set maximum. An effective price ceiling is set below equilibrium price. To calculate the shortage caused by the price ceiling, subtract the quantity supplied from the quantity demanded. In this case, the shortage is equal to 750−250, or 500 packs of pencils.

04a Using the information below, determine what percentage of total GDP for this country consists of structures. Round your answer to the nearest tenth. Components of GDP on the Supply Side(in trillions of dollars) Durable goods 4.8 Nondurable goods 2.5 Services 11.1 Structures 1.4 Change in inventories 0.7 Total?

6.8% GDP=Durable goods+Nondurable goods+Services+Structures+Change in inventories GDP=4.8+2.5+11.1+1.4+0.7=$20.5 trillion 1.4/20.5 ×100=6.8%

04a Using the information below, determine what percentage of total GDP for this country consists of services. Round your answer to the nearest tenth. Components of GDP on the Supply Side(in trillions of dollars) Durable goods 3.21 Nondurable goods 2.58 Services 12.03 Structures 1.77 Change in inventories 0.43 Total?

60.1% GDP=Durable goods+Nondurable goods+Services+Structures+Change in inventories For this economy, GDP=3.21+2.58+12.03+1.77+0.43=$20.02 trillion To find the percentage of services, 12.03/20.02×100=60.1%

02c Price controls are set on pet food. Calculate the shortage caused by the price ceiling

720 thousands of cans of pet food A price ceiling keeps the price for a good from rising above a set maximum. An effective price ceiling is set below equilibrium price. To calculate the shortage caused by the price ceiling, subtract the quantity supplied from the quantity demanded. In this case, the shortage is equal to 900−180, or 720 thousands of cans of pet food.

02c The graph below represents the market for pizzas. A supply and a demand curve are shown with a price floor at $29. Equilibrium price is $14 and the equilibrium quantity is 790 pizzas. The quantity demanded at the price floor is 450 pizzas and the quantity supplied is 1,200 pizzas. Calculate the surplus caused by the price floor

750 pizzas A price floor keeps the price for a good from falling below a set minimum. An effective price floor is set above equilibrium price. To calculate the surplus caused by the price floor, subtract the quantity demanded from the quantity supplied. In this case, the surplus is equal to 1,200−450, or 750 pizzas.

04a Which of the following statements about the business cycle are true? Note: Please select two correct answers.

A business cycle shows contractions and expansions of the economy. Economists use business cycles to track real GDP over a number of years. The business cycle shows movements in real GDP. Economists have sought for centuries to explain the forces at work in the business cycle. Not only are the currents that move the economy up or down intellectually fascinating, but also an understanding of them is of tremendous practical importance

02a The table below shows Jennifer's demand schedule for bottles of barbecue sauce. Choose the most accurate statement below.

As the price of barbecue sauce increases from $2 to $3, the quantity demanded of the sauce decreases from 12 units to 9 units. Law of demand says that as the price goes up, the quantity demanded goes down. We can examine the table and confirm that as the price of barbecue sauce increases from $2 to $3, the quantity demanded of the sauce decreases from 12 units to 9 units.

03b The quantity demanded of video game controllers increased from 1,800 to 1,900 when the price of video game consoles decreased from $300 to $275. What is the estimated cross-price elasticity of demand for video game controllers? Round your answer to the nearest hundredth. If elasticity is negative, make sure to include the "-" sign in your answer

Cross-price elasticity of demand of good A is the percentage change in quantity demanded of good A divided by the percentage change in price of good B. The quantity of video game controllers increased by 100, so the percentage change in quantity is 1,900−1,800/1,900+1,800/2×100≈5.4054% The price of video game consoles decreased by $25, so the percentage change in price is 275−300/275+300/2×100≈−8.6957% Therefore, the cross-price elasticity of demand is 5.4054%/−8.6957%≈−0.62

04a A high GDP may be misrepresented by an overestimated standard of living. Select two factors that demonstrate that a rise in the standard of living might be overestimated within a high GDP. Select two correct answers below.

Factors not included in GDP, such as human health and environmental cleanliness, are worsening. Factors such as crime rates and income inequality are both increasing. GDP does not fully capture all areas of standard of living. While GDP is rising, if human health and environmental cleanliness are decreasing, and crime rates and income inequality are increasing, a rise in standard of living may be overestimated. Conversely, increasing life expectancy, health, or leisure time, all indicate ways standard of living can be understated relative to GDP.

04a True or false? We call the economy's movement from peak to trough and trough to peak the depression cycle.

False We call the economy's movement from peak to trough and trough to peak the business cycle.

04b True or false? In an aggregate production function, GDP is commonly a primary input to production.

False An aggregate production function relates the total output in the form of GDP or GDP per capita of an economy to total or per person inputs like labor, human capital, physical capital, and technology.Therefore, GDP is the output of the function, not an input.

04a True or false? If GDP is rising, standard of living will increase at the same rate.

False GDP can rise while standard of living falls if human health, environmental cleanliness, and other factors are worsening. Standard of living can rise faster than GDP if leisure, health, and other factors rise more significantly than GDP.

04a True or false? If GDP is rising, standard of living will increase at the same rate.

False GDP can rise while standard of living falls if human health, environmental cleanliness, and other factors are worsening. Standard of living can rise faster than GDP if leisure, health, and other factors rise more significantly than GDP.

03b Quantities supplied and demanded are more flexible in the short run than in the long run.

False Quantities supplied and demanded are generally more inelastic in the short run than in the long run. As a result, it is more common for prices to change frequently in the short run, with quantities remaining relatively stable. However, in the long run quantities are easier to adjust, so quantities are more flexible in the long run.

03b True or false? If a good has zero substitutes and is considered to be an absolute necessity, we can assume that when there is a change in its price, the quantity demanded will be perfectly elastic.

False When there is a change in price for goods which are considered a necessity and have zero substitutes, we can expect the demand curve to be perfectly inelastic. This is represented graphically as a vertical line, as there is no change in quantity demanded when the price changes.

03b If the decrease in price of good B causes the demand for good A to decrease, then what can we determine about goods A and B?

Good A and good B are substitutes. If two goods are substitutes, then a decrease in the price of one of them will cause a decrease in demand for the other. Since substitute goods are two alternative goods that can be used for the same purpose, they have positive cross-price elasticities of demand.

04b Which of the following are ways that markets encourage economic growth? I. They incentivize workers to acquire more human capital. II. They leave employees responsible for their own training. III. They incentivize firms to look for new technologies.

I and III Markets encourage macroeconomic growth by allowing personal and business rewards and incentives for increasing human and physical capital. Workers will have an incentive to acquire additional human capital to earn higher wages. Firms will invest in physical capital and training for workers. Both individuals and firms look for new technologies because even small inventions can make work easier or lead to product improvement.

