Microeconomics Exam I

The marginal opportunity cost of the first unit of tanks is

50 units of autos. To find the total opportunity cost of producing "nth" unit of tanks (e.g. first), subtract the number of autos corresponding with the production alternative for the number of tanks produced from the number of autos produced at the previous alternative. The marginal opportunity cost is 50 (= 1,000 - 950).

b. What is the total surplus if Barb buys a unit from Courtney?

9 If Barb buys a unit from Courtney, then the economic surplus equals $9 (= $16 - $7).

If the number of buyers decreases, the demand for shoes will decrease This will cause the equilibrium price to decrease and the equilibrium quantity to decrease

A change in the number of buyers is a change in a non-price determinant of demand. This determinant has a direct relationship with the demand for the good—an increase in demand is shown by a shift to the right, and a decrease in demand is shown by a shift to the left. Because demand is the only thing changing here, we can see that a shift in demand has a direct relationship with both the equilibrium quantity and price.

A Venezuelan-style economic collapse would be less likely in a mixed economy like the United States because

V = corruption is less likely when economic power is more diffused X = inflation is always low in a mixed economy X = mixed economies like the US have more equal distribution of income V = private industry has strong incentives to produce efficiently An economic collapse would be less likely in the United States because businesses have a large degree of autonomy over what to produce. Also government has less power to control industry, which reduces the likelihood of government officials harming production by engaging in corruption or by making large-scale poor decisions. In addition, producers have incentives to produce efficiently because that boosts their profits.

Assume the price of product Y (the quantity of which is on the vertical axis) is $10 and the price of product X (the quantity of which is on the horizontal axis) is $30. Also assume that money income is $90. The absolute value of the slope of the resulting budget line is

3 The slope of the budget line is found by dividing the price of the good shown on the horizontal axis ($30) by the price of the good shown on the vertical axis ($10).

An advantage of using capital in the production process is that it

improves efficiency, increases output, and provides for growth. Capital goods enable producers to operate more efficiently and to produce more output. Typically when capital is combined with labor, labor becomes more productive and more valuable.

Refer to the diagram. The concept of opportunity cost is best represented by the

move from A on PP1 to C on PP1. The concept of opportunity cost refers to the trade-off of one good that must be made in order to obtain more of another, assuming fixed resources and technology. Visually this is represented by movement along a stable production possibilities curve. Changes involving moving to another curve would mean that available resources and technology had changed, potentially meaning that more of a particular good could be obtained without facing the tradeoff of sacrificing another.

The market system depends on private property and the protection of property rights to

provide an incentive to maintain the property and allow for the orderly transfer of property ownership. The ownership of private property provides an incentive to maintain and use the property to earn a private return. Ownership of private property, along with the protection of property rights, encourages investment, innovation, and therefore economic growth. Protection of private property rights facilitates the orderly exchange of property and property rights.

Consider the statement: "We want money only to part with it." When people express a desire to have money, they really want

the goods and services that money can buy. Money itself has value only in relation to the resources, goods, and services that can be obtained with it. When people say that they want money, they really mean that they want the things that money can buy. In this sense, money imparts value only when someone parts with it.

When an economy relies on specialization,

trade enables individuals to obtain the goods in which they do not have a specialization. On a regional basis, each region will produce those products for which it is best suited. By specializing in their comparative advantage, each region or set of human and material resources will be used to maximize efficiency. When resources are specialized, exchange is necessary to obtain the goods and services one needs. Markets facilitate the exchange of goods within a country or region and across countries and regions.

Camille is at the candy store with Grandma Mary, who offers to buy her $10 worth of candy. If lollipops are $2 each and candy bars are $3 each, what combination of candy can Camille's Grandma Mary buy her?

two lollipops and two candy bars The amount of Grandma Mary offers to spend represents Camille's income. The combination that is attainable is one where the combined expenditure is less than or equal to the income. The total expenditure (E) for each combination of lollipops (L) and candy bars (C) is found using the following formula: E = PLL + PCC, where PL and PC are the prices of lollipops and candy bars, respectively.

