Econ 101 Study Guide Chp. 1-4
Which of the following is the best example of an entrepreneur?
Suzie owns a company that designed and sells a software program that is used in self driving cars.
Explain absolute advantage.
The ability of an individual, firm, or country to produce more of a good or service than competitors, using the SAME amount of resources.
A supply schedule is a
table that shows the relationship between the price of a product and the quantity of the product supplied.
Which of the following is a current day example of a central economy?
North Korea
Price floors are illegal in the United States.
False
When the marginal benefit equals the marginal cost of the last unit sold in a competitive market
an economically efficient level of output is produced.
The study of economics arises due to
scarcity
A price ceiling is
A legally determined maximum price that sellers charge.
A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed is known as
Free Market
Three key economic ideas are presented in Chapter 1 to help us understand the market. Which of the following is not one of these key ideas?
Money is the most important motivator in all economic decisions.
The milk market is an example of a
Price floor
Adam Smith is known for his argument for the free market system. Which of the following best illustrates Adam Smith's ideas?
Smith argued for less government involvement and restrictions on how a good or service can be produced or sold.
The additional cost to a firm (business) of producing one more unit of a good or service is known as marginal cost. Which of the following best illustrates marginal cost?
The total cost of producing one pen is $5 and the total cost of producing two pens is $9, then the marginal cost of expanding output by one unit is $4 only (9 - 5 = 4).
The term "market" in economics refers to
a group of buyers and sellers of a product and the arrangement by which they come together to trade.
In cities with rent control, people have an incentive to list their apartments on sites such as Airbnb at rents ________ the controlled rates, because rent control causes a ________ of apartments.
above; shortage
What does the term "marginal" mean in economics?
an additional or extra
If a decrease in income leads to an increase in the demand for macaroni, then macaroni is
an inferior good.
The basis for trade is
comparative advantage not absolute advantage.
Goods and services that are used together are called
complements.
Suppose that when the price of hamburgers increases, the Ruiz family increases their purchases of hot dogs. To the Ruiz family,
hamburgers and hot dogs are substitutes.
Suppose that when the price of ice cream increases, Liza decreases her purchase of hot fudge. To Liza,
ice cream and hot fudge are complements.
Suppose a cigar manufacturer currently sells 1,500 cigars per week and makes a profit of $3,000 per week. The plant foreman observes, "Although the last 500 cigars we produced and sold increased our revenue by $7,500 and our costs by $7,000, we are only making an overall profit of $3,000 per week so I think we need to cut back on production. Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 500 cigars?
marginal cost
The additional cost to a firm of producing one more unit of a good or service is the
marginal cost.
Increasing marginal opportunity cost implies that
the more resources already devoted to any activity, the payoff from allocating yet more resources to that activity increases by progressively smaller amounts.
Price ceilings result in shortages. T/F
true
Scarcity refers to the situation in which
unlimited wants exceed limited resources.
Economics promotes which of the following as the way to make the best decision?
Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.
Which of the following is a positive economic statement?
The minimum wage law causes unemployment.
The amount of a good or service that a consumer is willing and able to purchase at a given price is known as
quantity demanded.
The amount of a good or service that a consumer is willing and able to purchase at a given price is called
the quantity demanded.
Which of the following is a normative economic statement?
Fashion designers should be allowed to copyright designs to promote innovation.
What does the phrase optimal decisions are made at the margin mean?
The optimal decision is to continue any activity to the point where the marginal benefit equals the marginal cost.
A demand curve shows the relationship between
price and quantity demanded
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays is called
Consumer surplus
Quantity supplied is the same as the Law of Supply.
False
Suppose that when the price of hamburger decreases, Teddy increases his purchase of ketchup. To Teddy,
hamburgers and ketchup are complements.
Assume that the hourly price for the services of personal trainers has risen and sales of these services have also risen. One can conclude that
the demand for personal trainers has increased.
Rent control is an example of a price floor.
False
Suppose a cigar manufacturer currently sells 1,500 cigars per week and makes a profit of $3,000 per week. The plant foreman observes, "Although the last 500 cigars we produced and sold increased our revenue by $7,500 and our costs by $7,000, we are only making an overall profit of $3,000 per week so I think we need to cut back on production. Using marginal analysis terminology, what is another economic term for the incremental revenue received from the sale of the last 500 cigars?