01 Which statement is not a normative statement?

If cheese is an input in macaroni and cheese, an increase in the price of cheese will decrease the supply of macaroni and cheese. This is an example of a positive economic statement. Positive statements are objective and fact based and must be able to be tested and proved or disproved. This statement could be tested by analyzing data on input prices and supply of macaroni and cheese.

03b As the average hourly wage increases from $20 per hour to $21 per hour, the quantity demanded of smartphones increases from 4,900 to 5,250. What is the income elasticity of demand for smartphones? Round your answer to the nearest hundredth. Your answer may be a positive or negative number.

Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. The quantity increased by 350, so the percentage change in quantity is: 5,250−4,900/5,250+4,900/2×100≈6.897 The income increased by $1, so the percentage change in income is: 21−20/21+20/2×100≈4.878 Therefore, the income elasticity of demand is: 6.897/4.878=1.41

03b As the average hourly wage increases from $15 per hour to $16 per hour, the quantity demanded of snow blowers increases from 4,000 to 4,450. What is the income elasticity of demand for snow blowers? Round your answer to the nearest hundredth. Your answer may be a positive or negative number.

Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. The quantity increased by 450, so the percentage change in quantity is: 4,450−4,000(4,450+4,000)2×100≈10.65% The income increased by $1, so the percentage change in income is: 16−1516+152×100≈6.45% Therefore, the income elasticity of demand is: 10.656.45=1.65

03b Suppose that when income falls by 20%, the quantity of bologna demanded at the current price increases by 10%. Calculate the income elasticity of demand for bologna. Round your answer to the nearest tenth. Your answer may be a positive or negative number.

Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income: Income elasticity of demand=% change in quantity demanded/% change in income The income elasticity of demand for bologna is 10%/−20%=−0.5.

02b Shelter dogs and dog food are complementary goods. If the price of adoption fees for shelter dogs goes down and more dogs are adopted, then the demand for dog food at the local pet store will increase.

Mad Cow Disease is an example of a poor natural condition for production. The disease taints the supply of beef in Europe, which decreases, or causes a leftward shift, in hamburgers at McDonald's restaurants in the UK. A leftward shift in supply means that at every given price, the quantity supplied is lower.

04a Why do economists care about recessions?

Many people lose work and struggle to support themselves financially. Economists care about recessions because during these periods many people lose work and struggle to support themselves financially. Even those who do not lose work may see cuts in hours or pay, which lowers their standard of living.

03a The table shows the price and quantity demanded for floor mats. Using the Midpoint Method, what is the price elasticity of demand between points B and C? Note: Remember to take the absolute value of the result and round to the nearest hundredth. Rounding should be done at the end of your calculation.

Price elasticity of demand is the percentage change in quantity divided by the percentage change in price. Using the Midpoint Method, the percentage change in quantity from point B to point C is shown. Rounding at each step of the solution is shown for simplicity in reporting. If you are using a graphing calculator, rounding should be done at the end of your calculation. Q2−Q1/Q2+Q1/2×100=460−480/460+480/2×100≈−4.26 The percentage change in price is: P2−P1/P2+P1/2×100=16−13/16+13/2×100≈20.69 Divide the percentage change in quantity by the percentage change in price to find the price elasticity of demand: −4.26/20.69=−0.21 Since, by convention, we always talk about elasticities as positive numbers, take the absolute value, which is0.21. Note: If you are using a graphing calculator to solve these fractions as one equation, your final answer will be −0.2056737589, rounded to 0.21 (absolute value).

03a The table shows the price and quantity demanded for snow shovels. Using the Midpoint Method, what is price elasticity of demand between points B and C? Note: Remember to take the absolute value of the result and round to the nearest hundredth. Rounding should be done at the end of your calculation.

Price elasticity of demand is the percentage change in quantity divided by the percentage change in price. Using the Midpoint Method, the percentage change in quantity from point B to point C is shown. Rounding at each step of the solution is shown for simplicity in reporting. If you are using a graphing calculator, rounding should be done at the end of your calculation. Q2−Q1/Q2+Q1/2×100=8000−9000/8000+9000/2×100=−11.76 The percentage change in price is: P2−P1/P2+P1/2×100= 12−11/12+11/2×100=8.70 Divide the percentage change in quantity by the percentage change in price to find the price elasticity of demand −11.76/8.70=−1.35 Since, by convention, we always talk about elasticities as positive numbers, take the absolute value, which is 1.35. Note: If you are using a graphing calculator to solve these fractions as one equation, your final answer will be −1.352941176, rounded to 1.35 (absolute value).

03a The table shows the price and quantity demanded for clocks. Using the Midpoint Method, what is the price elasticity of demand between points C and D? Note: Remember to take the absolute value of the result and round to the nearest hundredth. Rounding should be done at the end of your calculation.

Price elasticity of demand is the percentage change in quantity divided by the percentage change in price. Using the Midpoint Method, the percentage change in quantity from point C to point D is shown. Rounding at each step of the solution is shown for simplicity in reporting. If you are using a graphing calculator, rounding should be done at the end of your calculation. Q2−Q1/Q2+Q1/2×100=170−180/170+180/2×100≈−5.71 The percentage change in price is: P2−P1/P2+P1/2×100=18−17/18+17/2×100≈5.71 Divide the percentage change in quantity by the percentage change in price to find the price elasticity of demand: −5.71/5.71=−1.00 Since, by convention, we always talk about elasticities as positive numbers, take the absolute value, which is 1.00. Note: If you are using a graphing calculator to solve these fractions as one equation, your final answer will be −1, which is 1 as the absolute value.

03a The table shows the price and quantity demanded for exercise balls. Using the Midpoint Method, what is the price elasticity of demand between points D and E? Note: Remember to take the absolute value of the result and round to the nearest hundredth. Rounding should be done at the end of your calculation

Price elasticity of demand is the percentage change in quantity divided by the percentage change in price. Using the Midpoint Method, the percentage change in quantity from point D to point E is shown. Rounding at each step of the solution is shown for simplicity in reporting. If you are using a graphing calculator, rounding should be done at the end of your calculation. Q2−Q1/Q2+Q1/2×100=6000−6500/6000+6500//2×100=−8.00 The percent change in price is: P2−P1/P2+P1/2×100=19−18/19+18/2×100≈5.41 Divide the percentage change in quantity by the percentage change in price to find the price elasticity of demand, remembering that elasticity is always taken to be positive: −8.00/5.41≈1.48 Note: If you are using a graphing calculator to solve these fractions as one equation, your final answer will be −1.48, which is 1.48 as the absolute value

03a The data in the table shows the price and quantity supplied for baseball batting gloves. Using the Midpoint Method, what is the price elasticity of supply from point C to point D ? Note: Remember to take the absolute value of the result and round to the nearest hundredth. If using a calculator, rounding should be done at the end of your calculation.

