Chapter Two Homework and Quiz Review - Econ 150

The next-best thing that must be forgone in order to produce one more unit of a given product

Opportunity cost

Which of the following best describes the concept of "utility" and purposeful behavior?

-"Utility" refers to the pleasure, happiness, or satisfaction gained from engaging in an activity (eating a meal, attending a ball game, etc.). It does not refer to the usefulness of a product. -Utility is an important component of purposeful behavior because people will allocate their scarce time, energy, and money in an attempt to gain the most utility possible.

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 given a $100 budget at work that can be spent only on two items: staplers and pens. If staplers cost $10 each and pens cost $2.50 each, then the opportunity cost of purchasing one stapler is:

-4 pens -4 pens: You must forgo purchasing 4 pens if you are to free up enough money (4 × $2.50 = $10) to purchase a stapler.

Microeconomics is concerned with

-A detailed examination of specific economic units that make up the economic system.

The budget line shows

-All possible combinations of two goods that can be purchased, given money income and the prices of the goods.

Two major virtues of the market system are that it

-Allocates resources efficiently and allows economic freedom.

Why is entrepreneurial ability distinct from labor even though both are considered a category of economic resource?

-Because entreprenuerial ability is not directly engaged in production. -Entrepreneurial ability and labor are both human resources, but they perform different functions in the productive process. Entrepreneurial ability does not directly produce goods and services; it organizes the resources that do. Labor refers to the human inputs that directly engage in production.

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. 43,277 units at which MC = $99 and MB = $99:

-Current number -Current number, because MB = MC, there is no net gain in using scarce resources in producing and consuming one more unit.

Explain how (if at all) each of the following events affects the location of a country's production possibilities curve: A devastating earthquake destroys numerous production facilities:

-Curve shifts inward -The curve should shift inward with the destruction of resources (capital).

Explain how (if at all) each of the following events affects the location of a country's production possibilities curve: a. The quality of education increases:

-Curve shifts outward -Assuming better education translates into better work skills, then productivity should increase, and this would shift the curve outward.

Explain how (if at all) each of the following events affects the location of a country's production possibilities curve: A new technique improves the efficiency of extracting copper from ore:

-Curve shifts outward -The curve should shift outward as more production is possible with existing resources.

Suppose that you initially have $100 to spend on books or movie tickets. The books start off costing $25 each and the movie tickets start off costing $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease? Your budget remains $100, and the price of books remains $25, but the price of movie tickets rises to $20:

-Decrease -Decrease, because certain combinations are no longer affordable (for example, you can no longer purchase 10 movie tickets with your $100 budget).

The competitive market system

-Encourages innovation because successful innovators are rewarded with economic profits.

Because economic resources are used to produce goods and services, they are called

-Factors of production or inputs -Economic resources are also called factors of production because they are used to produce goods and services. They are called inputs because they go into a production process (like ingredients go into a bowl to make a cake), with the resulting goods and services also being referred to as output.

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. 5 units at which MB < MC:

-Fewer -Fewer, because MB < MC. (See the explanation for part b.) -Explanation for part b: Fewer, because MC > MB, the opportunity costs (scarce resources used elsewhere) of producing one more unit exceed the benefit of consuming that additional unit.

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. 11 units at which MC = $4 and MB = $3:

-Fewer -Fewer, because MC > MB, the opportunity costs (scarce resources used elsewhere) of producing one more unit exceed the benefit of consuming that additional unit.

A positive statement is one that

-Focuses on facts, descriptions, and theoretical relationships. -Fact based Ex: Monopolies have proved to be inefficient

The simple circular flow model shows that

-Households are on the selling side of the resource market and on the buying side of the product market. MAKE SURE TO KNOW

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.

Suppose that you initially have $100 to spend on books or movie tickets. The books start off costing $25 each and the movie tickets start off costing $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease? Your budget remains $100, and the price of movie tickets remains $10, but the price of a book falls to $15:

-Increase -Increase, because the lower price allows you to purchase combinations that you could not afford before (for example, you can now purchase 6 books and 1 movie ticket).

Suppose that you initially have $100 to spend on books or movie tickets. The books start off costing $25 each and the movie tickets start off costing $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease? Scenario: Your budget increases from $100 to $150 while the prices stay the same

-Increase Increase, because a larger budget allows you to purchase not only the combinations that you could afford before but also new combinations that you could not afford before (for example, you can now afford to purchase 4 books and 5 movie tickets).

What are the two major ways in which an economy can grow and push out its production possibilities curve?

-Increases in resource supplies and advances in technology -The economy produces output from resource inputs like land, labor, and capital. So one major way for an economy to grow and push out its production possibilities curve is for it to obtain more resources. The second major way is to develop new and better technologies so that the economy can produce more from any given amount of resources.

Broadly defined, competition involves

-Independently acting buyers and sellers and freedom to enter or leave markets.

What roles do entrepreneurs play in the economy?

-Innovate, take risks, and make decisions -Entrepreneurs are risk-takers: They coordinate the activities of the other three inputs for profit—or loss, which is why they are called risk-takers. Entrepreneurs sometimes manage companies that they own, but a manager who is not an owner is not necessarily an entrepreneur but may be performing some of the entrepreneurial functions for the company. Entrepreneurs are also innovators, or perhaps inventors, and profits help to motivate such activities.

