Microeconomics Chapters 1-6
Examples of command economies are
Cuba and North Korea
On the basis of the information, and assuming trade occurs between the three states, we can expect Texas has surplus lettuce wants apples Michigan has surplus autos wants lettuce Washington has surplus apples wants autos
Washington to exchange apples with Texas and receive money in return.
Economic profits and losses
are essential to the reallocation of resources from less desired to more desired goods.
The price elasticity of demand coefficient measures
buyer responsiveness to price changes.
The demand for a product is inelastic with respect to price if
consumers are largely unresponsive to a per unit price change.
Answer the question on the basis of the following five data sets, wherein it is assumed that the variable shown on the left is the independent variable and the one on the right is the dependent variable. Assume in graphing these data that the independent variable is shown on the horizontal axis and the dependent variable on the vertical axis. Refer to the data sets. For which data set(s) is the vertical intercept zero? (3) 0 -15 20 -25 40 -35 (4) 100 40 80 50 60 60 (5) 0 0 5 10 10 20
data set 5
Even though local newspapers are very inexpensive, people rarely buy more than one of them each day. This fact
implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost.
A demand curve
indicates the quantity demanded at each price in a series of prices.
The equation for the demand curve in the diagram shown.
is P = 35 − .5Q.
A market
is an institution that brings together buyers and sellers.
A public good
is available to all and cannot be denied to anyone.
Public goods are those for which there
is nonrivalry and nonexcludability.
The use of money contributes to economic efficiency because
it promotes specialization by overcoming the problems with barter.
The French term "laissez-faire" means
let it be
One reason that the quantity demanded of a good increases when its price falls is that the
lower price increases the real incomes of buyers, enabling them to buy more.
According to the marginal-cost-marginal-benefit rule,
the optimal project size is the one for which MB = MC.
Answer the question based on the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. If this good were a private good instead of a public one, the total quantity demanded at a $3 market price would be
4 units
Refer to the diagram. Between prices of $5.70 and $6.30,
D1 is more elastic than D2
Refer to the graph above. Which demand curve is perfectly inelastic?
D5
The following data are for a series of increasingly extensive flood-control projects. Total Cost per Year Total Benefit per Year Plan A = Levee $ 10,000 $ 16,000 Plan B = Small Reservoir 24,000 36,000 Plan C = Medium Reservoir 44,000 52,000 Plan D = Large Reservoir 72,000 64,000 On the basis of cost-benefit analysis, government should undertake
Plan B
What does "there is no such thing as a free lunch" mean in economics?
Scarce resources are used up to provide "freebies" and giveaways.
In interpreting the Ed value as either elastic or inelastic, we look at the
absolute value of the Ed coefficient.
A person should consume more of something when its marginal
benefit exceeds its marginal cost.
Economics is a social science that studies how individuals, institutions, and society may
best use resources to maximize satisfaction of economic wants.
A perfectly inelastic demand schedule
can be represented by a line parallel to the vertical axis.
Which of the following is a distinguishing feature of a command system?
central planning
A relationship illustrated by an upward-sloping graph means that a(n)
decrease in the value of one variable causes the value of the other to decrease
Answer the question on the basis of the following demand schedule. Price: $ 6 5 4 3 2 1 Quantity Demanded: 1 2 3 4 5 6 The price elasticity of demand is unity
in the $4-$3 price range only.
Answer the question on the basis of the following demand schedule. Price: $ 6 5 4 3 2 1 Quantity Demanded: 1 2 3 4 5 6 The price elasticity of demand is relatively elastic
in the $6-$4 price range.
If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will
increase the amount demanded by more than 10 percent.
An increase in consumer desire for strawberries is most likely to
increase the number of strawberry pickers needed by farmers
Alex sees that his neighbors' lawns all need mowing. He offers to provide the service in exchange for a wage of $20 per hour. Some neighbors accept Alex's offer and others refuse. Economists would describe Alex's behavior as
rational self-interest because he is attempting to increase his own income by identifying and satisfying someone else's wants.
Specialization in production is important primarily because it
results in greater total output.
Which one of the following expressions best states the idea of opportunity cost?
"There is no such thing as a free lunch."
Refer to the graphs which show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. The collective willingness to pay for the first unit of this public good is
$18
Alex, Kara, and Susie are the only three people in a community. Alex is willing to pay $40 for the third unit of a public good; Kara is willing to pay $25. If the marginal cost of producing the third unit is $100, what is the minimum amount that Susie must be willing to pay for it to be efficient for government to produce the third unit?