Price elasticity of supply is the percentage change in quantity divided by the percentage change in price. Using the Midpoint Method, the percentage change in quantity from point C to point D is shown. Rounding at each step of the solution is shown for simplicity in reporting. If you are using a graphing calculator, rounding should be done at the end of your calculation. Q2−Q1/Q2+Q1/2×100=10,075−10,050/10,075+10,050/2×100≈0.25 The percentage change in price is: P2−P1/P2+P1/2×100=8−7/8+7/2×100≈13.33 Divide the percentage change in quantity by the percentage change in price to find the price elasticity of supply:0.25/13.33=0.02. Note: If you are using a graphing calculator to solve these fractions as one equation, your final answer will be −0.0186335404, rounded to 0.02 (absolute value).

03a If the price of strawberries raises by 5% and the quantity demanded decreases by 5%, then which of the following describes the price elasticity of demand for strawberries?

Strawberries are unitary elastic If % change in quantity demanded /% change in price=1, then the elasticity is said to be unitary elastic. Therefore, because %5/%5=1, the price elasticity of demand for strawberries is unitary elastic.

03b The price of dog leashes increased 5% and the quantity demanded of dog collars decreased 7%. Calculate the cross-price elasticity of demand for dog collars. Round your answer to the nearest hundredth. Be sure to include a negative sign in your answer, if necessary.

The cross-price elasticity of demand is −7.0%/5.0%=−1.4.

03b In the short run, a significant increase in the price of oil has little effect on the quantity of oil demanded. However, in the long run, a significant increase in the price of oil will significantly decrease the quantity demanded. Which of the following reasons explains this?

The demand for oil is less elastic in the short run and more elastic in the long run. Demand is often inelastic in the short run, so that shifts in either demand or supply can cause a relatively greater change in prices. However, since supply and demand are more elastic in the long run, the long-run movements in prices are more muted, while quantity adjusts more easily in the long run.

04a Consider a situation where a country's GDP is rising. Which of the following scenarios, if true, would overstate the degree of change in the broad standard of living?

The environment becomes dirtier. It is theoretically possible that while GDP is rising, the standard of living could be falling if human health, environmental cleanliness, and other factors that are not included in GDP are worsening. A dirtier environment would reduce the broad standard of living, but would not be counted in GDP. Therefore, a rise in GDP would likely overstate improvements in standard of living.

03b Consider an industry where new technology which significantly lowers the cost of production has just been introduced. Which of the following are consequences of this change in a market with a relatively inelastic demand compared to supply? Note: Select two answers that apply.

The fall in production costs will increase supply. The lower costs of production will give a greater benefit to consumers than producers. When supply increases as a result of improved technology, the market equilibrium price falls as a result of supply shifting to the right (or increasing). When demand is relatively inelastic, this causes a small increase in equilibrium quantity, but a large decrease in equilibrium price. As a result, consumers will benefit to a greater degree than producers.

04a If the GDP deflator increases from 105 to 120 while nominal GDP increases from $26,000 to $30,000, what is the new level of real GDP? If necessary, round your answer to the nearest hundredth.

To calculate real GDP, use the formula: Real GDP =Nominal GDP /(Price Index/100) The GDP Deflator is also known as the price level, so Real GDP =$30,000/(120/100) ​​​​​​ Real GDP =$30,000/1.2=$25,000

04a Using the table below, calculate real GDP (in billions of dollars) in 2004. Round your answer to the nearest tenth. Year: Nominal GDP(in billions of dollars): GDP Deflator(2005=100) 2002: 8,309.8: 83.3 2003: 9,890.9: 87.6 2004: 10,502.9: 94.5 2005: 10,856.8: 100 2006: 11,200.8: 106

To calculate real GDP, use the formula: Real GDP =Nominal GDP/(Price Index/100) The GDP Deflator is also known as the price level, so Real GDP in 2004 =$10,502.9/(94.5/100) ​​​​​​ Real GDP in 2004 =$10,502.9/0.945= $11,114.2

04a Using the table below, calculate real GDP (in billions of dollars) in 2005. Round your answer to the nearest tenth Year: Nominal GDP(in billions of dollars): GDP Deflator(2005=100) 2002: 8,309.8: 83.3 2003: 9,890.9: 87.6 2004: 10,302.9: 94.5 2005: 10,786.8: 100 2006: 11,200.8: 106

To calculate real GDP, use the formula: Real GDP =Nominal GDP/(Price Index/100) The GDP Deflator is also known as the price level, so Real GDP in 2005 =$10,786.8/(100/100) ​​​​​​ Real GDP in 2005 =$10,786.8/1=$10,786.8

04a Using the table below, calculate real GDP (in billions of dollars) in 2018. Round your answer to the nearest tenth. Year: Nominal GDP(in billions of dollars): GDP Deflator(2005=100) 2014: 17,522: 109.34 2015: 18,219: 110.51 2016: 18,707: 112.19 2017: 19,485: 114.27 2018: 19,960: 114.90

To calculate real GDP, use the formula: Real GDP =Nominal GDP/(Price Index/100) The GDP Deflator is also known as the price level, so Real GDP in 2018 =$19,960/(114.90/100) ​​​​​​ Real GDP in 2018 =$19,960/1.149= $17,371.6

04a Businesses become more optimistic and increase business expenditures on investment, causing real GDP to increase from $17,500 to $20,000. What is the percent change in real GDP? Round your answer to the nearest tenth.

To find the real growth rate, we apply the formula for percentage change: New GDP - Old GDP/Old GDP×100=% change In this case, real GDP increased, so 20,000-17,500/ 17,500×100= 14.3%

04a An earthquake destroys much of the capital stock within an economy, causing real GDP to decrease from $18,000 to $12,000. What is the percent change in real GDP? Round your answer to the nearest tenth and include the negative sign if needed.

To find the real growth rate, we apply the formula for percentage change: New GDP-Old GDP/Old GDP×100=% change In this case, real GDP decreased, so the percent change is negative, 12,000-18,000/ 18,000×100=−33.3%

03a Goods with a limited supply of inputs have nearly zero elastic supply curves.

True Goods with a limited supply of inputs have nearly zero elastic supply curves because the production of these goods is not able to increase easily. Examples include diamond rings or housing in prime locations such as apartments facing Central Park in New York City.

03b Addictive substances, for which demand is inelastic, are products for which producers can pass higher costs on to consumers.

True Addictive substances, for which demand is inelastic, are products for which producers can pass higher costs on to consumers. For example, the demand for cigarettes is relatively inelastic among regular smokers who are somewhat addicted. Economic research suggests that increasing cigarette prices by 10% leads to about a 3% reduction in the quantity of cigarettes that adults smoke. Because users of addictive substances are less responsive to increases in price, producers can pass higher costs along to consumers in the form of higher prices without much of a decline in equilibrium quantity.

04b True or false? A contractual right is a form of property right that allows individuals to use the legal system when agreements regarding the use of property are violated.