An economic system

-Is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.

Economists classify resources as

-Labor, land, real capital, and entrepreneurs. -Economic resources fall into four main categories: labor, land (natural resources), real capital (machines, factories, buildings, etc.,) and entrepreneurs. Financial capital is not classified as a resource. It is used to facilitate resources transactions.

Which of the following is a distinguishing feature of laissez-faire capitalism?

-Minimal government intervention

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. 3,000 units at which MC = $10 and MB = $13:

-More -More, because MB > MC, the benefit of consuming one more unit exceeds the opportunity costs (scarce resources used elsewhere) of producing that additional unit.

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. 82 units at which MC < MB:

-More More, because MB > MC. (See the explanation for part a.) Explanation for part a: More, because MB > MC, the benefit of consuming one more unit exceeds the opportunity costs (scarce resources used elsewhere) of producing that additional unit.

Economic resources are the

-Natural, human, and manufactured inputs used to produce goods and services. -Economic resources are the natural, human, and manufactured inputs used to produce goods and services. Technological resources are manufactured resources. Economic resources fall into four main categories: labor, land (natural resources), real capital (machines, factories, buildings, etc.), and entrepreneurs. Financial capital is not classified as a resource. It is used to facilitate resource transactions.

Explain how (if at all) each of the following events affects the location of a country's production possibilities curve: The number of unemployed workers increases

-No change -This should not affect the location of the curve. Production moves inward and away from the curve.

Money is not considered a capital resource in economics because money is

-Not productive -Money is not considered a capital resource because money is not productive—it provides access to resources, but by itself, it does not directly contribute to the production of goods and services. Additionally, the quantity of money in circulation does not determine an economy's productive capacity, while the amount of capital and other resources do. Doubling the amount of money in circulation does not change the economy's physical capacity to produce goods and services. Money is, however, referred to as a financial resource and financial capital, reflecting its ability to acquire real economic resources.

The Latin term "ceteris paribus" means

-Other things equal.

Which of the following is a fundamental characteristic of the market system?

-Property rights

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.

From society's point of view, the economic function of profits and losses is to

-Reallocate resources from less-desired to more-desired uses.

Macroeconomics approaches the study of economics from the viewpoint of

-The entire economy.

Which of the following represents a normative economic statement?

-The government ought to lower taxes so people have more money. Normative economic statements describe "what should be."

Macroeconomics

-The part of economics concerned with the performance and behavior of the economy as a whole. Focuses on economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as the household, business, and government sectors. -Examines the performance and behavior of the economy as a whole.

Which of the following represents a positive economic statement?

-The unemployment rate is 4.8 percent. Positive economic statements describe "what is."

The presence of market failures implies that

-There is an active role for government, even in a market system.

Potatoes cost Janice $0.50 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 $3.00 to spend?

-Three pounds of potatoes Explanation: The following table summarizes the cost and value of potatoes for Janice: Cost ($). Value 1st pound $ 0.50. $ 1.50 2nd pound $ 0.50. $ 1.14 3rd pound. $ 0.50. $1.05 4th pound $ 0.50. $ 0.30 Now assume Janice only has $3.00 to spend on potatoes. She will purchase three pounds of potatoes at a total cost of $1.50.

Potatoes cost Janice $0.50 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?

-Three pounds of potatoes Explanation: The following table summarizes the cost and value of potatoes for Janice: Cost ($). Value 1st pound $ 0.50. $ 1.50 2nd pound $ 0.50. $ 1.14 3rd pound. $ 0.50. $1.05 4th pound $ 0.50. $ 0.30 a. 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 fourth pound of potatoes is greater than its value. Therefore, Janice will purchase a total of three pounds of potatoes with her original income of $5.00.

Which of the following most closely relates to the idea of opportunity costs?

-Trade-offs

Economic systems differ according to which two main characteristics?

-Who owns the factors of production and the methods used to coordinate economic activity

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. Check graph on number 15 of Ch. 2 Hw Explanation: -b. (-.50) Explanation: The slope of the budget line from trading with Friday equals −1/2 or −0.50. This implies that for every coconut you give up, Friday must give up two fish, or for every fish that Friday gives up, you must give up 1/2 a coconut. c. (- 0.3) Explanation: The slope of the budget line from trading with Kwame equals −1/3 or −0.33. This implies that for every coconut you give up, Kwame must give up three fish, or for every fish that Kwame gives up, you must give up 1/3 a coconut. d. The budget line from trading with Kwame. Explanation: The budget line from trading with Kwame features a larger set of attainable combinations of coconuts and fish. Because Kwame is willing to give up more fish per coconut, you can consume more of both (assuming you make a trade). This implies that you would prefer to trade with Kwame. e. Kwame Explanation: Because Kwame is willing to give up more fish per coconut, you can consume more of both (assuming you make a trade). This implies that you would prefer to trade with Kwame.

The assertion that "there is no free lunch" means that

All production involves the use of scarce resources and thus the sacrifice of alternative goods.

