Microeconomics CH: 1-4
Refer to the table below. Corey's opportunity cost of making of a pizza is delivering: Made (hour) Del(Hour cor 12 6 Pat 10 15
1/2 of a pizza (Corey has to give up 6 deliveries to make 12 pizzas, so his opportunity cost of making 1 pizza is 1/2 of a delivery.)
Suppose the most you would be willing to pay for a plane ticket home is $250. If you buy one for $175, then your economic surplus is:
$75 $250-$175= $75 (The economic surplus of taking an action is its benefit minus its cost.)
What might cause a demand function to shift to the right?
An increase in the price of a substitute. A substitute is a good for which demand will increase if the price of a related good increases.
What might cause Supply to shift from the Original Supply to the New Supply( to the right)? A. storm in South America wipes out the entire coffee crop. B.New technology reduces the amount of coffee beans necessary to make a good-tasting pot of coffee. C.A news report that coffee consumption greatly increases productivity. D.An increase in the price of tea.
B.New technology reduces the amount of coffee beans necessary to make a good-tasting pot of coffee. An improvement in technology will shift supply rightward.
The tendency of markets to automatically gravitate toward equilibrium is an application of which core principle?
The Incentive Principle (When buyers and sellers follow their private incentives, they will take actions that cause market prices and quantities to gravitate toward equilibrium.)
A movement along a demand curve from one price-quantity combination to another is called:
a change in quantity demanded. (A change in quantity demanded is a change along a demand curve; a change in demand is a shift in the entire curve)
Suppose you camped out in front of an electronics store to be one of the 200 lucky people able to purchase the latest gaming system. You bought the system for $350. Two weeks later you see that the same system can be sold on e-Bay for $600, so you sell your system. Your market role is as:
a consumer at the electronics store and as a seller on e-Bay. (A market consists of all economic agents who are potentially able to buy or sell a good at a given time or location.)
The slope of a production possibilities curve is ______ because ______.
negative; producing more of one good requires producing less of the other
A shortage occurs when:
quantity demanded exceeds quantity supplied.
If one fails to account for implicit costs in decision making, then applying the cost-benefit rule will be flawed because:
the costs will be understated. (The cost includes both implicit and out-of-pocket costs.)
When a nation reduces the barriers to international trade:
the total value of all goods and serviced produced by the nation rises. (While reducing barriers to trade increases total value of all goods and services produced by a nation, it does not guarantee that each individual citizen will be better off.)
To increase total revenue, firms with ______ demand should lower price, and firms with ______ demand should increase price.
elastic; inelastic unit; inelastic If demand is elastic, then a fall in price will increase total revenue (since the resulting percentage increase in quantity demanded will be comparatively large), and if demand is inelastic, then an increase in price will increase total revenue (since the resulting fall in quantity demand will be comparatively small).
If the demand for a good decreases as income decreases, it is a(n):
normal good (A normal good is one for which the demand curve shifts leftward when the incomes of buyers decrease.)
If a market is in equilibrium and demand increases while supply decreases, the change in the equilibrium price is ________ and the change in the equilibrium quantity is _________
positive; indeterminate An increase in demand and a decrease in supply both cause price to increase, but will have opposite effects on quantity
You notice that your grocery store always has day-old bakery products at a reduced price. Why might that be?
At the original price, quantity supplied was greater than quantity demanded. (If a supplier lowers its price it must be the case that there was excess supply at the original price. The supplier lowers its price in order to sell more of the item.)
Amy is thinking about going to the movies tonight. A movie ticket costs $15, and she'll have to cancel a $20 dog-sitting job that she would have been willing to do for free. The opportunity to Amy cost of going to the movies is:
$35 (Opportunity cost includes both implicit costs and explicit costs. If she goes to the movies, Amy will give up the opportunity to earn $20 plus the $15 cost of the ticket.)
You won a free ticket to see the latest Star Trek movie this Friday night (which you can costlessly resell for its face value of $15). Your favorite band is also performing on Friday and is your only alternative activity. Friday is your last chance to see either the movie or the band. Tickets to see your favorite band cost $30, and on any given day, you would be willing to pay as much as $50 for a ticket. Based on this information, what is your opportunity cost of going to see the Star Trek movie on Friday?
$35 (The opportunity cost of seeing the movie is the economic surplus you give up by not seeing your favorite band ($50 - $30 = $20) plus the $15 you could have received by selling your movie ticket.)
Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending Elite U is:
$70,000
If the quantity demanded of a good is Q when the price for the good is P, the price elasticity of demand for that good at that point is
(P/Q) × (1/slope) The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope).
A demand curve that is drawn as a vertical line has a price elasticity of demand equal to:
0 The price elasticity of demand is equal to zero at every point along a vertical demand curve.
When the price of hot dogs is $1.50 each, 500 hot dogs are sold every day. After the price falls to $1.35 each, 510 hot dogs are sold every day. At the original price, what is the price elasticity of demand for hot dogs?
0.2 The percentage change in quantity demanded is 0.02 (= 10/500) and the percentage change in price is 0.1 (= $0.15/$1.50), so elasticity is 0.02/0.1 = 0.2.
If the absolute value of slope of the demand curve is 2.5, price is $6 per unit, and the quantity demanded is 8 units, then the price elasticity of demand is:
0.3 The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope). Here, (6/8) × (1/2.5) = 0.3.
The figure below shows the production possibilities curve for the island of Genovia: The opportunity cost of producing one ton of agricultural products in Genovia is:
1/50 of a car This country would have to give up 1,000 cars to gain 50,000 tons of agricultural products. Thus, the opportunity cost of one ton of agricultural products is 1,000/50,000 = 1/50 of a car.
Frank owns an apple farm and plans to spend 4 hours today picking apples. The number of apples he can pick per hour depends on the total number of hours he spends working in the east orchard. HOURS Apples per hour 1 40 2 32 3 25 What is the marginal benefit to Frank of the 2nd hour he spends picking in the east orchard?
24 Apples (If Frank spends 1 hour in the east orchard he can pick 40 apples. If he spends 2 hours in the east orchard, he can pick 64 (= 32 × 2) apples. Thus, the marginal benefit of the 2nd hour he spends picking in the east orchard is 24 (= 64 - 40).)
According to the Cost-Benefit Principle, how many units of this activity should be carried out? Units (activity) TC TB 0 $0 $0 1 $2 $12 2 $6 $22 3 $12 $30 4 $20 $36 5 $30 $40 6 $42 $42 7 $56 $43
3 (Three units of this activity provide a net benefit (total benefit - total cost) of $18, which is the highest of all the options given. Also, note that marginal benefit is greater than marginal cost for the first three units, but marginal benefit is less than marginal cost for units 4, 5, 6 and 7.)
If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to:
3 The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here +3/-1 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value.
f 20% increase in the price of a good leads to a 60% decrease in the quantity demanded, then what is the price elasticity of demand?
3 The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here -60/20 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value.
If the price elasticity of demand for pineapples is 0.75, then a 4% increase in the price of pineapples will lead to a:
3% decrease in the quantity of pineapples demanded. The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. So, if the price elasticity of demand is 0.75 and price increases by 4 percent, then quantity demanded must fall by 3 (= 0.75 × 4) percent. Recall that price and quantity demanded move in opposite directions
Martha's opportunity cost of making of a pie is: Time 4 pie 4 cake M 60min 80min J 50min 60min
3/4 of a cake (In the time it takes Martha to make a pie, she could have made 3/4 (= 60/80) of a cake.)
If the price elasticity of demand for cigarettes is 0.55, and the price of cigarettes increases by 10 percent, then the quantity of cigarettes demanded will fall by
5.5% The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. So, if the price elasticity of demand is 0.55, and price increases by 10 percent, then quantity demanded must decrease by 5.5 (= 10 × 0.55) percent.
Suppose that the equilibrium price of rice falls and the equilibrium quantity falls. Which of the following best fits the observed data?
A decrease in demand with supply constant. When demand shifts leftward both price and quantity will fall.
Suppose that the equilibrium price of T-shirts increases and the equilibrium quantity falls. Which of the following best fits the observed data?
A decrease in supply with demand constant. When supply shifts leftward price rises and quantity falls.
Which of the following is NOT a characteristic of a market in equilibrium? A.Excess supply is zero. B.All consumers are able to purchase an amount equal to their quantity demanded. C. Excess demand is zero. D. The equilibrium price is stable, i.e., there is no pressure for it to change.
B.All consumers are able to purchase an amount equal to their quantity demanded. (When a market is in equilibrium there is neither excess demand nor excess supply. Therefore, there is no pressure for price to change. However, some consumers will be either unwilling or unable to purchase as much of the item as they would like.)
