Module 3-10

The supply of a good is likely to be more elastic if:

resources used as inputs in producing the good are readily available at relatively low cost. → Firms will be able to respond to a price increase by producing more.

The _____ effect is the change in the quantity of a good demanded that results from the adjusted purchasing power of the consumer's income due to a price change.

income → The greater the price of the good, the greater potential for a strong income effect.

The percentage change in the quantity demanded of a good divided by the percentage change in income is __________.

income elasticity of demand → Income elasticity of demand measures the responsiveness of the demand for a good to a change in income.

If the price of a good decreases, the quantity effect causes total revenue to _____.

increase → A decrease in the price increases the quantity sold, which increases total revenue.

Assuming that yarn and knitting needles are complements, which statement would cause an increase in the demand for yarn?

A lower price of knitting needles

Mark and Julie are going to sell brownies and cookies for their third annual fundraiser bake sale. In one day, Mark can make 40 brownies or 20 cookies, and Julie can make 15 brownies or 15 cookies. Based on this information, _____ has the comparative advantage in making brownies and _____ has the comparative advantage in making cookies.

Mark; Julie

If the price of milkshakes increases, the quantity supplied will _____.

increase → According to the law of supply, an increase in the price of a product causes an increase in the quantity supplied

Suppose that in an hour Chip can gather 8 pounds of fruit or 4 pounds of nuts. In an hour, Monk can gather 9 pounds of fruit or 3 pounds of nuts. _________ should specialize in gathering fruit.

Monk → Monk should specialize in gathering fruit because he has the comparative advantage, lowest opportunity cost, and a pound of fruit costs 1/3 pound of nuts.

If an economy is producing a level of output that is on its production possibility frontier, the economy has:

no idle resources and is using resources efficiently.

If the quantity demanded of apples is 19 bushels and the quantity supplied is 25 bushels, there is a surplus of _____.

6 → If people want to buy 19 bushels of apples but other people want to sell 25 bushels, there is a surplus of 25 − 19 = 6.

Eric's income increased from $40,000 to $50,000 per year. All other things equal, Eric's consumption of tickets to pro football games increased from two to four per year. Using the midpoint formula, his income elasticity of demand for pro football game tickets is equal to _____, and football game tickets are _____ goods.

+3; normal

When income increases by 3%, the number of meals sold at fast food restaurants decreases by 6%. The income elasticity of fast food meals is calculated to be _______ .

-2.0 → The income elasticity is the percent change in demand divided by the percent change in income, - 6%/3% = - 2

If the price of corn increases by 50% and the quantity supplied increases by 10%, then the price elasticity of supply is calculated to be _______.

0.20 → The price elasticity of supply is the percent change in the quantity supplied divided by the percent change in the price, 10%/50% = 0.2.

Suppose that in an hour Chip can gather 8 pounds of fruit or 4 pounds of nuts. In an hour, Monk can gather 9 pounds of fruit or 3 pounds of nuts. Which of the following choices would benefit both Chip and Monk if trade occurred?

1 pound of nuts for 2.5 pounds of fruit → For both sides to benefit, the terms of trade must be between the two opportunity costs, 1 pound of nuts for 2 pounds of fruit to 1 pound of nuts for 3 pounds of fruit.

The publisher of an economics textbook finds that when the book's price is lowered from $70 to $60, sales rise from 10,000 to 15,000. Using the midpoint method, the price elasticity of demand is:

2.6.

If the price elasticity of aspirin is 0.4 and the price increases by 60%, the quantity demanded decreases by _____%.

24 → The price elasticity is the ratio of the percent change in the quantity demanded to the percent change in the price. To get an elasticity of 0.4 with a 60% increase in price the percent change in quantity must be 24%, so that 24%/60% = 0.4.

The toll to cross the Golden Gate Bridge increased by 20% and riders on the ferry to cross San Francisco Bay increased by 60%. The cross-price elasticity between crossing the Golden Gate Bridge and riding the ferry is _______ and the bridge and the ferry are _______.

3; substitutes → The cross-price elasticity is 60%/20% = 3. Substitutes have a positive cross-price elasticity.

Egg producers know that the elasticity of demand for eggs is 0.1. If they want to increase sales by 5%, they will have to lower the price by:

50%

The benefits of specialization and the gains from trade were described in 1776 by _________ in __________.