Given the following diagram, indicate whether the specified changes below represent a change in supply or a change in the quantity supplied. a) A change from point A to point B: b) A change from point A to point C:

a) A change in the quantity supplied b) A change in supply The reverse of any or all of the above changes in the determinants of supply will cause a decrease in supply and will be shown as a shift of the supply curve to the left. Less will now be supplied at any given price. Alternatively expressed, any given amount will now be supplied at a higher price.

A production possibilities table for DVDs and computers is shown below. What is the opportunity cost of computers when moving from point B to point C?

18 DVDs Point B to point C: 65 − 47 = 18

c. Assume that we are back to talking about bags of oranges (a private good), but the government has decided that tossed orange peels impose a negative externality on the public that must be rectified by imposing a tax of $4 per bag on sellers. What is the new equilibrium price? What is the new equilibrium quantity? If the new equilibrium quantity is the optimal quantity, by how many bags were oranges being overproduced before?

$ 12 4 bags 1 bag If the government decides that tossed orange peels impose a negative externality on the public that must be rectified by imposing a tax of $4 per bag on sellers, then the "minimum acceptable price" will increase by the amount of the tax. The reason behind this increase is that the producers must now pay an additional $4 on top of production costs. This implies that the "minimum acceptable price" for Carlos is $2 + $4, Courtney $4 + $4, and so on. Comparing this new "minimum-acceptable-price" schedule with the original "maximum-willingness-to-pay" schedule, we can find the new equilibrium quantity using the same process as in part a. If this is the optimal quantity, then the market was overproducing by 1 unit(s) before the tax was imposed on orange producers.

Suppose you have a money income of $20, all of which you spend on Coke and popcorn. In the diagram, the prices of Coke and popcorn, respectively, are

$1.00 and $2.00. $1.00 = 20/20; $2.00 = 20/10; alternatively, price = money income divided by the quantity of the good at the intercept. The price for each good is found by taking the money income and dividing by the quantity of that good at the intercept.

Suppose you have a money income of $50, all of which you spend on Coke and popcorn. In the diagram, the prices of Coke and popcorn, respectively, are

$2.50 and $5.00. $2.50 = 50/20; $5.00 = 50/10; alternatively, price = money income divided by the quantity of the good at the intercept. The price for each good is found by taking the money income and dividing by the quantity of that good at the intercept.

Andy purchased a new drone last year for $1,200. He no longer uses the drone and wants to sell it. He currently values the drone at $400. Suppose Jeff wants to purchase a drone. His maximum willingness to pay for a drone is $1,200. Suppose Andy and Jeff agree on a price of $1,000 for the drone. How much consumer surplus will this transaction generate?

$200 Consumer surplus is $200. Jeff is willing to pay $1,200, but only has to pay $1,000. Consumer surplus is defined as the difference between the maximum price a consumer is willing to pay for a product and the actual price that he pays.

Andy purchased a new drone last year for $1,200. He no longer uses the drone and wants to sell it. He currently values the drone at $400. Suppose Jeff wants to purchase a drone. His maximum willingness to pay for a drone is $1,200. Suppose Andy and Jeff agree on a price of $1,000 for the drone. How much producer surplus will this transaction generate?

$600 Producer surplus is $600. Andy values the drone at $400 and is getting $1,000 from the sale, so he is making $600 over his value of the drone.

Refer to the table. If demand is represented by columns (3) and (1) and supply is represented by columns (3) and (4), equilibrium price and quantity will be

$7 and 40 units

Andy purchased a new drone last year for $1,200. He no longer uses the drone and wants to sell it. He currently values the drone at $400. Suppose Jeff wants to purchase a drone. His maximum willingness to pay for a drone is $1,200. Suppose Andy and Jeff agree on a price of $1,000 for the drone. What will be the total surplus generated from this transaction?

$800 The total surplus from the exchange is $800 (= $600 from the seller and $200 from the buyer).

What are the determinants of supply?

- Prices of other goods - Technology - Resource prices - Number of producers The fundamental determinant of supply is the price of the commodity. As price increases, the quantity supplied increases. An increase in price causes a movement up a given supply curve. A decrease in price causes a movement down a given supply curve. The non-price determinants of supply are: resource (input) prices, technology, taxes and subsidies, changes in prices of other related goods, expectations, and the number of sellers. If one or more of these change, there will be a change in supply and the whole supply curve will shift to the right or to the left.