$35
In which price range of the accompanying demand schedule is demand elastic? Price: $ 4 3 2 1 Quantity Demanded: 2 4 6 8
$4-$3
Answer the question based on the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. If the marginal cost of producing this good at the optimal quantity is $4, the optimal quantity must be
3 units.
Pham can work as many or as few hours as she wants at the college bookstore for $12 per hour. But due to her hectic schedule, she has just 15 hours per week that she can spend working at either the bookstore or multiple other potential jobs. One potential job, at a café, will pay her $15 per hour for up to 6 hours per week. She has another job offer at a garage that will pay her $13 an hour for up to 5 hours per week. And she has a potential job at a daycare center that will pay her $11.50 per hour for as many hours as she can work. Assume that the travel time between job locations is negligible. If her goal is to maximize the amount of money she can make each week, how many hours will she work at the bookstore?
4 hours Pham will choose to work at the bookstore as long as the wage rate at the bookstore exceeds her other opportunities. However, if another job offers a higher wage rate, she will choose employment there. She will work until her total time allotment (for work) is exhausted.She will choose to work at the café for the full 6 hours because the wage rate at the café is $15 per hour, which is greater than the wage rate at the bookstore of $12. This leaves her with 9 hours of work time remaining. Next, she will choose to work at the garage for the full 5 hours because the wage rate here is $13, which again is greater than the bookstore wage rate of $12. After this decision, she only has 4 hours of work time remaining. She will choose to work these last 4 hours at the bookstore because the bookstore wage rate of $12 exceeds the daycare center wage rate of $11.50.
Suppose that you are on a desert island and possess exactly 20 coconuts. Your neighbor, Friday, is a fisherman, and he is willing to trade 2 fish for every 1 coconut that you are willing to give him. Another neighbor, Kwame, is also a fisherman, and he is willing to trade 3 fish for every 1 coconut. a. On the diagram below, draw budget lines for trading with Friday and for trading with Kwame. b. What is the slope of the budget line from trading with Friday (coconuts for fish)? c. What is the slope of the budget line from trading with Kwame (coconuts for fish)? d. Which budget line features a larger set of attainable combinations of coconuts and fish? e. If you are going to trade coconuts for fish, would you rather trade with Friday or Kwame?
A. 20 Coconuts blue to 60 Fish (click Kwame point on Fish 60 then Coconuts 20) 20 Coconuts purple to 40 Fish (click Friday point on Fish 40 then Coconuts 20) B. -0.5 C. -0.3 D. The budget line from trading with Kwame E. Kwame
Which of the following statements is correct?
An increase in the price of C will decrease the demand for complementary product D.
Command systems are also known as
Communism
In the past few years, the demand for donuts has greatly increased. This increase in demand might best be explained by
a change in buyer tastes.
Which of the following would not shift the demand curve for beef?
a reduction in the price of cattle feed
a. Suppose that businesses buy a total of $200 billion of the four resources (labor, land, capital, and entrepreneurial ability) from households. If households receive $100 billion in wages, $30 billion in rent, and $40 billion in interest, how much are households paid for providing entrepreneurial ability? b. If households spend $105 billion on goods and $95 billion on services, how much in revenues do businesses receive in the product market?
a. 30 billion Explanation: $200 billion in total factor payments - $100 billion in wages - $30 billion in rent - $40 billion in interest. b. 200 billion Explanation: $105 billion + $95 billion, because household expenditures equal business revenues.
Potatoes cost Janice $1 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. Suppose she feels that the first pound of potatoes is worth $1.50, the second pound is worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth $0.30 per pount.