Adam Smith; The Wealth of Nations → Smith used the example of a pin factory to show the productivity gains from specialization.

Which example illustrates the law of demand?

Consumers buy more personal computers because prices have fallen.

True or False? An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is higher for that individual than for other people.

False → An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that individual than for other people

True or False? Economic growth is shown by a movement along the production possibilities frontier.

False → Economic growth is shown by an outward shift of the production possibilities frontier.

True or False? The price elasticity of demand is the percent change in the quantity supplied divided by the percent change in the quantity demanded.

False → Price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price.

True or False? The gains from specialization and trade include the elimination of scarcity.

False → Specialization and trade result in an increase in output and the standard of living.

True or False? The numeric value for price elasticity of demand will depend on the units in which quantity is measured.

False → The formula uses percentage changes, so the unit of measurement does not affect the result.

True or False? Total revenue is total sales of a good minus its total cost.

False → Total revenue is the price of a good multiplied by the quantity of the good sold.

Suppose that in a day a worker in the United States can produce 10 bushels of corn or 2 shirts. In Russia a worker can produce 9 bushels of corn or 3 shirts in one day. _____ should specialize in shirts.

Russia → Russia should specialize in producing shirts because it has the comparative advantage, the lowest opportunity cost for a shirt, 3 bushels of corn. In the United States, the opportunity cost is 5 bushels of corn.

If they produce only hamburgers, in a single day Sarah can produce 10 hamburgers whereas Abe can produce 5 hamburgers. If they make milkshakes only, in a single day Sarah can produce 10 milkshakes whereas Abe can produce 4 milkshakes. Therefore:

Sarah has an absolute advantage and a comparative advantage in making milkshakes.

Which book illustrates the advantages of specialization using an eighteenth-century pin factory?

The Wealth of Nations, by Adam Smith

Suppose students at Big University can purchase season football tickets at the beginning of the fall semester and resell tickets to individual games. Everyone expects that the team will have a great season. What will happen in the market for Big University football tickets?

The current supply will decrease.→ If producers expect higher prices in the future, current supply will decrease.

A hotel has a capacity of 100 rooms in the short run. Which statement best describes the short-run elasticity of supply for rooms at this hotel?

The elasticity of supply is zero in the short run because the short-run supply curve is vertical.

In the market for grass-fed beef, what would cause a price increase?

The prices of grass and corn increase.

The cross-price elasticity of demand for Coke with respect to the price of Pepsi has been estimated to be 0.61. If the price of Pepsi falls by 10% in a period, how will that affect the demand for Coke in that period, all other things unchanged?

The quantity demanded of Coke will decrease by 6.1%.

If gasoline and heating oil are substitutes in production, what happens in the market for heating oil when the price of gasoline decreases?

The supply of heating oil increases. → When the price of a substitute in production decreases, the supply of the other product increases.

If beef and leather are complements in production, when the price of beef decreases, what happens in the market for leather?

The supply of leather decreases. The supply of leather decreases. → When the price of a complement in production decreases, the supply of the other product decreases.

Suppose the number of bookstores selling textbooks in a university town increases. What will happen in the market for textbooks?

The supply will increase. → If the number of producers increases, the supply increases.

One parent picks up the child from day care while the other parent goes to the grocery store and begins to make dinner. This is an example of which principle at work?

There are gains from trade.

True or False? If the good accounts for a substantial share of a consumer's budget, both the substitution and income effects are important in explaining the consumer's response to a price change.

True → For goods that are relatively expensive and account for a large part of the consumer's budget, the income effect is large because the change in the price of the good affects purchasing power. The substitution effect, which says that consumers substitute cheaper goods for more expensive ones, is also important in explaining why consumers buy more of a relatively expensive good when its price decreases.

True or False? When the price of a normal good decreases, the income effect predicts that consumers will buy more of the good because their purchasing power has increased

True → A decrease in the price of a good will increase the purchasing power of a given amount of income, so consumers can afford to buy more of the lower priced good with the same dollar amount of income.

True or False? Increasing costs are observed because resources are not perfectly suited to all uses.

True → Increasing costs arise because some resources are better suited for some goods than for others.

True or False? Markets are what make specialization possible.

True → Markets allow each individual to specialize in producing one thing and yet consume many different things.

True or False? Labor used to make game-day t-shirts is a factor of production.

