Econ 120 Exam 1

For the Fall semester, you had to pay a nonrefundable fee of $600 for your meal plan, which gives you up to 150 meals. If you eat 100 meals, your marginal cost of the 100th meal is:

$0

Refer to the figure below. Suppose the solid line represents the current supply of Star Wars action figures. If the price of the plastic used to make action figures rises, current supply will:

Shift to S(A). Move to the left

Suppose all the sellers in this market started out charging a price of $45 per unit. What is the most likely result?

They would lower their prices because at $45 there would be an excess supply

If price elasticity is 1, demand is....

Unit Elastic

The Cost-Benefit Principle indicates that an action should be taken if, and only if:

its benefits exceed its costs

If the demand for a good decreases as income decreases, then the good is a:

normal good

Change in Supply

A shift of the entire supply curve

What might cause a demand curve to shift to the right?

An increase in the price of a substitute

Substitution possibilities

As the number and quality of substitutes increases, price elasticity of demand increases

Pat earns $25,000 per year (after taxes), and Pat's spouse, Chris, earns $35,000 (after taxes). They have two pre-school-aged children. Childcare for their children costs $12,000 per year. Given that Chris doesn't want to stay home with the kids, regardless of what Pat does, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than:

$13,000 per year

The marginal cost of the 3rd unit of this activity is: Total cost increases from $40 to $60 when you go from 2 to 3 units

$20

The average cost of 4 units of this activity is: (total cost $100/units of activity 4)

$25

Suppose that Tom bought a bike from Helen for $195. If Helen's reservation price was $185, and Tom's reservation price was $215, the total economic surplus from this transaction was:

$30

Amy is thinking about going to the movies tonight. A movie tickets costs $15, and she'll have to cancel a $20 dog-sitting job that she would have been willing to do for free. The opportunity to Amy cost of going to the movies is:

$35

You won a free ticket to see the latest Star Trek movie this Friday night (which you can costlessly resell for its face value of $15). Your favorite band is also performing on Friday and is your only alternative activity. Friday is your last chance to see either the movie or the band. Tickets to see your favorite band cost $30, and on any given day, you would be willing to pay as much as $50 for a ticket. Based on this information, what is your opportunity cost of going to see the Star Trek movie on Friday?

$35

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending Elite U is:

$70,000

If 20% increase in the price of a good leads to a 60% decrease in the quantity demanded, then what is the price elasticity of demand?

3

Change in Demand

A shift of the entire demand curve

Suppose you observe a decrease in the equilibrium price and quantity of corn. Of the options listed below, this is best explained by:

A fall in consumer income assuming corn is a normal good

Price Ceiling

A maximum allowable price, specified by law

Change in the Quantity Demanded

A movement along the demand curve that occurs in response to a change in the price

Change in the Quantity Supplied

A movement along the supply curve that occurs in the price

Value of Alternative Activity =

Benefit - Explicit Cost

Economic Surplus=

Benefit - Opportunity Cost

Buyer's Surplus

Buyer's reservation price minus the price they actually pay

The tendency for consumers to purchase more of a good or service as its price falls is captured by:

Cross price elasticity of demand

If two products are substitutes, then the:

Cross price elasticity of demand between them will be positive

The responsiveness of the quantity demanded of one good to change in the price of a different good is measured by the:

Cross-price elasticity of demand

Matt has decided to purchase his textbooks for the semester. His options are to purchase the books online with next day delivery at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170. Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16.Given that driving to campus to buy the concert ticket was rational for Matt, Matt should:

Drive to campus to buy the books because the $5 he would save is more than he saved by driving to campus to buy the concert ticket.

Suppose Mary is willing to pay up to $15,000 for a used Ford pick-up truck. If she buys one for $12,000, her ___ would be ___.

Economic surplus; $3,000

If price elasticity is greater than 1, demand is....

Elastic

If the price elasticity of demand for a good is greater than one, then the demand for that good is:

Elastic

Suppose that when the price of oranges is $3 per pound, the quantity demanded is 4.7 tons per day and the quantity supplied is 3.9 tons. In this case:

Excess demand will lead the price of oranges to rise

Opportunity Cost=

Explicit Cost + Implicit Cost

The marginal benefit of an activity is the:

Extra benefit associated with an extra unit of the activity

Demand Curve

Graph showing the quantity of a good that buyers wish to buy at each possible price

Supply Curve

Graph showing the quantity of a good that sellers wish to sell at each possible price

Economics is best defined as the study of:

How people make choices in the face of scarcity & the implications of those choices for society as a whole

If price elasticity is less than 1, demand is....