A nation can produce two products: tanks and autos. The table below is the nation's production possibilities schedule. In moving from combination C to B, the opportunity cost of producing 100 more autos is

1 unit of tanks. To find the opportunity cost of producing "X" number of additional autos (e.g. 100 between combinations C to B), find the change in the output of tanks over same range (e.g. from C to B, the change in the number of tanks is 1 (= 2 − 1)

In moving from combination D to C, the opportunity cost of producing 200 more autos is

1 unit of tanks. To find the opportunity cost of producing "X" number of additional autos (e.g. 200 between combinations D to C), find the change in the output of tanks over same range (e.g. from D to C, the change in the number of tanks is 1 (= 3 − 2).

b. Instead of bags of oranges, assume that the data in the two tables deal with a public good (such as fireworks displays) that can be enjoyed by free riders who do not pay for it. If all the buyers in the table free ride, what quantity will private sellers supply?

0 units b. If instead of bags of oranges, the data in the table dealt with a public good like fireworks displays, and all the buyers free ride, then the quantity supplied will be zero. Everyone will try to pay a zero price and no private producer is willing to supply at a price of zero.

Assume that a consumer has a given budget or income of $10 and that she can buy only two goods, apples or bananas. The price of an apple is $2.00 and the price of a banana is $10. This means that, in order to buy two bananas, this consumer must forgo

1 apple The opportunity cost measures how many bananas must be sacrificed to obtain one more apple. This is found by taking the ratio of the total price of bananas ($2.00) to the price of apples ($2.00).

Potatoes cost Janice $1.25 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 pound. How many pounds of potatoes will she purchase?

1 pound(s) of potatoes Janice will purchase potatoes until the value of potatoes is less than the cost of potatoes or until her income has been exhausted. From the table, we can see that the cost of the second pound of potatoes is greater than its value. Therefore, Janice will purchase a total of one pound of potatoes with her original income of $5.00.

Potatoes cost Janice $1.25 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 pound. How many pounds would she purchase if she only had $2.00 to spend?

1 pound(s) of potatoes Now assume Janice only has $2.00 to spend on potatoes. She will purchase one pound of potatoes at a total cost of $1.25.

The opportunity cost of producing the 76th unit of wheat is approximately

1/15 of a unit of steel To find the opportunity cost of the "nth" unit (e.g. the 76thunit) of wheat in terms of steel, divide one (the change in steel from one alternative to the next by the difference between the two alternatives for wheat on either side of this unit. For the 76th unit, the alternatives on either side are 75 and 90 units of wheat; their difference is 15 units (= 90 − 75). So for the 76th unit of wheat, the opportunity cost = 1/(90 − 75) = 1/15 of a unit of steel.

Assume the price of product Y (the quantity of which is on the vertical axis) is $10 and the price of product X (the quantity of which is on the horizontal axis) is $5. Also assume that money income is $30. The absolute value of the slope of the resulting budget line is

1/2 The slope of the budget line is found by dividing the price of the good shown on the horizontal axis ($5) by the price of the good shown on the vertical axis ($10).

Suppose that businesses buy a total of $100 billion of the four resources (labor, land, capital, and entrepreneurial ability) from households. If households receive $60 billion in wages, $10 billion in rent, and $20 billion in interest, how much are households paid for providing entrepreneurial ability?

10 billion $10 billion for entrepreneurial ability: $100 billion in total factor payments - $60 billion in wages - $10 billion in rent - $20 billion in interest.

If households spend $55 billion on goods and $45 billion on services, how much in revenues do businesses receive in the product market?

100 billion $100 billion: $55 billion + $45 billion, because household expenditures equal business revenues.

Assume that a consumer has a given budget or income of $10 and that she can buy only two goods, apples or bananas. The price of an apple is $1.00 and the price of a banana is $0.50. If the consumer decides to buy 4 apples, how many bananas can she also buy with the remainder of her budget, assuming she exhausts her income?

12 bananas The total expenditure (E) for each combination of apples (A) and bananas (B) is found using the following formula: E = PAA + PBB, where PA and PB are the prices of apples and bananas, respectively. In this example, since whatever income remains (E - PAA) must be spent on bananas, the total quantity of bananas purchased will be calculated as B = (E - PAA)/PB.