Which of the following is NOT a reason why there are gains to specialization? A. It eliminates many of the costs of switching from one task to another. B. It further improves skills through experience and practice. C. It increases the amount productive resources in the economy. D. It allows individuals to concentrate on the activities in which they have a comparative advantage.
C. It increases the amount productive resources in the economy. (Specialization does not increase the amount of productive resources; it simply enables those resources to be used more efficiently.)
Which of the following is likely to have the highest price elasticity of demand? A.shoes B.running shoes C.Nike running shoes D.The price elasticity of demand will be the same for all of the answers listed.
C.Nike running shoes There are more substitutes for a particular brand of running shoes than for running shoes in general. And there are more substitutes for running shoes than for shoes in general. Thus, of the goods listed, the price elasticity of demand will be the highest for Nike running shoes.
Refer to the table below. ______ has the comparative advantage in making pizza, and ______ has the comparative advantage in delivering pizza. Made (hour) Del(Hour cor 12 6 Pat 10 15
Corey; Pat (Corey gives up fewer deliveries to make a pizza, and Pat gives up making fewer pizzas to deliver a pizza.)
When a market is in equilibrium there is neither excess demand nor excess supply. Therefore, there is no pressure for price to change. However, some consumers will be either unwilling or unable to purchase as much of the item as they would like.
Either excess supply or excess demand.
At the midpoint of a straight-line demand curve, the price elasticity of demand is:
Equal to 1 Along a straight-line demand curve, the price elasticity of demand at the midpoint is always equal to one.
Suppose Colin brews beer and makes cheese. If Colin can increase his production of beer without decreasing his production of cheese, then he is producing at an:
Inefficient point (inefficient point is any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of some other good.)
Suppose a 10% increase in the price of aspirin leads to a 5% decrease in the quantity demanded of aspirin. The demand for aspirin, therefore, is
Inelastic If the percentage change in quantity demanded is less than the percentage change in price, then the price elasticity of demand is less than one, implying that demand is inelastic.
If Jane can produce 3 pairs of shoes per hour, while Bob can produce 2, then ______ has a(n) ______ advantage in producing shoes.
Jane; absolute (Absolute advantage means being able to produce more in a given time period.)
Demand tends to be ______ in the short run than in the long run.
Less elastic When consumers have more time to adapt to a price change, the change in quantity demanded will be higher, implying that the price elasticity of demand will be higher in the long run than in the short run.
Refer to the table above. ______ has the comparative advantage in making pies and ______ the comparative advantage in making cakes. Time 4 pie 4 cake M 60min 80min J 50min 60min
Martha; Julia (Martha's opportunity cost of making a pie (3/4 of a cake) is less than Julia's (5/6 of a cake), and Julia's opportunity cost of making a cake (6/5 of a pie) is less than Martha's (4/3 of a pie).)
Moe has a big exam tomorrow. He considered studying this evening, but decided to hang out with Curly instead. If neither activity involves any explicit costs, and Moe always chooses rationally, it must be true that:
Moe gets more benefit from spending time with Curly than from studying. (then his benefit of spending time with Curly must outweigh his cost. Given that neither activity involves any explicit costs, the opportunity cost of spending time with Curly equals the benefit of studying. Thus, if Moe rationally chooses to spend time with Curly, it must be the case that his benefit from spending time with Curly is greater than his benefit from studying.)
According to the table, Martha has the absolute advantage in: Time 4 pie 4 cake M 60min 80min J 50min 60min
Neither pies nor cakes. (It takes Martha longer to make both pies and cakes than Julia.)
If the demand curve for open-heart surgery is vertical for people with serious heart conditions, then the demand for open-heart surgery is ______ with respect to price.
Perfectly inelastic Vertical demand curves are said to be perfectly inelastic.
Refer to the table below. Based on their comparative advantage, Martha should specialize in _______ while Julia should specialize in _______. Time 4 pie 4 cake M 60min 80min J 50min 60min
Pies; cakes (Martha has the comparative advantage in pies, and Julia has the comparative advantage in cakes. To see this note that Martha's opportunity cost of making a pie (3/4 of a cake) is less than Julia's (5/6 of a cake), and Julia's opportunity cost of making a cake (6/5 of a pie) is less than Martha's (4/3 of a pie.)
A graph that illustrates the maximum amount of one good that can be produced for every possible level of production of the other good is called a(n):
Production possibilities curve.