The study of economics is primarily concerned with

Choices that are made in seeking the best use of resources

The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity:

Economics

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Suppose you won $15 on a lotto ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. Candy bars cost $0.75 each while bags of peanuts cost $1.50 each. Complete the table below (gray-shaded cells) showing the alternative combinations of the two products that are available. Goods: A Candy Bars: Bags of peanuts: Goods: B Candy Bars: Bags of peanuts: Goods: C Candy Bars: Bags of peanuts: Goods: D Candy Bars: Bags of peanuts: Goods: E Candy Bars: Bags of peanuts:

Goods: A Candy Bars: 0 Bags of peanuts: 10 Goods: B Candy Bars: 4 Bags of peanuts: 8 Goods: C Candy Bars: 8 Bags of peanuts: 6 Goods: D Candy Bars: 12 Bags of peanuts: 4 Goods: E Candy Bars: 16 Bags of peanuts: 2 Goods: F Candy Bars: 20 Bags of peanuts: 0

A normative statement is one that

Is based on value judgments. -Opinion based Ex: The government should implement strict wealth tax laws to decrease the uneven distribution of wealth

The most efficient combination of resources in producing a given output is the combination that

Minimizes the cost per unit of output.

#23 QUIZ

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The consumer price index rose by 2.2 percent from November 2017 to November 2018:

Macroeconomics

The unemployment rate in the United States was 3.7 percent in December 2018:

Macroeconomics

U.S. output, adjusted for inflation, increased by 2.3 percent in 2017:

Macroeconomics

Making choices based on comparing marginal benefits with marginal costs:

Marginal analysis

A U.S. software firm laid off 15 workers last month and transferred the work to India:

Microeconomics

An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise:

Microeconomics

Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1 percentage point:

Microeconomics

Joe sold gold coins for $1,000 that he bought a year ago for $1,000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money because he could have received a 3 percent return on the $1,000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of

Opportunity costs

Use the tool provided 'Budget' to draw a single budget line. Plot each of the six combinations (A-F) above (plot 6 points total). Goods: A Candy Bars: 0 Bags of peanuts: 10 Goods: B Candy Bars: 4 Bags of peanuts: 8 Goods: C Candy Bars: 8 Bags of peanuts: 6 Goods: D Candy Bars: 12 Bags of peanuts: 4 Goods: E Candy Bars: 16 Bags of peanuts: 2 Goods: F Candy Bars: 20 Bags of peanuts: 0

See problem number 14 in Ch. 2 Homework for answer. You pretty much just plot the points. Candy bars is on the x axis and goods are on the y axis.

All of the following would affect the position and shape of a nation's production possibilities curve, except

The level of employment

Microeconomics

The part of economics concerned with (1) decision making by individual units such as a household, a firm, or an industry and (2) individual markets, specific goods and services, and product and resource prices. -Concerned with decision making by individual customers, workers, households, and business firms.

In economics, the pleasure, happiness, or satisfaction received from a product is called

Utility

The pleasure, happiness, or satisfaction obtained from consuming a good or service:

Utility

The division of labor means that

Workers specialize in various production tasks.

Suppose you won $15 on a lotto ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. Candy bars cost $0.75 each while bags of peanuts cost $1.50 each. a. Complete the table below (gray-shaded cells) showing the alternative combinations of the two products that are available. Goods: A Candy Bars: 0 Bags of peanuts: 10 Goods: B Candy Bars: 4 Bags of peanuts: 8 Goods: C Candy Bars: 8 Bags of peanuts: 6 Goods: D Candy Bars: 12 Bags of peanuts: 4 Goods: E Candy Bars: 16 Bags of peanuts: 2 Goods: F Candy Bars: 20 Bags of peanuts: 0 Question: b. What is the opportunity cost of one more candy bar? b. Do these opportunity costs rise, fall, or remain constant as additional units are purchased? Question: c. Does the budget line tell you which of the available combinations of candy bars and bags of peanuts to buy? Question: d. Suppose that you had won $30 on your ticket, not $15. Is the slope of a new budget line flatter, steeper, or the same as in the diagram above? d. Has the number of available combinations increased or decreased?

b. -0.5 bag(s) of peanuts -Remain constant Question b explanation: The slope for the budget line, with candy bars on the horizontal axis, is −0.5 (− Pcb /Pbp or −0.75/1.5). The opportunity cost of one candy bar is 0.5 bags of peanuts. Note that the figure could also be drawn with bags of peanuts on the horizontal axis. The slope of that budget line would be −2. The opportunity cost of one more candy bar is ½ of a bag of peanuts. The opportunity cost of one more bag of peanuts is 2 candy bars. These opportunity costs are constant. They can be found by comparing any two of the consumption alternatives for the two goods. c. -No. Question c explanation: The budget line does not tell you which of the available combinations of candy bars and bags of peanuts to buy. You will need to use your preference relationship for candy bars and bags of peanuts to determine which combination to buy. The budget line only tells you which combinations are feasible. d. -The same -Increased Question d explanation: An increase in income will cause a parallel shift outward. The slope is the same. The budget line at $30 includes greater quantities of both goods and is preferable to the original budget line.