What is the total surplus if Bob buys a unit from Carlos?

15 If Bob buys a unit of the good from Carlos, then the economic surplus is the difference between Bob's "maximum willing-to-pay price" and Carlos's "minimum acceptable price." Economic surplus is $15 (= $20 - $5).

A production possibilities table for DVDs and computers is shown below. What is the opportunity cost of computers when moving from point A to point B?

15 DVDs Point A to point B: 80 − 65 = 15

The total opportunity cost of two unit(s) of tanks is

150 autos To find the total opportunity cost of producing "X" number of tanks (e.g. two units), subtract the number of autos corresponding with the production alternative for the number of tanks produced (e.g. at production alternative of two tanks, 850 autos are produced) from the maximum number of autos that can be produced (1,000). For 150 tanks produced, the total opportunity cost is 150 (= 1,000 − 850).

Assume that a consumer has a given budget or income of $12 and that she can buy only two goods, apples or bananas. The price of an apple is $1.50 and the price of a banana is $0.75. For this consumer, the opportunity cost of buying one more apple is

2 bananas. The opportunity cost measures how many bananas must be sacrificed to obtain one more apple. This is found by taking the ratio of the price of apples ($1.50) to the price of bananas ($0.75).

Refer to the table. If South Cantina is producing at production alternative F, the opportunity cost of the first unit of capital goods will be

2 units of consumer goods. To find the opportunity cost of the "nth" unit (e.g. the first unit) of capital, find the difference between the two alternatives for consumer goods on either side of this unit. For the first unit, the alternatives on either side are 25 and 27 units of consumer goods; their difference is 2 units (= 27 − 25). So for the third unit of capital goods, the opportunity cost = 2 units units of consumer goods.

A production possibilities table for DVDs and computers is shown below. What is the opportunity cost of computers when moving from point C to point D?

20 DVDs Point C to point D: 47 − 27 = 20

A production possibilities table for DVDs and computers is shown below. What is the opportunity cost of computers when moving from point D to point E?

27 DVDs Point D to point E: 27 − 0 = 27

d. If you match up pairs of buyers and sellers so as to maximize the total surplus of all transactions, what is the largest total surplus that can be achieved?

30 d. If we match up buyers and sellers to maximize the total economic surplus, then we need to choose the pairs with the largest gap between the "maximum willing-to-pay price" and the "minimum acceptable price." Note that this gap must be positive or zero; otherwise, there is no surplus. Doing this, we see the largest total surplus equals ($15 + $9 + $5 + $1 + $-3 + $-7). Excluding the negative numbers, the total surplus is $30.

c. What is the total surplus if Bob buys a unit from Chad?

5 c. If Bob buys a unit from Chad, then the economic surplus is $5 (= $20 - $15).

a. What is the equilibrium quantity for the data displayed in the two tables?

5 bags Although the equilibrium price of oranges is listed in the table, we could find it by comparing the highest willingness to pay with the lowest minimum acceptable price. Bob is willing to pay $18 and Carlos is willing to accept at minimum $2. This trade is made because Bob is willing to pay more than Carlos requires for the sale. We then move on to the trade between Barb and Courtney. This trade is also made because Barb is willing to pay $16 and Courtney only requires $4 to make the sale. This goes on until the "maximum willingness to pay" equals the "minimum acceptable price." When they equal each other, surplus will be zero, and the equilibrium quantity will be reached.

Gus tutors George in economics for 2 hours, and Gus values his time at $35 an hour. George is willing to pay up to $120 for a tutoring session. What is the value of consumer surplus, relative to producer surplus, if George pays only $100 for a tutoring session? Consumer surplus will be less than producer surplus by $ 10

If Gus values his time at $35 an hour and spends 2 hours tutoring George, he values the total time spent tutoring at $70 (= 2 hours × $35). If he earns $100 for the session, and producer surplus is the difference between what he earns and the value of his time, then producer surplus equals $30 (= $100 − $70). If George is willing to pay $120 for the tutoring session but only has to pay $100, then consumer surplus equals the difference, or $20 (= $120 − $100). Thus, consumer surplus will be less than producer surplus by $10 (= $20 - $30).