If the elasticity of demand for the latest American Idol album is 1.4, this means
a 5% increase in the price leads to a 7% decrease in quantity demanded. The price elasticity of demand is given by the absolute value of the percentage change in quantity demanded divided by the percentage change in price. Here, |-7/5| = 1.4.
"As the price of personal computers continues to fall, demand increases." This headline is inaccurate because:
a falling price for personal computers increases quantity demanded, not demand. (A change in price leads to a change in quantity demanded because it is a change along a demand curve; a change in demand is a shift in the entire curve.)
Chris has a one-hour break between classes every Wednesday. Chris can either stay at the library and study or go to the gym and work out. The decision Chris must make is:
an economic problem because Chris has only one hour, and engaging in one activity means giving up the other.
Refer to the table above. Relative to column A, it appears that column B represents ______. $/unit A(unit/y) B $20 100 110 $30 85 95 $40 70 80 $50 55 65 $60 40 50
an increase in demand Units are decreasing as price rises, so these numbers represent demand. Column B is an increase in quantity at each price, or an increase in demand.
Whether or not a good can be classified as a complement depends on whether;
an increase in demand for one good follows a decrease in the price of the other. (Whether a good is a complement is determined by the reaction of market demand for one good to a change in the price of the other.)
Assume consumers eat either rice or pasta for dinner every night. If the price of rice increases, in the pasta market one would expect to see:
an increase in the demand for pasta.
When the price of an item increases, buyers tend to purchase less of that item:
because of both the substitution and the income effects. (Both the substitution effect and the income effect operate to reduce the quantity demanded when price increases)
As one moves down along a linear demand curve (i.e., from high price, low quantity pairs to low price, high quantity pairs), demand:
becomes less elastic. Consider the formula for the price elasticity of demand: (P/Q) × (1/slope). As you move down along a linear demand curve, slope stays the same but (P/Q) falls, implying that demand is becoming less elastic.
Refer to the figure above. The equilibrium price in this market is: D S $/unit A(unit/y) B $20 100 40 $30 95 50 $40 80 60 $50 65 70 $60 50 80
between $40 and $50. At $40 there is excess demand and at $50 there is excess supply, so the equilibrium price must lie between those two prices.
Suppose you notice that more and more people are driving gas-guzzling cars. Since you drive an economy car, their increased demand for gas:
causes the price you pay for gas to increase. (An increase in demand will cause the equilibrium price to rise.)
When the price of a good is below its equilibrium value:
consumers will bid the price up. (Consumers whose reservation price exceeds the (low) disequilibrium price have an incentive to offer greater than the disequilibrium price to obtain the good.)
If two products are substitutes, then the:
cross-price elasticity of demand between them will be positive. If two goods are substitutes, then if the price of one increases, the quantity demanded of the other will increase, implying that the cross-price elasticity of demand between the two goods is positive
The responsiveness of the quantity demanded of one good to a change in the price of a different good is measured by the:
cross-price elasticity of demand. The cross-price elasticity of demand is the percentage by which the quantity demanded of one good changes in response to a one percent change in the price of another good.
If a nation restricts imports, it will:
decrease the total value of goods and services produced in that nation. (Restricting imports lowers the total value of goods and services produced by a nation, but individual citizens could be better or worse off.)
Suppose that the extra cost to Tim of a third glass of soda is zero because he's at a restaurant that gives free refills. According to the Cost-Benefit Principle Tim should:
drink a third glass of soda if the extra benefit of doing so is positive.
The demand for a good is elastic if the price elasticity of demand is:
greater than one If the percentage change in quantity demanded is greater than the percentage change in price, then the price elasticity of demand will be greater than one, and demand is said to be elastic with respect to price.
Shelly purchases a leather purse for $400. One can infer that:
her reservation price was at least $400. (We assume that buyers will purchase an item if its price is less than or equal to the buyer's reservation price.)
You can spend $5 for lunch and you would like to have two double cheeseburgers. When you get to the restaurant, you find out the price for double cheeseburger has increased from $2.50 to $2.99. You decide to have just one double cheeseburger for lunch. This is best described as a(n):
income effect. (You can no longer afford your desired lunch, and so you purchase less of the good.)
If both supply and demand decrease simultaneously, the new equilibrium price is ___________ and the new equilibrium quantity is _________________.
indeterminate; lower A decrease in demand and a decrease in supply both cause quantity to decrease, but will have opposite effects on price.