a. How many pounds of potatoes will she purchase? 3 pounds of potatoes b. How many pounds would she purchase if she only had $2 to spend? 2 pounds of potatoes Explanation: a. Janice will purchase potatoes until the value of potatoes is less than the cost of potatoes or until her income has been exhausted. For example, assume Janice has $5.00 to spend on potatoes or other items and the cost of a pound of potatoes is $1. Now assume the first pound of potatoes is worth $1.50 to Janice. She will purchase this pound of potatoes, since the value of the pound of potatoes ($1.50) is greater than the cost ($1). If the second pound is worth $1.14 and the third pound is worth $1.05, then Janice will purchase these as well, since the value exceeds the cost of $1. If all remaining pounds are worth $0.30, then Janice will not purchase these because the value is less than the cost. Thus, Janice will purchase 3 pounds of potatoes at a total cost of $3.00. b. Now assume Janice only has $2.00 to spend on potatoes. She will purchase the first pound because it is worth $1.50 to her and it only costs $1. She will purchase the second pound because it is worth $1.14. She has now spent her entire income on potatoes. She would like to purchase the third pound because the value of this pound of potatoes is $1.05, but she does not have the income to make this purchase. Thus, Janice will purchase 2 pounds of potatoes at a total cost of $2.00.
Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex are shown in the table below. a. Fill in the table (gray-shaded cells) for the missing values. b. Which buyer demands the least at a price of $5? The most at a price of $7? c. Which buyer's quantity demanded increases the most when the price is lowered from $7 to $6? d. Which direction would the market demand curve shift if Tex withdrew from the market?What is Dex doubled his purchase at each possible price? e. Suppose that at a price of $6, the total quantity demanded increases from 19 to 29. Is this a "change in the quantity demanded" or a "change in demand"?
a. Row 1: total quantity demanded: 5 Row 2: Rex: 7 invididual Q Dem Row 3: Tex: 5 individual Q Dem Row 4: Dex: 4 individual Q Dem Row 5:total quantity demanded: 33 b. Dex, Rex c. Rex d. To the left; to the right e. Change in demand
Suppose Natasha currently makes $50,000 per year working as a manager at a cable TV company. She then develops two possible entrepreneurial business opportunities. In one, she will quit her job to start an organic soap company. In the other, she will try to develop an Internet-based competitor to the local cable company. For the soap-making opportunity, she anticipates annual revenue of $465,000. She estimates the costs for the necessary land, labor, and capital to be $395,000 per year. For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,250,000 per year and revenues of $3,275,000 per year.
a. Should she quit her current job to become an entrepreneur? Yes, she should quit her job to become an entrepreneur b. If she does quit her job, which opportunity would she pursue? She would pursue the soap business.
With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources for producing those loaves is 5 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. Assume the firm can sell these 400 loaves at $2 per unit
a. What is the firm's total revenue? To calculate total revenue multiply the selling price by the number of units sold. Total revenue equals $2 (price) multiplied by 400 (loaves of bread sold). So, total revenue equals answer: $800 b. What is its total cost? To calculate total cost multiply each input usage (number of units employed) by the price of the input and then add these values together. Total cost equals 5 × $40 (cost of labor) + 7 × $60 (cost of land) + 2 × $60 (cost of capital) + 1× $20 (cost of entrepreneurial ability) answer: $760 c. Calculate the amount of economic profit or loss. The profit/loss for this firm equals total revenue minus total cost. Here, profit/loss equals $800 (total revenue) minus $840 (total cost) = $-40. If total revenue is greater than total cost, the firm will have a profit; but if total cost is greater than total revenue, the firm will have a loss. answer: profit, $40 d. Will it continue to produce banana bread? answer: yes e. If this firm's situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good? answer: toward
Which of the following will cause the demand curve for product A to shift to the left?
an increase in money income if A is an inferior good
An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that
bicycles are normal goods.
Among the following examples, the one that best illustrates a public good is the
bike paths around a city or town.
Cost-benefit analysis attempts to
compare the benefits and costs associated with any economic project or activity.
The main mechanism that regulates the market system is
competition
Blu-ray players and Blu-ray discs are
complementary goods.
If Z is an inferior good, an increase in money income will shift the
demand curve for Z to the left.
Demand-side market failures occur when
demand curves don't reflect consumers' full willingness to pay for a good or service
For a linear demand curve,
demand is elastic at relatively high prices.
If the price of hand calculators falls from $10 to $9 and, as a result, the quantity demanded increases from 100 to 125, then
demand is price elastic.
If many people in a community get flu shots, the whole community benefits, including those who did not get flu shots. Therefore, not enough people may decide to get the shots. This is one illustration of
demand-side market failure.
Because successive units of a good produce less and less additional satisfaction, the price must fall to encourage a buyer to purchase more units of the good. This statement is most consistent with which explanation for the law of demand?
diminishing marginal utility
The relationship between quantity supplied and price is _____, and the relationship between quantity demanded and price is
direct; inverse
In a market economy, a significant change in consumers' desire for product X will
do all the things mentioned in the other answers.