The table below contains information on three techniques for producing $15 worth of bar soap. Assume that we specified "$15 worth of bar soap" because soap costs $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar × 5 bars). So you know each technique produces 5 bars of soap. If the resource prices return to their original levels (those shown in the table) but a new technique is invented that can produce 3 bars of soap (yes, 3 bars, not 5 bars!), using 1 unit of each of the four resources, will firms prefer the new technique?

No, they will still prefer technique 2. The total revenue from this new technique equals $3 (price per bar) multiplied by 3 (units sold and produced), or $9. The total cost of this technique equals the sum of the resource prices (in the table above) because this technique employs one unit of each input. Thus, total cost equals $9 ($2 (labor) + $1 (land) + $3 (capital) + $3 (entrepreneurial ability)). Using this new technique, economic profit is zero ($9 (revenue) - $9 (cost)), whereas technique 2 continues to generate $2 of economic profit ($15 (revenue) - $13 (cost)). Since economic profit is greater using technique 2, the firm will continue to employ this technique.

What two conditions must hold for a competitive market to produce efficient outcomes?

Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.

The table below contains information on three techniques for producing $15 worth of bar soap. Assume that we specified "$15 worth of bar soap" because soap costs $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar × 5 bars). So you know each technique produces 5 bars of soap. What technique will you want to use if the price of a bar of soap falls to $2.75? Which technique will you use if the price of a bar of soap rises to $4?Which technique will you use if the price of a bar of soap rises to $5?

Technique 2 If the price falls to $2.75, total revenue (price multiplied by units sold) equals $13.75 ($2.75 × 5). This does not change the total cost of each technique, so the firm will continue to use the lowest-cost technique, or technique 2. This logic also applies to the increase in the price to $4 and $5, respectively. This does not change the cost of each technique, so the firm will continue to employ the lowest-cost technique, which again is technique 2.

The table below contains information on three techniques for producing $15 worth of bar soap. Assume that we specified "$15 worth of bar soap" because soap costs $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar × 5 bars). So you know each technique produces 5 bars of soap. Suppose that the price of soap is again $3 per bar but that the prices of all four resources are now $1 per unit. Which is now the least-profitable technique?

Technique 3 Here we must first calculate the cost incurred by the firm for each technique. Since the cost of each input is $1 per unit, the cost for each technique is just the sum of the inputs used. For example, the cost of technique 1 equals $7 ($4 (labor) + $1 (land) + $1 (capital) + $1 (entrepreneurial ability)). Using the same procedure, the total cost of technique 2 equals $7 ($2 + $3 + $1 + $1), and the total cost of technique 3 equals $8 ($1 + $4 + $2 + $1). Thus, the least-profitable technique is technique 3.

Suppose Natasha currently makes $60,000 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. If she does quit her current job, which opportunity would she pursue?

The organic soap company If both companies provide a net revenue greater than her wage at the cable TV company, she will choose the company with the greatest net revenue; if neither company provides a net revenue greater than her wage at the cable TV company, she will keep her current job.

Suppose Natasha currently makes $60,000 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. Should she quit her current job to become an entrepreneur?

Yes Net revenue from the organic soap company equals $465,000 (revenue) minus $395,000 (cost). If this net revenue of $70,000 exceeds Natasha's current wage of $60,000, she should develop this company instead of working for the cable TV company. If not, the soap company is not a good decision. The net revenue from the Internet company equals $3,275,000 (revenue) minus $3,250,000 (cost). If this net revenue of $25,000 exceeds Natasha's current wage of $60,000, she should develop this company instead of working for the cable TV company. If not, the Internet company is not a good decision.

The table below contains information on three techniques for producing $15 worth of bar soap. Assume that we specified "$15 worth of bar soap" because soap costs $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar × 5 bars). So you know each technique produces 5 bars of soap. How many bars of soap will you want to produce if the price of a bar of soap falls to $2.00?

Zero: It is not profitable to produce bars of soap at this selling price. Here the answer is different from that in part a because total revenue equals $10 ($2 × 5). Here, it is unprofitable to produce any output because the least-cost technique 2 is $13.

In a command economy, scarce goods are allocated by

a government-appointed planning board based on the board's long-term priorities. The command economy is characterized by public ownership of nearly all property resources, and economic decisions are made through central planning. The planning board, appointed by the government, determines production goals for each enterprise. The division of output between capital and consumer goods is centrally decided based on the board's long-term priorities.