True → Workers are not used up and are available to produce more cars, so labor is classified as a factor of production.

The primary difference between a change in supply and a change in the quantity supplied is that:

a change in quantity supplied is a movement along the supply curve, whereas a change in supply is a shift in the supply curve.

Which factor will result solely in a movement along the demand curve for a particular good?

a change in the price of that good

Which statement would NOT cause the supply curve to shift?

a change in the price of the good

The income effect refers to:

a change in the quantity demanded of a good caused by a change in the buyer's real income caused by a change in the price of a good or service.

If chicken and beef are substitutes, then a fall in the price of chicken will bring about:

a decrease in the demand for beef.

An announcement that smoking will harm the ability to think clearly will most likely result in:

a decrease in the demand for cigarettes.

Which of the following would cause an increase in the price of peanut butter?

a decrease in the price of jelly, a complement → A decrease in the price of jelly would increase the demand for peanut butter and increase its price.

Many public utilities burn oil to generate electricity. If the price of oil increases, one would expect there to be:

a shift to the left in the supply curve of electricity and a higher price for electricity.

Consider two competing motorcycle manufacturers: Harley-Davidson and Honda. If Harley-Davidson raises the price of its motorcycles, one would expect to see:

a shift to the right in the demand curve for Hondas and higher prices for Hondas.

Which statement would shift the demand curve for new textbooks to the right?

an increase in college enrollment

The benefits from specialization and trade include:

an increase in output and a higher standard of living. → Specialization and trade result in an increase in output and the standard of living.

Suppose vegetable farmers decide to sell more beans at each possible price. This represents _____ and is shown by_____.

an increase in supply; a shift of the supply curve to the right → Selling more at each price is an increase in supply, shown by a shift in the supply curve to the right.

A decrease in supply can result from:

an increase in the price of goods that are used in production.

Which will NOT cause an increase in the supply of good X?

an increase in the price of inputs used to produce good X

For a Giffen good:

an increase in the price of the good causes quantity demanded to increase. → This is how the upward-sloping demand curve is derived.

After graduation from college, Jill might have an increase in her income from a new job. If, as a result, she decides that she will purchase more T-bone steak and less hamburger, then for her hamburger would be considered:

an inferior good.

Demand is perfectly elastic when:

any price change will cause the quantity demanded to drop to zero. → Demand is perfectly elastic when any price increase will cause the quantity demanded to drop to zero.

The price elasticity of demand can be found by:

comparing the percentage change in quantity demanded to the percentage change in price.

Because of trade, a country may:

consume outside its production possibility frontier.

If demand decreases and supply remains constant, the equilibrium price will _____.

decrease → If demand decreases and supply remains constant, there will be a surplus at the old equilibrium price, which causes the price to decrease, leading to a decrease in quantity supplied until the shortage is eliminated at a lower equilibrium price and quantity.

If there is a surplus in a competitive market, the price will _____.

decrease → If there is a surplus in a competitive market, sellers will reduce the price to eliminate the surplus.

The price of aspirin recently decreased by 10%. If the price elasticity of supply of aspirin is 0.7, the quantity supplied will ________ by ________.

decrease; 7% → The price elasticity of supply is the percent change in the quantity supplied divided by the percent change in the price. If the elasticity is 0.7 and the percent change in the price is -10%, the percent change in the quantity supplied must be - 7%% so that -7%/-10% = 0.7.

If the price of an input decreases, the supply of the good it is used to produce increases and the equilibrium price of the good _____.

decreases → A decrease in the price of an input is one of the factors that increases supply, which causes a surplus, causing the equilibrium price to decrease.

According to the law of demand, when the price of a product increases, the quantity demanded _____.

decreases → According to the law of demand, the price and quantity demanded of a product are inversely related.

When demand is elastic and the price increases, total revenue:

decreases. → The percentage decrease in quantity demanded will exceed the percentage increase in price.

As you move along a linear demand curve from high prices to low prices, the price elasticity of demand:

decreases. → This is a good reminder that elasticity is not exactly the same thing as slope.

An inferior good is a good for which:

demand decreases when consumers are richer. → Demand decreases for an inferior good when consumers are richer.