The benefits of specialization can be used to explain why:
individuals and nations benefit from trade. (Specialization allows two parties with different opportunity costs to benefit from trade because by specializing they can increase their combined output.
If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is:
inelastic If the percentage change in quantity is less than the percentage change in price, then the price elasticity of demand will be less than one in absolute value, implying that demand is inelastic.
If the San Diego Opera decreases the price of their opera tickets and their total revenue falls, then this suggests that, at the original price, the demand for tickets to the San Diego Opera was:
inelastic Total revenue decreases when price decreases if demand is inelastic with respect to price.
If demand is ______ with respect to price, a price increase will ______ total revenue.
inelastic; increase If an increase in price leads to a relative small percentage drop in quantity demanded (that is, if demand is inelastic), then total revenue will increase
The Incentive Principle states that a person:
is more likely to take an action if its benefit increases. (The Incentive Principle states that a person is more likely to take an action if its benefit rises, and less likely to do something if its cost rises.)
A country is most likely to have a comparative advantage in the production of cars if:
it has a relative abundance in the natural resources needed to produce cars.
The Cost-Benefit Principle indicates that an action should be taken if:
its extra benefit is greater than or equal to its extra cost.
Jeans in general have fewer close substitutes than a specific brand of jeans. Therefore, the demand for jeans in general will be _______ than the demand for a specific brand of jeans.
less elastic Goods with more substitutes have a greater price elasticity of demand because consumers can readily switch to or away from them if their price changes.
You would expect the price elasticity of demand for transportation generally to be:
less than price elasticity of the demand for bus tickets. There are more substitutes for bus tickets than for transportation in general, so the price elasticity of demand for transportation will be less than the price elasticity of demand for bus tickets.
A decrease in the demand for bananas with no concurrent change in the supply of bananas will result in a ________ equilibrium price and a(n) ________ equilibrium quantity.
lower; lower A decrease in demand changes equilibrium to a point that corresponds to a lower price and a lower quantity.
A firm that produces a good with many substitutes will most likely find that:
lowering its price will increase total revenue. The demand for a good with many close substitutes is likely to be elastic with respect to price. If demand is elastic with respect to price, then total revenue will rise as price falls.
When a U.S. firm engages in outsourcing, it benefits ______ and harms ______.
the U.S. consumers of the firm's products; the firm's U.S. employees. (Outsourcing benefits U.S. consumers, who enjoy lower prices, but harms the firm's domestic workers, who may lose their jobs.)
When a market is not in equilibrium:
the economic motives of sellers and buyers will move the market to its equilibrium. (A feature of private (unregulated) markets is that individual incentives will cause prices and quantities to automatically gravitate toward equilibrium.)
Alex received a four-year scholarship to State U. that covered tuition and fees, room and board, and books and supplies. If Alex becomes a full-time student, then:
the opportunity cost of attending State U. includes the money Alex could have earned working for four years. (Even though Alex has no out-of-pocket costs, by attending State U Alex would be giving up on 4 years worth of earnings.)
A seller's reservation price is generally equal to:
the seller's opportunity cost. (At higher prices, more sellers find that the price they can sell an item for is greater than their opportunity cost to produce that item.)
As coffee becomes more expensive, Joe starts drinking tea, and therefore quantity demanded for coffee decreases. This is called:
the substitution effect. (When one good becomes more expensive, buyers switch to substitutes.)
Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than spending an equal amount of money to go to a movie. Her opportunity cost of going to the beach is:
the value she places on seeing the movie. (Opportunity cost is the value that must be foregone to undertake an activity. By going to the beach, Jen gives up the value she places on seeing the movie. We don't include the $12 she spends at the beach because she also would have spent that money at the movies.)
Supply curves are generally _______ sloping because _______________.
upward; of the principle of increasing opportunity costs. (At higher prices, more sellers find that the price they can sell an item for is greater than their opportunity cost to produce that item.)
Janie must choose to either mow the lawn or wash clothes. If she mows the lawn, she will earn $30, and if she washes clothes, she will earn $45. She dislikes both tasks equally and they both take the same amount of time. Janie will therefore choose to ______ because it generates a ______ economic surplus.
wash clothes; bigger (Because both activities have the same cost (Janie's time and her dislike of the task), the activity with the greatest benefit will yield the greatest economic surplus.)
The Scarcity Principle states that
with limited resources, having more of one thing means having less of another.