True Contractual rights are rights based on property rights that allow individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance. An example is the employment agreement, where an employee performs duties agreed upon and expects payment. Failure to pay the employee violates the contract.

04b True or false? According to proponents to the "New Economy" theory, advancements in technology and communication generate higher productivity growth in the long run.

True The "new economy" is the idea that today's economy is based on extraordinary advances in communication and information technology from the 1990s. Economists of different schools of thought have different views regarding the sustainability of this growth. Optimistic supporters argue that these advancements will generate higher average productivity growth for decades to come. Pessimists argue that a decade of productivity growth is not proof of long-term productivity.

02b True or false? A rise in the price of a substitute for olive oil will increase demand for olive oil.

True A rise in the price of a substitute will increase demand because people are likely to buy the more affordable product instead of the higher priced one.

04a Which of the following is the best definition of GDP deflator?

a measure of inflation based on the prices of all the components of GDP The GDP deflator is defined as a measure of inflation based on the prices of all the components of GDP. It is calculated by dividing nominal GDP by real GDP.

02b Which one of the following options will increase demand?

a rise in the population likely to buy the good in question A rise in the population likely to buy the good in question will increase demand for that good since more consumers in a market means a greater amount of the good will be sold.

02a The following supply schedule shows ___________.

a supply curve that does not satisfy the Law of Supply The chart shows a supply curve, however, as price increases, quantity supplied decreases. This is in contrast to the Law of Supply.

04b A special economic zone (SEZ) is __________.

an area of a country, generally with access to a port, where the government typically does not tax trade A special economic zone (SEZ) is a designated area within a country, usually with access to a port, in which business and trade laws differ from the rest of the country. The SEZ is government supported and typically does not tax trade. Other benefits to help promote trade, investment, and job creation might also be granted to the SEZ.

04b Capital deepening is __________.

an increase by society in the average level of physical and/or human capital per person Capital deepening is defined as an increase in the average level of physical and/or human capital per person. Physical capital is increased by improvements in such factors of production as technology, equipment, factories, and transportation. Human capital is improved by such factors as more education, training, and other means of building skills and capacities for critical thinking and problem solving that lead to innovation and invention.

03b When we study the price elasticity of demand of a good or service, it is important to take into account which of the following determinants?

availability of close substitutes the extent to which the good or service is a necessity the extent to which the good or service is a luxury All of the above The study of price elasticity of demand for a given product or service should include analysis of the availability of substitutes, the distinction between luxuries and necessities.

04b The idea of human capital deepening applies to which two of the following?

averages levels of education in the economy years of experience that workers have One way to measure human capital is to look at the average levels of education in an economy. The idea of human capital deepening also applies to the years of experience that workers have, but the average experience level of U.S. workers has not changed much in recent decades, unlike the average level of education, which has increased dramatically in this period.

03a Which of the following are most likely to have nearly perfectly elastic supply curves?

bread products goods with easily expanded production While perfectly elastic supply curves are for the most part unrealistic, goods with readily available inputs and whose production can easily expand will feature highly elastic supply curves. Examples include pizza, bread, books, and pencils. Bread products have nearly infinite elastic supply curves because their inputs are readily available. Goods with easily expanded production have nearly infinite or perfect elastic supply curves because the production of these goods can increase or decrease very easily in response to price changes.

04a Consumption, investment, government spending, and net exports are all _________. Select the two correct answers below.

components of GDP on the demand side used to measure the size of a nation's overall economy The components of demand used to measure GDP are consumption, investment, government spending, and net exports (imports minus exports). In general, GDP is used to measure the size of a nation's overall economy, so taking these components together is one way to find that measurement. Each of the market transactions that enter into GDP must involve both a buyer and a seller. We can measure an economy's GDP either by the total dollar value of what consumers purchase in the economy or by the total dollar value of what is the country produces. Who buys all of this production? We can divide this demand into four main parts: consumer spending (consumption), business spending (investment), government spending on goods and services, and spending on net exports.

02b Which of the following cannot be an example of a pair of substitute goods?

computers and computer mouses A substitute good is one that can be used in place of another good or service. The substitution of a good has an effect on the demand curve for the original good. When rents increase, individuals turn to home purchases as a substitute. When the price of coal increases, energy producers will turn to less expensive substitutes such as natural gas. For some people tea and coffee are substitutes and so are tablets and laptop computers. Computers and computer mouses are complementary goods - they are purchased together.

01 A macroeconomist is _____________ with how new technology influences economic growth in a developing country.

concerned Explanation: Macroeconomics is concerned with issues of growth, unemployment, and inflation in economies in the aggregate.

04b Failure to pay an employee who performs services agreed upon is known as a violation of __________.

contractual rights Contractual rights are rights based on property rights that allow individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance. An example is the employment agreement, where an employee performs duties agreed upon and expects payment. Failure to pay the employee violates the contract.

04b The idea that low income countries grow faster than high-income countries is called ________.

convergence Some low-income and middle-income economies around the world have shown a pattern of convergence, in which their economies grow faster than those of high-income countries.

01 Positive statements ___________________.

define the world as it is Positive statements describe the world as it is, whereas normative statements focus on what the world ought to be. For example, research outcomes can be viewed as positive statements, while policy decisions and statements could be viewed as normative.

03b In the short run, it is difficult for a person to make changes to their energy consumption habits. In the long run, they can purchase a car that is more efficient, live closer to work, and buy energy efficient appliances. Because of this, you can say that ___________________________.

elasticity is lower in the short run than the long run Because significant changes cannot be made in the short run but can be in the long run, elasticity is higher in the long run.

02b When considering factors that shift supply curves, which of the following will increase supply?

favorable natural conditions for production lower taxes levied on producers Favorable natural conditions for production will increase supply because firms are able to produce more with the available resources. Lower taxes will increase supply because taxes are treated as costs by firms.

04a When calculating GDP, government statisticians count just the value of __________________ in the chain of production that are sold for consumption, investment, government, and trade purposes.

final goods and services When calculating GDP, government statisticians count just the value of final goods and services in the chain of production that are sold for consumption, investment, government, and trade purposes. Statisticians exclude intermediate goods from GDP calculations.

04b The accumulated skills and education of workers is also known as ______.

human capital Human capital refers to the skills and knowledge that make workers productive. In general, the higher the level of education and skill training, the more productive the worker.

02b Which of the following best completes the statement below? If the price of coffee falls by 90%, we would expect demand for coffee stirrers to _____________. This occurs because the two goods are close ______________.

increase; complements Coffee stirrers and coffee are clearly close complements, that is, the more coffee people consume, the more stirrers they require.

04b Technological change is a combination of which two concepts?

innovation invention Technological change is a combination of invention—advances in knowledge—and innovation, which is putting those advances to use in a new product or service.