Marginal Revenue
Samantha is a farmer in Florida who grows both oranges and apples. Warren is a farmer in Washington who grows both oranges and apples. Samantha's opportunity cost for growing 1 pound of apples is 2 pounds of oranges and her opportunity cost of 1 pound of oranges is 1/4 pound of apples. This means based on the resources Samantha has she must give up harvesting 2 pounds of oranges for every 1 pound of apples she chooses to produce and she gives up 1/4 pound of apples for every pound of oranges she chooses to produce. Warren's opportunity cost for growing 1 pound of oranges is 3 pounds of apples and his opportunity cost for growing 1 pound of apples is 1/2 pound of oranges. Which of the following best describes this scenario?
Samantha has the comparative advantage in producing oranges and Warren has the comparative advantage in producing apples.
Every society has a limited amount of economic resources available to produce goods and services. Which of the following best describes the questions a society must consider when determining how to use resources?
What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services?
When ________ in a market, the total net benefit to society is maximized.
a competitive equilibrium is achieved
In the United States and most other countries, trade is carried out in markets. A market is
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
Using the attached picture please answer the following questions: a. What are the equilibrium price and quantity of sorghum? b. Suppose the prevailing price is $6 per bushel. Is there a shortage or a surplus in the market? c. What is the quantity of the shortage or surplus? d. How many bushels will be sold if the market price is $6 per bushel? e. At what price will suppliers be able to sell 36,000 bushels of sorghum? f. Suppose the market price is $14 per bushel. Is there a shortage or a surplus in the market?
a. Equilibrium price = $10; Equilibrium quantity = 20,000 bushels. b. There is a shortage. c. Shortage = 30,000 - 8,000 = 22,000 bushels. d. Quantity sold = 8,000 bushels. e. At $4 per bushel. f. There is a surplus.
The illustration of S1 and S2 (representing supply curve 1 and supply curve 2) represents a(n)
decrease in supply.
The difference between the ________ for a good and the ________ is called consumer surplus.
highest price a consumer is willing to pay; price the consumer actually pays
A change in supply refers to a
shift in the supply curve based on a variable.
When two goods are substitutes, the more you buy of one, the less you will buy of the other. A decrease in the price of a substitute causes the demand curve for a good to shift to
the left because there is a decrease in demand of the good.
1 - How does the study of microeconomics differ from that of macroeconomics?
1 - Microeconomics is the study of how household and businesses make choices, how they interact in markets, and how the government attempts to influence their choices while macroeconomics is the study of the economy as a whole, including topics like unemployment, inflation and economic growth.
Which of the following best describes the difference between a centrally planned economy and a market economy?
A centrally planned economy is an economy in which the government decides how the economic resources will be allocated. A market economy is an economy where households and firms interact within markets to determine how economic resources will be allocated.
Which of the following best describes a mixed economy?
A mixed economy is a modern economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
Canada produces 100 tons of maple syrup each year. The United States produces 72 tons of maple syrup each year. Which of the following statements is true?
Canada has the absolute advantage when producing maple syrup.
You and your neighbor both have fruit trees on your property. You both have apple trees and cherry trees on your property. Which of the following is a concept discussed in chapter 2 you should consider?
Consider using the production possibilities frontier to show how both you and your neighbor could benefit from trading if you each specialize in one of the fruits.
Absolute advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
False
Suppose a cigar manufacturer currently sells 1,500 cigars per week and makes a profit of $3,000 per week. The plant foreman observes, "Although the last 500 cigars we produced and sold increased our revenue by $7,500 and our costs by $7,000, we are only making an overall profit of $3,000 per week so I think we need to cut back on production. Had the firm not produced and sold the last 500 cigars, would its profit be higher or lower, and if so by how much?
Its profit would be $500 lower.
Explain comparative advantage.
The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
Several studies have shown promising links between green tea consumption and cancer prevention. How does this affect the market for green tea?
The green tea demand curve shifts to the right because of a change in tastes in favor of green tea.
________ shows that if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good.
The production possibilities frontier model
Absolute advantage is the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.
True
Explain how both renters and landlords could be either winners or losers with the imposition of rent control.