The market price of airline flights increased recently. Some economists suggest that the price increased because there has been an increase in the number of business travelers. They believe that in the market for flFights:

demand increased

If the percentage change in the quantity demanded is smaller than the percentage change in the price, then:

demand is inelastic. → If the percentage change in the quantity demanded is smaller than the percentage change in the price, then demand is inelastic.

Rice and potatoes are substitutes in consumption. If the price of rice rises and there is a bumper crop of potatoes, in the market for potatoes one would expect the

equilibrium price to rise, fall, or stay the same and equilibrium quantity to rise.

For which pair is the cross-price elasticity of demand most likely a large, positive number?

french fries and onion rings

Greta starts using a new baking technique and she can now do twice as much of everything—in a single day Greta can now make 10 cakes or 8 pies, rather than the 5 cakes and 4 pies she could previously bake. Greta's production possibility frontier:

has shifted right, but her opportunity costs of making pies have not changed.

An economy is said to have a comparative advantage in the production of one good if it:

has the lowest opportunity cost for producing a particular good.

If the price of e-books, a substitute for printed textbooks, increases:

he demand for printed textbooks will increase. → An increase in the price of a substitute, the e-book, causes an increase in demand for the other product, the printed text.

If two products are substitutes in production, a decrease in the price of one of the products will result in a(n) _____ in supply of the other product.

increase → If two products are substitutes in production, a decrease in the price of one of the products will cause producers to decrease the quantity supplied of the less expensive product and increase the supply of the substitute.

If two products are complements in production, a decrease in the price of one of the products will result in a(n) _____ in the price of the other product.

increase → When the price of a complement in production decreases, the supply of the other product decreases and its price increases.

For an inferior good, if its price increases, the income effect results in a(n):

increase in quantity demanded. → The demand for inferior goods increases when income decreases. If the price of a good increases, then the purchasing power of a consumer's income decreases, so the price increase for an inferior good results in an increase in quantity demanded.

According to the law of supply, an increase in the price of petroleum will:

increase the quantity of petroleum supplied.

If Benjamin considers sushi to be a normal good and if his income increases by 20%, his purchases of sushi will:

increase.

Gains from trade exist for:

individuals, states, and countries

For _____ goods, the income and substitution effect work in opposite directions.

inferior → For inferior goods, when the price increases, consumers substitute a less expensive goods for the more expensive one. For inferior goods, consumers buy more of them when their income decreases. If the price of a good increases, according to the income effect, the purchasing power of income decreases, causing people to buy less of an inferior good.

If the consumption of a certain good increases when income decreases, all else equal, that good is considered a(n):

inferior good.

If the quantity of housing supplied in a community is greater than the quantity of houses demanded, the existing price:

is above the market equilibrium price.

The slope of the demand curve:

is negative. → Price and quantity demanded move in opposite directions, so the slope of the demand curve is negative.

The demand curve for an inferior good shifts to the _____ when incomes increase.

left → People buy less of inferior goods when they can afford something better.

If two goods are complementary, one can assume that the cross-price elasticity of demand for these goods is:

less than 0.

If an economy has NOT achieved efficiency, there must exist ways to:

make some people better off without making others worse off.

Trade can be beneficial to an economy because:

more goods and services can be obtained at a lower opportunity cost.

When milk prices increased in 2008, one milk consumer stated that the reason he cut down on milk consumption is so that he could drive his car. This action represents a:

movement along the demand curve for milk.

If Shannon's income increases and her consumption of bagels increases, other things equal, bagels are considered a(n):

normal good.

If the income elasticity is positive, the good is a(n)

normal good. → If the income elasticity is positive, it means that an increase in income will cause an increase in demand.

Economists usually make the assumption that production is subject to increasing opportunity costs because:

not all resources are equally suited to producing every good.

The _____ is what is given up to get something.

opportunity cost → When a choice is made, something else is given up, which is the opportunity cost.

Assume that the price of peach preserves increases while the price of strawberry preserves remains the same. According to the substitution effect:

people will buy less peach preserves and more strawberry preserves. → The substitution effect says that a price increase of one good will cause people to buy more of a substitute good.

Assume that the price of imitation gemstones decreases while the price of genuine gemstones remains unchanged. According to the substitution effect:

people will buy more imitation gemstones. → The substitution effect says that a price decrease of one good will cause people to buy more of that good and less of a substitute good.

Supply is _________ when the quantity supplied does not respond at all to a change in price.

perfectly inelastic → The corresponding measure for price elasticity of supply would be zero.