04b In studying economic growth, a country's ___________ framework plays a critical role.

institutional Institutions are the traditions and laws by which people in a community agree to behave and govern themselves. Institutional progress is the development of institutions to reinforce social order, and thus, economic growth. In studying economic growth, a country's institutional framework plays a critical role.

04a Which of the following are not included in GDP? Select the two correct answers below.

intermediate goods non-market activities When GDP is measured by components of demand, we can divide it into four main parts: consumer spending (consumption), business spending (investment), government spending on goods and services, and spending on net exports. Intermediate goods and non-market activities are not included in GDP.

04a Even though GDP does not measure the broader standard of living with any precision, it does measure production well and it does indicate when a country is materially better or worse off in terms of ________________.

jobs and incomes Even though GDP does not measure the broader standard of living with any precision, it does measure production well and it does indicate when a country is materially better or worse off in terms of jobs and incomes. In most countries, a significantly higher GDP per capita occurs hand in hand with other improvements in everyday life along many dimensions, like education, health, and environmental protection.

03b Which of the following goods would most likely have high elasticities of demand? Please select two answers.

luxury cars restaurant meals Goods like luxury cars and restaurant meals have high elasticities because they are non-essential goods. Demand for goods like these will depend significantly on price. At high prices, consumers can easily find other (cheaper) goods to buy instead.

04a Which of the following terms refers to the commonly referenced value of a good or service that is not adjusted for inflation?

nominal value By definition, nominal value is the value of a good or service that is not adjusted for inflation. The nominal value of any economic statistic means that we measure the statistic in terms of actual prices that exist at the time.

03b The income elasticity of demand for peanut butter is 0.1. From this, we know that peanut butter is a(n) __________ because _______________.

normal good; elasticity is positive For most products, most of the time, including peanut butter in this case, the income elasticity of demand is positive. These are called normal goods. For normal goods, a rise in income will cause an increase in the quantity demanded.

04a GDP can understate standard of living by ______________.

not capturing increases in leisure time In some ways, the rise in GDP understates the actual rise in the standard of living. For example, the typical workweek for a U.S. worker has fallen over the last century from about 60 hours per week to less than 40 hours per week. Life expectancy and health have risen dramatically, and so has the average level of education. Since 1970, the air and water in the United States have generally been getting cleaner. Companies have developed new technologies for entertainment, travel, information, and health. A much wider variety of basic products like food and clothing is available today than several decades ago. Because GDP does not capture leisure, health, a cleaner environment, the possibilities that new technology creates, or an increase in variety, the actual rise in the standard of living for Americans in recent decades has exceeded the rise in GDP.

03b Suppose that demand is unitary elastic at all points. When price is increased from a point on this demand curve, then total revenue will_____________.

not change At a point on a demand curve that is unitary elastic at all points, a percentage rise in price is exactly canceled out by a percentage fall in quantity demanded. Therefore, total revenue will remain unchanged when price changes

04b All of the following are inputs for the aggregate production function with GDP as its output except:

physical capital per person With GDP as its output, the aggregate production function has workforce, human capital, physical capital, and technology as its inputs. However, if GDP per capita is the output, inputs must be measured and included on a per-person basis (for example, physical capital per person).

03b When determining the cross-price elasticity of demand, you must start by looking at the relationship between which of the following?

price and quantity demanded Finding the price elasticity of demand requires that we first compute percentage changes in price and in quantity demanded. We calculate those changes between two points on a demand curve, for two separate goods. The cross-price elasticity of demand of good A is the percentage change in quantity demanded of good A divided by the percentage change in price of good B

03a The percent change in the quantity demanded of a good in relation to the percent change in the price of that good is called its ____________.

price elasticity of demand Price elasticity of demand measures how responsive quantity demanded is to a given change in price. Mathematically, it can be defined as the percent change in the quantity demanded of a good or service divided by the percent change in the price.

04b The technical relationship between inputs and outputs is also known as the ___________.

production function The production function is the technical relationship by which economic inputs like labor, machinery and raw materials are turned into outputs used by consumers.

02a Given the graph below, what is the equilibrium quantity and price?

q=15 p=$10 Equilibrium occurs where demand and supply cross, in this case where quantity is 15 and price is $10.

04a Which term refers to the value of a good or service after adjusting for changes in inflation?

real value The nominal value of any economic statistic means that we measure the statistic in terms of actual prices that exist at the time. The real value refers to the same statistic after it has been adjusted for inflation. Generally, it is the real value that is more important.

04a A moderate decline in real GDP that lasts two or more consecutive quarters is known as a __________.

recession We call a decline in real GDP that typically lasts at least two consecutive quarters a recession. We call an especially lengthy and deep recession a depression.

02a The table below shows the market's demand and supply for cheddar cheese. If the price is set at $3.80, the market will experience a ______________ with resulting ____________________ pressure on the price.

surplus, downward The equilibrium price is where quantity supplied equals quantity demanded, which is where price = $3.40. At a higher price, a surplus occurs leading to downward pressure on the price until equilibrium is reached.

02a If producers and consumers agree on a market price, they have reached:

the equilibrium price Equilibrium price occurs where quantity supplied and quantity demanded and where producers and consumers agree on a price.

01 Assume Brandon can buy either 1 DVD for $20 or 3 CDs for $25. What is the opportunity cost if he decides to buy 3 CDs?

the lost opportunity to buy 1 DVD. Opportunity cost is the cost of what must be given up to obtain something that is desired. Since Brandon spends all of his money on CDs, he is giving up the opportunity to purchase a DVD.

04a Which of the following best describes the term gross domestic product (GDP)?

the measure of the size of total production in an economy Gross domestic product (GDP) is the value of all final goods and services produced within a country in a given year. Measuring GDP involves counting the production of millions of different goods and services—smart phones, cars, music downloads, computers, steel, bananas, college educations, and all other new goods and services that a country produced in the current year—and summing them into a total dollar value.

03b Income elasticity of demand is __________.

the percentage change in quantity demanded divided by the percentage change in income Income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the income of the people demanding the good. More specifically, it is calculated as the percentage change in quantity demanded divided by the percentage change in income.

03b Which of the following best defines the term cross-price elasticity of demand?

the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B

04a GDP is the most often-used measure to assess which of the following?

the size of a nation's overall economy Economists typically measure the size of a nation's overall economy by its gross domestic product (GDP), which is the value of all final goods and services produced within a country in a given year.

02a Quantity supplied is a term that refers to _______.

the total number of units of a good or service producers are willing to sell at a given price Quantity supplied is the total number of units of a good or service producers are willing to sell at a given price. This is not to be confused with supply, which is the relationship between a range of prices and the quantities supplied at those prices. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers to the (specific) point on the curve.

04a Which of the following descriptions best fits the term nominal value?

the value of a good or service actually announced at the time and not adjusted for inflation By definition, nominal value is the value of a good or service that is not adjusted for inflation. The nominal value of any economic statistic means that we measure the statistic in terms of actual prices that exist at the time.