When sellers are unable to distinguish "good" buyers from "bad" ones, they face the problem of

adverse selection

When the production of a good generates external costs, the producing firm's supply curve will be

below (to the right of) the total-cost supply curve.

Suppose that Julia receives a $24 gift card for the local coffee shop, where she only buys lattes and muffins. If the price of a latte is $3 and the price of a muffin is $2, then we can conclude that Julia

can buy 8 lattes or 12 muffins if she chooses to buy only one of the two goods. The value of the gift card represents Julia's income. The quantities of lattes and muffins shown assume that the amount of the gift card is spent entirely on one good or the other. There is not enough income for Julia to purchase the maximum quantities of both goods.

Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. A decrease in the price of X can be expected to

decrease the demand for Z.

Barter requires that you

find a person who has what you want and a person who needs what you have to offer. Barter requires the "double coincidence of wants." If someone wants something, he or she will have to find someone who wishes to part with that good and at the same time wishes to exchange the good for something that the first person wishes to part with.

ADVANCED ANALYSIS Assume that demand for a commodity is represented by the equation P=18−2Qd. Supply is represented by the equation P=−2+2Qs where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price. Using the equilibrium condition Qs = Qd, solve the equations to determine equilibrium price and equilibrium quantity. Equilibrium price = $ 7.95 Equilibrium quantity = 5 units

i. $7.95 ii. 5 units Demand for a commodity is: P = 18 - 2Qd. Supply of the commodity is: P = -2 + 2Qs. To solve this system of equations, we use the fact that the equilibrium price in both equations must be the same. Therefore, we can equate the two (eliminate P from the system). This gives us: 18 - 2Qd = -2 + 2Qs. We now use the equilibrium condition for quantity: Qs = Qd = Q. We substitute Q for Qd and Qs. This gives us: 18 - 2Q = -2 + 2Q. From here, we can solve for Q and then apply that to either equation to solve for P. Since we are at equilibrium, P will be the same with both equations.

ADVANCED ANALYSIS Assume that demand for a commodity is represented by the equation P=20−2Qd Supply is represented by the equation P=−5+3Qs ,where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price. Using the equilibrium condition Qs = Qd, solve the equations to determine equilibrium price and equilibrium quantity. i. Equilibrium Price: ii. Equilibrium Quantity:

i. $9.95 ii. 5 units Demand for a commodity is: P = 20 - 2Qd Supply of the commodity is: P = -5 + 3Qs To solve this system of equations, we use the fact that the equilibrium price in both equations must be the same. Therefore, we can equate the two (eliminate P from the system). This gives us: 20 - 2Qd = -5 + 3Qs We now use the equilibrium condition for quantity: Qs = Qd = Q. We substitute Q for Qd and Qs. This gives us: 20 - 2Q = -5 + 3Q From here, we can solve for Q and then apply that to either equation to solve for P. Since we are at equilibrium, P will be the same with both equations.

What happens to the supply curve when any of the following determinants change? Indicate whether each of these determinants causes a shift of the supply curve or a movement along the curve. i. Change in market price: ii. Change in factor productivity: iii. Change in producer expectations: iv. Change in the price of other goods: v. Change in technology: vi. Change in resource prices: vii. Change in taxes:

i. Movement along the supply curve ii. A shift of the supply curve iii. A shift of the supply curve iv. A shift of the supply curve v. A shift of the supply curve vi. A shift of the supply curve vii. A shift of the supply curve The following will cause an increase in supply: a decrease in resource (input) prices; improved (lower cost) technology; a decrease in business taxes; an increase in subsidies to businesses; a decrease in the price of another commodity that this firm was making, provided that commodity is a substitute in production (the firm can switch from the now lower-priced one to our commodity); an expectation of lower prices in the future; and an increase in the number of sellers. The increase in supply caused by the noted change in one or more of the above will cause the entire supply curve to shift to the right. More will now be supplied at any given price. Alternatively expressed, any given amount will now be supplied at a lower price

A production possibilities table for DVDs and computers is shown below. As we produce more computers, opportunity costs are:

increasing As we move from each new point with a higher number of computers produced, the data show that the opportunity costs (in terms of DVDs) increase as we produce more computers. In other words, the opportunity cost of producing one computer (in terms of DVDs) is higher between points D and E than between points C and D (and so forth).