With rent control, those renters who are able to obtain a rent-controlled apartment will win by paying a rent which is below the equilibrium rent. Those renters who are not able to obtain an apartment due to the shortage created by rent control will lose. Landlords who abide by the rent control will lose by receiving less than the equilibrium rent. Landlords who do not abide by the rent control can win by charging a rent that is higher than the controlled rent.
Marginal cost is the ________ associated with a particular increase in an activity.
additional cost
The basis for trade is
comparative advantage.
Give an example of a surplus.
doughnut shop that produces 500 doughnuts a day but historically has sold 300 daily.
A(n) ________ is represented by a rightward shift of the demand curve while a(n) ________ is represented by a movement along a given demand curve.
increase in demand; increase in quantity demanded
The law of demand implies, holding everything else constant, that as the price of yogurt
increases, the quantity of yogurt demanded will decrease.
The highest valued alternative that must be given up to engage in an activity is known as
opportunity cost.
The most important of the variables that influence the willingness and ability of firms to sell a good or service is
price.
Ivan runs a custom jewelry shop in Sparkle City. He is debating whether he should extend his hours of operation. Ivan figures that his sales revenue will depend on the number of additional hours the jewelry shop is open as shown in the table above. He would have to hire a worker for those hours at a wage rate of $25 per hour.
5 hrs
When a market is not in equilibrium which of the following best describes the condition that is known as deadweight loss?
A reduction in economic surplus resulting from a market not being in competitive equilibrium or simply stated deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.
Suppose the U.S. president is attempting to decide whether the federal government should spend more on research to find a cure for heart disease. He asks you, one of his economic advisors, to prepare a report discussing the relevant factors he should consider. Use the concepts of opportunity cost and trade-offs to discuss some of the main issues you would deal with in your report.
If the federal government has a fixed budget for medical research, then the opportunity cost of funding more research on heart disease is the reduction in funding for research on other diseases. The decision should be made at the margin: to maximize the benefits from government spending on medical research, the last dollar devoted to research on heart disease should result in the same marginal benefit
Using the demand graph shown if the price point is the horizontal line P (directly below the pink shaded area) which of the following describes the pink shaded area?
The pink shading represents the consumer's surplus.
What is the Law of Demand?
The rule that states that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.
Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
True
The equilibrium moves when there is a shift in supply.
True
Comparative advantage, opportunity cost, and housework: Please provide a scenario demonstrating your understanding of how comparative advantage relates to opportunity cost and housework.
When I mow my grass it takes me 3 hours. If I were not mowing my grass on Friday morning I would be working as a consultant. When I bill my clients for consulting work I bill them $100/hour. If I mow the grass my opportunity cost is $300. If my boyfriend mows the grass it takes him 2 hours. If my boyfriend were to mow the grass this Friday instead of working he would lose out on his wages. He makes $200/hour consulting. The opportunity cost associated with my boyfriend mowing the grass is $400. Therefore, I should mow the grass this Friday because I have the comparative advantage since my opportunity cost is less than my boyfriend's opportunity cost. Please also see page 53 and 54 in your book for additional illustrations.
Which of the following is true based on the following scenario (assume the price associated is the highest price each person is willing to pay): Jessica is willing to pay $8 for a Starbucks coffee Kaylee is willing to pay $6 for a Starbucks coffee Zack is willing to pay $2 for a Starbucks coffee Warren is willing to pay $1.50 for a Starbucks coffee
Jessica and Kaylee would purchase the coffee and experience surplus as follows: Jessica's consumer surplus would be $3 Kaylee's consumer surplus would be $1
The additional benefit to a consumer from consuming one more unit of a good or service is called
Marginal benefit
Ramen noodles is an example of a ___________ good while organic wheat pasta is an example of a __________ good.
inferior; normal
Carmelita can perform either a combination of 35 manicures and 70 pedicures or a combination of 50 manicures and 45 pedicures. If she now performs 35 manicures and 70 pedicures, what is the opportunity cost of performing an additional 15 manicures?
25 pedicures
If the price of gasoline increases, what will be the impact in the market for public transportation?
The demand curve for public transportation shifts to the right.
Which of the following best describes producers surplus?
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.
The purpose of markets is to bring buyers and sellers together. The interaction of buyers and sellers in markets results in firms producing goods and services most desired by consumers. Market equilibrium is
a situation in which quantity demanded equals quantity supplied.
Economic growth is
the ability of the economy to incomes the production of goods and services.