04a Which of the following is the correct definition of real value?

the value of a good or service after adjusting for changes in inflation The definition of real value is the value of a good or service after adjusting for changes in inflation. Generally, the real value is a more important statistic than the nominal value since it tells us more about how to interpret the amount.

04a If 1% of the population has 70% of the wealth, while the other 99% of the population has the remaining 30% of the wealth, GDP ____________________.

would not be able to show that disparity GDP can only account for production exchanged in the market, including the value of goods and services, spending, income, and inventories. It does not account for leisure time, worker inequality, quality of goods, unpaid work, wealth distribution, productivity, health, environmental cleanliness, learning, household production, illegal production, and available technology.

02b Severe hailstorms have caused significant damages in car windshields. How does this impact the demand for windshields? In the graph below, show how demand for windshields is impacted by shifting the appropriate curve.

After the hailstorms, many car owners need to replace their windshields. Demand for windshields rises, represented by a rightward shift in demand. A rightward shift in demand means that at any price, the quantity demanded will be higher than it was before.

01 The division of labor may also be referred to as human specialization. Overall, it is beneficial to firms because it ____________.

increases output by enabling workers to take advantage of differences in their skills Explanation: A group of workers, each specializing in certain tasks, can produce more than the same number of workers who try to produce the entire good or service by themselves. Specialization results in higher levels of output because it allows workers to focus their labor where they have an advantage and potentially learn to produce more quickly in their areas of specialization.

03a The responsiveness of quantity supplied of a good in relation to a change in its price is called ____________.

price elasticity of supply Price elasticity of supply measures how responsive quantity supplied is to a change in output prices. Mathematically, it can be defined as the percent change in the quantity supplied of a good or service divided by the percent change in its price.

02b Jeremy is studying the effects of income on the demand for Greek ceramics. If "ceteris paribus" is used, which factors would be held constant when studying the effects of changes in income? Select the two correct answers below.

price of Italian ceramics demand for Greek sculptures When studying the relationship between demand and an influencing factor, the ceteris paribus assumption holds all other influencing factors constant in order to study the effects of only the factor at hand. In Jeremy's case, the price of Italian ceramics and demand for Greek sculptures, among other things, are held constant in order to better understand the relationship between income and demand for Greek ceramics.

02a Per the graph below, what is the equilibrium price and quantity? Use only the numbers written on the graph as your answer.

q=1600 p=$1.50 Equilibrium occurs when supply and demand cross, in this case where quantity = 1600 and price = $1.50.

02a The supply and demand schedule below represents the market for toothbrushes. What is the equilibrium price and quantity?

q=24 p=$8 Equilibrium occurs when the quantity supplied equals the amount demanded. The price at which this occurs is the equilibrium price. The supply and demand schedule shows that quantity supplied equals quantity demanded when q = 24 and price = $8.

02a The supply and demand schedule below represents the market for toothbrushes. What is the equilibrium price and quantity?

q=24,p=$8 Equilibrium occurs where quantity supplied equals quantity demanded, in this case where quantity is 24 and price is $8.

02a Using the supply and demand schedule below, determine the equilibrium price and quantity for gallons of milk.

q=4 p=$5 Equilibrium occurs where quantity supplied equals quantity demanded. This can be seen in the chart where price = $5 and quantity = 4.

02a The table below shows the market supply and demand for cheddar cheese. What is the equilibrium price and quantity?

q=650 p=$3.40 Equilibrium occurs when the quantity supplied equals the amount demanded. The price at which this occurs is the equilibrium price. The supply and demand schedule shows that quantity supplied equals quantity demanded when q = 650 and price = $3.40

02a What term describes the total number of units of a good or service consumers are willing to purchase at a given price?

quantity demanded Quantity demanded is the total number of units of a good or service consumers are willing to purchase at a given price.

02a What term is best described as the total number of units of a good or service producers are willing to sell at a given price?

quantity supplied Quantity supplied is the total number of units of a good or service producers are willing to sell at a given price.

01 Consider the following scenario: David eats lunch outside every day because he enjoys the daily walk to the park, the fresh air, and the time away from his computer desk. While the time it takes him is a little longer, the utility he receives outweighs the costs associated with the additional time. This is an example of ______________. Select the two answers below that correctly fill in the blank.

rational decision-making self-interested behavior Because David's utility outweighs his costs of eating lunch outside, he is maximizing his utility through his self-interested behavior and making a rational decision. Through his behavior, he might be a better employee and more productive, which would support efficiency in the market economy.

03a The data in the table shows the price and quantity supplied for tool boxes. Using the Midpoint Method, what is the price elasticity of supply from point B to point C ? Note: Remember to take the absolute value of the result and round to the nearest hundredth. If using a calculator, rounding should be done at the end of your calculation.

0.42 Price elasticity of supply is the percentage change in quantity divided by the percentage change in price. Using the Midpoint Method, the percentage change in quantity from point B to point C is shown. Rounding at each step of the solution is shown for simplicity in reporting. If you are using a graphing calculator, rounding should be done at the end of your calculation. Q2−Q1/Q2+Q1/2×100= 770−735/770+735/2×100≈4.65 The percentage change in price is: P2−P1/P2+P1/2×100=19−17/19+17/2×100≈11.11 Divide the percentage change in quantity by the percentage change in price to find the price elasticity of supply:4.65/11.11=0.42. Note: If you are using a graphing calculator to solve these fractions as one equation, your final answer will be −0.4186046512, rounded to 0.42 (absolute value).

02c The table below represents the market for greeting cards. Suppose there is a price floor set at $6.00. Calculate the surplus caused by the price floor.

550 greeting cards A price floor keeps the price for a good from falling below a set minimum. An effective price floor is set above the equilibrium price. To calculate the surplus caused by the price floor, subtract the quantity demanded from the quantity supplied. In this case, the surplus is equal to 800−250=550 greeting cards.

02a In order to increase support for the ruling party before the next general election, the government decrees that Product Z cannot be sold for more than $8.60. At a price of $8.60, what is the quantity supplied of Product Z?

800 If price is fixed at $8.60, then according to the supply curve, only 800 units of product Z will be brought to market by producers. Therefore 800 is the quantity supplied.

01 Which scenario below is an example of scarcity?

A factory has a large need for highly skilled workers, however the majority of applicants do not have any work experience. Explanation: Because the factory has a demand for highly skilled workers, but none exist in the area, there is a shortage of labor for these positions. Because we are able to create diamonds in a lab, they are no longer scarce. Similarly, fracking has increased the availability of natural gas which has lowered energy prices because it is not viewed as a scarce resource. There is no shortage of kittens in animal shelters.