Price ceilings during a hyperinflation are problematic because:

many producers will go out of business because the costs of production will soon exceed the legal selling price. Price ceilings during hyperinflation are particularly problematic because the prices producers have to pay for their inputs keep increasing. However, the price ceilings prevent producers from charging higher prices to offset the increased costs of production. Soon the costs of production exceed the legal selling price and producers are forced to choose between going out of business or selling their products illegally. Since the Venezuelan government imposed severe penalties on those who sold at prices above the legal limit, many firms chose to go out of business.

In a market system, scarce goods are allocated by

market prices that are determined by consumers and producers acting in their own self-interest. A market system allows for the private ownership of resources and coordinates economic activity through market prices. Participants act in their own self-interest and seek to maximize satisfaction or profit through their own decisions regarding consumption or production. Goods and services are produced and resources are supplied by whomever is willing to do so. The result is competition and widely dispersed economic power.

If consumer incomes increase, the demand for product X

may shift either to the right or left.

The use of money

provides a common value that makes buying and selling transactions simpler than would be the case with barter. With money as a medium of exchange, one knows the purchase price of the item to be purchased and its relative price to other items. Money is a very convenient common denominator, a common measure of value that is also used as a medium of exchange. Money also encourages specialization. Without money, workers and other resources could not be paid except in the output produced. All those who participated in the production of the good would have to collectively exchange it for all the goods and services desired by the resource owners.

The emergence of self-driving cars is an example of "creative destruction" because

self-driving cars will likely replace most cars that require drivers. Creative destruction refers to the process by which the creation of new products and production methods destroys the market positions of firms committed to existing products and outdated ways of doing business. Once developed to the point where the public has full confidence in their safety, self-driving cars will likely cause a large decline in the production of conventional automobiles, just as cars once replaced horse and buggies. In addition, self-driving cars will likely reduce or eliminate the need for professional drivers such as taxi drivers and delivery drivers.

Refer to the diagram. An improvement in technology will

shift the production possibilities curve from PP2 to PP3. Improvements in technology shift out the production possibilities curve, usually allowing a society to produce more of both goods. Visually this is represented by moving from one curve to a curve further to the right (e.g. from PP2 to PP3).

If the equilibrium price in a market is $20, and the government imposes a price ceiling of $16, what will be the resulting market condition?

shortage An effective price control is one that forces the market away from equilibrium. For a price ceiling to be effective, it needs to be set below market equilibrium so that the equilibrium price is prohibited by the price control. If this is the case, the price will be forced below the equilibrium price, causing the quantity demanded to be greater than the quantity supplied, thereby creating a shortage. If a price ceiling is set above equilibrium, the price control does not force the market away from equilibrium, so the market can stay there. For a price floor to be effective, it needs to be set above equilibrium. If this is the case, the price will be forced above the equilibrium, thus causing a surplus. If a price floor is set below equilibrium, the price control does not force the market away from equilibrium, so the market can stay there.

The term "division of labor" means that workers

specialize in tasks that take advantage of their individual abilities and skills. Correct "Division of labor" means that workers perform those tasks that are best suited to their individual abilities and skills.

Some large hardware stores, such as Home Depot, boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of

the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits. The quest for profits led firms to produce these goods. Producers looked for and found the least-cost combination of resources for producing their output. Resource suppliers, seeking income, made these resources available. Consumers, through their dollar votes, ultimately decide on what will continue to be produced. The purchasing agents at Home Depot replenish goods based on consumer purchasing and identify those producers that have these goods at the lowest cost.

Refer to the diagram. If society is currently producing the combination of bicycles and computers shown by point C, the production of 3 more units of bicycles

will cost 2 units of computers. To find the (opportunity) cost of the additional units of bicycles, take the difference between the starting and ending values for computers. For example, if society is currently producing 9 units of bicycles and 4 units of computers, in order to produce 3 more units of bicycles, computer output will have to fall to 2 units. That makes the cost of the 3 units of bicycles equal to 2 units (= 4 − 2).