The price elasticity of demand of a straight-line demand curve is
elastic in high-price ranges and inelastic in low-price ranges.
Property rights are important because they
encourage cooperation by improving the chances of mutually agreeable transactions.
Barter
entails the exchange of goods for goods.
If competitive industry Z is making substantial economic profit, output will
expand in industry Z, as more resources will move to that industry
Most demand curves are relatively elastic in the upper-left portion because the original price
from which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small.
Which of the following is not a typical characteristic of a market system?
government ownership of most property resources
The term "laissez-faire" suggests that
government should not interfere with the operation of the economy.
If demand for a product is elastic, the value of the price elasticity coefficient is
greater than one.
Unlike a private good, a public good
has benefits available to all, including nonpayers.
A recurring theme in economics is that people
have unlimited economic wants but limited resources.
Purposeful behavior suggests that
individuals may make different choices because of different desired outcomes.
When the price of a product increases by 15 percent, the quantity demanded decreases by 10 percent. We can therefore conclude that the demand for this product is
inelastic.
When economists say that people act rationally in their self-interest, they mean that individuals
look for and pursue opportunities to increase their utility
At the optimal quantity of a public good,
marginal benefit equals marginal cost.
Economics involves marginal analysis because
most decisions involve changes from the present situation
Toll-free roads sometimes get congested, such as during rush-hour traffic. During those times, we would say that these roads are
nonexcludable and rival.
The two main characteristics of a public good are
nonrivalry and nonexcludability.
The demand for most products varies directly with changes in consumer incomes. Such products are known as
normal goods.
The notion of "purposeful behavior" in the economic perspective suggests that
one person's choice may differ from another's if their circumstances and information different
When a state government chooses to build more roads, the resources used are no longer available for public education programs. This dilemma illustrates the concept of
opportunity cost
The price-elasticity of demand coefficient, Ed, is measured in terms of
percentage change in price and percentage change in quantity demanded.
A demand curve that is parallel to the horizontal axis is
perfectly elastic.
If quantity demanded is completely unresponsive to price changes, demand is
perfectly inelastic.
Specialization in production is economically beneficial primarily because it
permits the production of a larger output with fixed amounts of resources.
For economists, the word "utility" means
pleasure or satisfaction
The law of demand states that, other things equal,
price and quantity demanded are inversely related
The demand curve shows the relationship between
price and quantity demanded.
Copyrights and trademarks are examples of
property rights
Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services they purchase. This is a reflection of
purposeful behavior
What are the two characteristics that differentiate private goods from public goods?
rivalry and excludability
If the price of product L increases, the demand curve for close-substitute product J will
shift to the right.
Opportunity costs exist because
the decision to engage in one activity means forgoing some other activity.
Other things equal, which of the following might shift the demand curve for gasoline to the left?
the development of a low-cost electric automobile
Steve went to his favorite hamburger restaurant with $3, expecting to buy a $2 hamburger and a $1 soda. When he arrived, he discovered that hamburgers were on sale for $1 each, so Steve bought two hamburgers and a soda. Steve's response to the decrease in the price of hamburgers is best explained by
the income effect.
The price-elasticity of demand is always negative because of
the law of demand.
Answer the question based on the following information for four highway programs of increasing scope. All figures are in millions of dollars. Program Total Cost Total Benefit A $2 $ 9 B 6 16 C 12 21 D 20 23 The data indicate that
the marginal cost and marginal benefit of Program A are $2 and $9, respectively.
When the price of a product rises, consumers with a given money income shift their purchases to other products whose prices are now relatively lower. This statement describes
the substitution effect.
Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the third unit of a public good. Also, assume that the marginal cost of the third unit is $17. We can conclude that
the third unit should be produced.
The opportunity cost of doing or getting something is defined as
the value of the best alternative that is given up in order to do or get something.
Which of the following characteristics is least unique to a market system?
the widespread use of money
Competition means that
there are independently-acting buyers and sellers in each market.
Nonexcludability describes a condition where
there is no effective way to keep people from using a good once it comes into being.Correct
Which of the following most closely relates to the idea of opportunity costs?
trade-offs
Refer to the diagram. The combination of computers and bicycles shown by point G is
unattainable given currently available resources and technology.