01 Of the following examples below, which is not an example of scarcity?

A puppy mill was shut down and all of the dogs went to an overcapacity humane society, leading to an increase in the supply of adoptable dogs. Because a puppy mill was shut down, the animal shelter has an influx of dogs for interested adopters. John's time is scarce - he cannot study and go to the concert. Only a limited number of people can receive the flu vaccine each year, thus it is a scarce resource. There is a shortage of teachers in Hawaii due to the high costs of living and low wages.

02a The supply and demand curve for sales of widget springs is shown below. Based on this graph, move the point shown to the correct equilibrium point. Make sure the point is placed on the exact value for equilibrium.

Equilibrium occurs where supply and demand intersect, in this case where quantity is 50 and price is $5.50.

02b A rainy season improves the weather conditions for growing tomatoes in the Southeast. Demonstrate the impact on the supply of tomatoes on the graph below by shifting the supply curve in the appropriate direction.

Especially good weather for agricultural products shifts the supply curve for those products to the right. In this case, ideal weather conditions for growing tomatoes causes the supply curve to shift to the right. A rightward shift in supply means that at every given price, the quantity supplied is higher.

01 Identify the two groups that do not interact in a circular flow diagram for a two-sector economy.

Exporters Importers Explanation: A circular flow diagram shows the interactions and flow of goods, services, and money between households and businesses (or firms). In a two-sector economy there are firms and households. Firms provide households with goods and services. Households provide firms with labor, land, capital, and entrepreneurship. Households do not receive free goods or services from firms, and households do not provide firms with free labor. Everything has a cost.

02c True or false? A price ceiling is the minimum amount that can legally be charged for a good or service.

False This is the definition of a price floor. A price ceiling is defined as the maximum amount that can legally be charged for a good or service.

02c If the price of a good were to change will it shift demand or change quantity demanded?

It will change quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they mean only a certain point on the demand curve, or one quantity on the demand schedule. A shift in demand means that at any price (and at every price), the quantity demanded will be different than it was before. A change in the price of a good or service causes a movement along a specific demand curve, and it typically leads to some change in the quantity demanded, but it does not shift the demand curve.

02c The market for Coca-Cola is initially in equilibrium. Demonstrate a shift in demand for Coca-Cola that reflects a higher price of Pepsi.

Pepsi is a substitute for Coca-Cola. As a result, an increase in the price of Pepsi will cause a rightward shift of the demand curve for Coca-Cola, while a decrease in the price of Pepsi will cause a leftward shift of the demand curve for Coca-Cola. A rightward shift of the demand curve for Coca-Cola will cause both the equilibrium price and quantity of Coca-Cola to increase.

03a The table shows the price and quantity demanded for toasters. Using the Midpoint Method, what is the price elasticity of demand between points C and D? Note: Remember to take the absolute value of the result and round to the nearest hundredth. Rounding should be done at the end of your calculation.

Price elasticity of demand is the percentage change in quantity divided by the percentage change in price. Using the Midpoint Method, the percentage change in quantity from point C to point D is shown. Rounding at each step of the solution is shown for simplicity in reporting. If you are using a graphing calculator, rounding should be done at the end of your calculation. Q2−Q1/Q2+Q1/2×100= 17,000−18,000/17,000+18,000/2× 100≈ −5.71 The percentage change in price is: P2−P1/P2+P1/2× 100= 12−11/12+11/2×100≈8.7 Divide the percentage change in quantity by the percentage change in price to find the price elasticity of demand,: −5.71/8.7=−0.66 Since, by convention, we always talk about elasticities as positive numbers, take the absolute value, which is 0.66. Note: If you are using a graphing calculator to solve these fractions as one equation, your final answer will be −0.6571428571, rounded to 0.66 (absolute value).

02b Economists use the ceteris paribus assumption to make it easier to analyze complex problems by looking at one factor affecting a variable at a time.

True Ceteris paribus is a Latin phrase that means "all other things being equal." Economists try to test hypotheses by observing actual behavior and using real-world data. By keeping all other factors constant, economists are able to analyze one factor at a time.

01 Giovanni and Pedro make guitars. Their current rate of production is 2 guitars a week: each of them makes one guitar. How would production most likely be affected if Pedro made the frets and tuning pegs on the guitars, and Giovanni made the guitar bodies?

Production would be increased. Explanation: When workers specialize, each is likely to become more efficient at the task each specializes in. As Giovanni and Pedro become more efficient at the production of guitars, they will produce more per week. Workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better.

02c Farmers are given a subsidy to encourage the production of more corn. Demonstrate the effect this has on the equilibrium price and quantity of corn.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? A subsidy decreases the production cost of corn, impacting supply. Step 3: The supply of corn will increase, shifting the supply curve to the right. Step 4: A rightward shift in supply causes a movement down the demand curve, decreasing the equilibrium price and increasing the equilibrium quantity.

02c Suppose that dry dog food and canned dog food are substitutes. The price of dry dog food rises 10%. Demonstrate the effect the price increase has on the equilibrium price and quantity of canned dog food by moving the appropriate curve in the graph below.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? Canned dog food and dry dog food are substitutes. Because the price of dry dog food increases 10%, the demand for canned dog food increases. Step 3: The demand for canned dog food will increase, shifting the demand curve to the right. Step 4: A rightward shift in demand causes a movement up the supply curve, increasing the equilibrium price and the equilibrium quantity.

02c Pepsi is a substitute for Coca-Cola. As a result, an increase in the price of Pepsi will cause a rightward shift of the demand curve for Coca-Cola, while a decrease in the price of Pepsi will cause a leftward shift of the demand curve for Coca-Cola. A rightward shift of the demand curve for Coca-Cola will cause both the equilibrium price and quantity of Coca-Cola to increase.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? The increase in cream cheese prices will decrease the demand for bagels, its complement. Step 3: The demand for bagels will decrease, shifting the demand curve to the left. Step 4: A leftward shift in demand causes a movement down the supply curve, lowering the equilibrium price and the equilibrium quantity.

02c A main component used in the production of bowling balls has risen in price by 15%. Demonstrate the effect this has on the equilibrium price and quantity of bowling balls.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? The increase in price will decrease supply because of increased production costs. Step 3: The supply of bowling balls will decrease, shifting the supply curve to the left. Step 4: A leftward shift in supply causes a movement up the demand curve, increasing the equilibrium price and decreasing the equilibrium quantity.

02c Suppose that a soda tax, intended to curb obesity, is already in place. Demonstrate the effect of a reduction in the soda tax on the equilibrium price and quantity of soda. Recall that taxes are considered as input costs to the producers.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? The tax decrease will cause the costs to decrease for the producers of soda. Step 3: The supply of soda will increase, shifting the supply curve to the right. Step 4: A rightward shift in supply causes a movement down the demand curve, decreasing the equilibrium price and increasing the equilibrium quantity.

02b Corn farmers in Ohio experience especially good weather, extending the growing season. Which of the following describes the impact on corn supply?