If the price of the textbook required for an economics class increases from $100 to $120 and the bookstore still supplies the same number of books, supply is:

perfectly inelastic. → Supply is perfectly inelastic when the quantity supplied does not respond at all to a change in the price.

The _____ is the ratio of the percentage change in the quantity demanded to the percentage change in the price.

price elasticity of demand → The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price, which is equal to the ratio of the percentage change in the quantity demanded to the percentage change in the price.

The ratio of the percentage change in the quantity demanded to the percentage change in price is the:

price elasticity of demand.

he ___________ is the ratio of the percentage change in quantity supplied to the percentage change in price.

price elasticity of supply → The price elasticity is the percentage change in the quantity supplied divided by the percentage change in the price.

According to the law of demand, as:

price increases, the quantity demanded decreases. → An increase in price causes a decrease in quantity demanded.

The income effect of a price change of e-Books is the effect on consumption due to a change in:

purchasing power caused by a change in the price of the good.

When the price of a product increases, the _____ increases.

quantity supplied → An increase in the price of a product causes an increase in quantity supplied. A change in any factor other than the price of the product itself will cause a change in supply.

When income is adjusted to reflect purchasing power, it is called _____ income.

real → This is as opposed to nominal income, or money, income.

Assuming that people who buy knitting needles also buy yarn, the demand curve for yarn will shift to the _____ when the price of knitting needles decreases.

right → This is an example of demand for one good increasing when the price of a complement good decreases]].

Researchers find a new strain of genetically modified seeds that results in a higher yield for corn producers. Holding all other things constant, this research

shift the supply curve for corn to the right.

Wii consoles and Wii video games are complements. If the price of Wii consoles goes up, the demand curve for Wii video games will:

shift to the left. → If the price of a complement (the Wii console) increases, the demand for the other complement will decrease, causing the demand curve to shift to the left.

If the price is below the equilibrium price, there is a(n) _____.

shortage → If the price is below equilibrium, the quantity demanded increases, but the quantity supplied decreases, which causes a shortage.

Gains from trade are due to _____.

specialization → If each person specializes in producing what they do best, they economy can produce more.

If the price of chocolate-covered peanuts increases and the demand for strawberry licorice twists increases, all else equal, this indicates that these two goods are:

substitute goods.

The cross-price elasticity between popcorn and peanuts is 1.6. Therefore, popcorn and peanuts are ________.

substitutes → Goods are substitutes if the cross-price elasticity is positive.

An oil refiner can produce either gasoline or heating oil. To the refiner, gasoline and heating oil are:

substitutes in production.→ When a producer can produce either one product or the other, they are substitutes in production.

A shift in the supply curve represents a change in _____.

supply → A movement along a stationary supply curve represents a change in quantity supplied, while a shift in the curve represents a change in supply.

When the price of DVD players falls, the quantity of DVD players sold increases. This set of observations can be the result of the:

supply of DVD players shifting to the right.

Suppose the price of real estate increases by 37.11% in Oakland next year. If the quantity of new homes supplied does not change, all else equal, this means that the price elasticity of _____ will be perfectly _____ in Oakland next year.

supply; inelastic

Recent research suggests that certain plastic containers may have cancer-causing elements in them. As a result of this research, one would expect that:

the demand for such containers would decrease

Cross-price elasticity of demand measures

the effect of changes in one good's price on the quantity demanded of the other good.

The price elasticity of demand is:

the percentage change in the quantity demanded divided by the percentage change in the price. → The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price.

The price elasticity of supply is:

the percentage change in the quantity supplied divided by the percentage change in the price. → This measures the responsiveness of quantity supplied to changes in price.

The demand for gasoline is inelastic, so when the price increases, total revenue increases because:

the price effect is stronger than the quantity effect. → When demand is inelastic, the price effect is stronger than the quantity effect.

Supply is perfectly inelastic when:

the quantity supplied does not respond at all to a change in the price. → This would be the case if firms were unable to expand production of the good.

It is certain that the equilibrium price will fall when:

the supply curve shifts to the right and the demand curve shifts to the left.

Suppose the price of apples rises from $1.75 to $2 per pound. According to the law of demand:

this will decrease the quantity of apples demanded.

Free trade between countries:

will allow for greater levels of consumption than without trade.