The corn supply will increase. If the growing season for corn is extended, a greater amount of corn is grown. This increases the supply of corn (the quantity produced at any given price) and is represented by a rightward shift in the supply curve.

01 If individuals pursue their own interests when participating in the markets, per Adam Smith, those individuals are being guided by

an "invisible hand" that will also lead to a promotion of the greater good. Adam Smith in writing in The Wealth of Nations described the property of the invisible hand, in that as people pursue their own interests, they are also supporting the greater good.

02b Suppose the price of adoption fees for shelter dogs decreases so that more dogs can be adopted. What would happen to the demand for dog food at the local pet store? Assume that the shelter does not buy its pet food from this pet store, rather it buys in bulk directly from a national supplier.

The demand for dog food will go up because the number of dogs being adopted has increased. Shelter dogs and dog food are complementary goods. If the price of adoption fees for shelter dogs goes down and more dogs are adopted, then the demand for dog food at the local pet store will increase.

02b Workers at factories building machinery go on strike. Which of the following describes how the supply of machines will be affected?

The supply of machines will decrease. When workers go on strike, there are not people available to produce the goods. Either the goods do not get produced, or the firm has to hire new workers, which raises the cost of production. This in turn decreases the supply of machines.

02b Holding all else constant, the government imposes a policy on factories saying they must produce cleaner air and less waste. How will the supply of goods produced in factories be impacted?

The supply will decrease because the policy requires companies to spend money to produce less waste and cleaner air, increasing production costs. Government policies are treated the same as taxes by businesses. When policies raise production costs, supply decreases.

01 Choose the best option below that illustrates an example of scarcity.

The value for ivory has increased leading to an increase in the poaching of African Elephants and a decrease in the African Elephant population. Explanation: When we have limited availability of a given resource, we say that the resource is in scarce supply. Elephants are becoming a scarce resource due to the high demand for their tusks. They are killed by poachers that are only interested in their tusks. The other options in the question are examples of situations where scarcity is not present - the wolf population has grown since reintroduction, there are a number of craft breweries in Portland, and with generic drugs on the market, they are more readily available.

02b Improvements in technology have given tablets similar capabilities to laptop computers and are also lighter and more durable. In the graph below, demonstrate how demand for laptop computers is affected by the increase in popularity for tablets by shifting the appropriate curve.

There has been a taste shift from laptop computers to tablets. Laptop computers have become less desirable, so the demand for them decreases or shifts to the left. A leftward shift in demand means that at any price, the quantity demanded will be lower than it was before.

02b If there is a decrease in price for printers, what would we expect to happen to the demand for printer cartridges?

There will be an increase in demand for printer cartridges. Printers and printer cartridges are clearly complementary goods, so if the price of one decreases, then the demand for the other will increase.

02a True or false? According to the law of demand, changing the price of sweater vests will only affect the quantity demanded of sweater vests, not demand itself.

True As demand is a schedule consisting of quantity and price combinations, changing the price of sweaters will move the consumer from one row or point in the demand schedule to another row or point. The demand schedule itself remains unchanged.

01 True or false?In market economies, economic decisions are determined by market forces.

True In market economies, economic decisions are determined by market forces. In a market economy, decision-making is decentralized. Market economies are based on private enterprise: the private individuals or groups of private individuals own and operate the means of production (resources and businesses). Businesses supply goods and services based on demand. (In a command economy, by contrast, the government owns resources and businesses.) Supply of goods and services depends on what the demands are. A person's income is based on his or her ability to convert resources (especially labor) into something that society values. The more society values the person's output, the higher the income (think Lady Gaga or LeBron James). In this scenario, market forces, not governments, determine economic decisions.

02b Coca-Cola and Pepsi, two popular brands of soda, are substitutes. Suppose that the price of Coca-Cola drops by 20%. In the graph below, show how demand for Pepsi is impacted by this change by shifting the appropriate curve.

When the price of a good (Coca-Cola) falls, the demand for its substitute (Pepsi) will decrease. This is because as Coca-Cola and Pepsi are similar, the consumer chooses to switch consumption from Pepsi to Coca-Cola whenever the Coca-Cola price falls, all else the same. This reduces the demand for Pepsi, which is represented by a leftward shift in the demand curve. A leftward shift in demand means that at any price, the quantity demanded will be lower than it was before.

02c Which of the following is not a factor that could cause a shift in the demand curve for a certain good? Note: consider the difference between demand and quantity demanded.

a change in the price of a good A change in the price of a good does not change demand for it. A price increase will change the quantity demanded but not shift the demand curve. If the price of a good increases, fewer people will want to purchase it, as explained by a downward sloping demand curve.

02b If a product's demand rises as income rises, ceteris paribus, the product is ________.

a normal good A product whose demand rises when income rises, and vice versa, is called a normal good. Normal goods are things we buy more of when our income rises, for example, restaurant meals, vacations, luxury items, etc.

02c Which of the following would be consequences of more rental properties in the United States being subject to binding price ceilings? Select the two correct answers below

a shortage of apartments the quantity demanded of apartments will exceed the quantity supplied When a binding rent ceiling is instituted, this causes the price in the market for apartments to be below equilibrium. As a result, there will be more people looking for apartments than there will be landlords looking to rent out apartments. A shortage of apartments will result.

01 Microeconomics and macroeconomics are ______________________ on the overall subject of the economy.

complementary perspectives Explanation: Economics covers considerable ground. We can divide that ground into two parts: Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses. Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports. Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy.

02b As an economic wizard, you know that a bad recession will strike next year. Which one of the following industries should you choose to invest in to weather out the recession?

dollar stores Dollar stores are the safest investment. There is likely to be significant substitution from higher-end retail stores to dollar stores, because people switch to lower-priced purchases as incomes fall.

02b A(n) _______________ is a good for which demand falls as income rises, and demand rises as income falls.

inferior good An inferior good is defined as a good in which the quantity demanded falls as income rises, and in which quantity demanded rises as income falls. For example, lower-end food items, like Ramen noodles are inferior goods - when our income improves, we purchase less cheap foods like Ramen noodles and more restaurant meals.

01 Which description best fits the definition of opportunity cost?

the measure of cost by what is given up in exchange for what is obtained Economists use the term opportunity cost to indicate what one must give up to obtain what he or she desires. The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else.

02c Assuming a market is currently at the equilibrium price and quantity, when a price ceiling is set below the equilibrium price, ______________.

the quantity demanded will rise and the quantity supplied will fall, causing a shortage When a price ceiling is set below the equilibrium price, the quantity demanded will rise and the quantity supplied will fall, causing a shortage.

Economists call a simplified description of how two or more variables interact with each other a _______.

theory In economics, a theory is defined as a simplified description of how two or more variables interact with each other. Economic theories strive to solve real-world problems that are based on particular assumptions about human behavior.