Inelastic

If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is:

Inelastic

If demand is ___ with respect to price, a price increase will ___ total revenue

Inelastic; increase

Assume that Joe is willing to produce a hamburger for $1, and Mary is willing to pay $3 for a hamburger. Which of the following is true?

Joe and Mary can make a mutually beneficial exchange

Suppose two demand curves intersect and so have a point in common. At that point, demand shown by the steeper curve will be ___ the flatter the curve

Less elastic than

Three Decision Pitfalls

Measuring costs & benefits as proportions instead of absolute amounts, ignoring implicit costs, failure to think at the margin

If most consumer goods and services are ___, then most income elasticities are good ___.

Normal; positive

Market Equilibrium

Occurs in a market when all buyers and sellers are satisfied with their respective quantities at market price

Jody has purchased a non-refundable $75 ticket to attend a Miley Cyrus concert on Friday night. Subsequently, she is asked to go to out dinner at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going out to dinner, the opportunity cost of going out to dinner should include:

Only the entertainment value of the concert

Pat can either drive to work, which takes half an hour and uses $1.50 worth of gas, or take the bus, which takes an hour and costs $1.00. How should Pat get to work?

Pat should drive if saving half an hour is worth $0.50 or more

If consumers completely cease purchasing a product when its price increases by any amount, then demand is:

Perfectly elastic

When calculating price elasticity of demand, if the percentage change in price is negative, then the percentage change in quantity demanded is typically:

Positive

Equilibrium Price/Quantity

Price & quantity at the intersection of the demand and supply curves

Seller's Surplus

Price paid to the seller minus their reservation price

The price elasticity of demand for a good measures the responsiveness of:

Quantity demanded to a one percent change in price of that good

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry maximizes his economic surplus by attending:

State College

Economic Surplus

The benefit of an activity minus its opportunity cost

Income Effect

The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

Substitution Effect

The change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of a good changes

Suppose that if the price of plane tickets increased, more people would choose to travel by train. If this happened, you would know that:

The cross price elasticity between plane tickets and train tickets is positive

When Joe's Gas raises its price for regular unleaded gasoline, total revenue from regular unleaded gas falls to zero. It must be the case that:

The demand for Joe's regular unleaded gasoline is perfectly elastic

If pencils & paper are complements for most consumers, then if the price of paper increases, you would expect:

The equilibrium price and quantity of pencils to fall

Buyer's Reservation Price

The largest dollar amount the buyer would be willing to pay for a good

Cross Price Elasticity of Demand

The percentage change in quantity demanded of good A from a 1 percent change in the price of good B

Income Elasticity of Demand

The percentage change in quantity demanded that results from a 1 percent change in income

Price Elasticity of Demand

The percentage change in the quantity demanded of a good that results from a 1% change in price

If the government imposed a price ceiling of $40, what would happen in this market?

The price ceiling would have no effect

Seller's Reservation Price

The smallest dollar amount the seller would be willing to sell an additional unit of a good

Total Surplus

The sum of buyer and seller's surplus

Opportunity Cost

The value of what must be foregone to undertake an activity

The price of bananas will increase in response to:

an excess demand for bananas

At the price of $9, there will be:

an excess supply of 5 units. At a price of $9 buyers will want to buy 1 unit, and sellers will want to sell 6 units, a difference of 5 units.

If the local slaughterhouse gives off an unpleasant stench, then the equilibrium quantity of meat will be ___ the quantity that maximizes total economic surplus

higher than

Positive Economic Principle

how people WILL behave

Suppose that the market price for hot dogs sold by street vendors has just risen from $4.50 to $5.00, and that in response Curly has now begun operating a hot dog cart. We can assume that Curly's reservation price for hot dogs is:

greater than $4.50 but no more than $5.00

It is likely that for most people:

coffee and tea are substitutes

Shelly purchases a leather purse for $400. One can infer that:

her reservation price was at least $400

Suppose demand decreases, but there is no change in supply. As the market reaches its new equilibrium:

excess supply will lead the price to fall

Normative Economic Principle

says how people SHOULD behave

The economic surplus of an action is:

the difference between the benefit and the cost of taking an action

The entire group of buyers and sellers of a particular good or service makes up:

the market

The opportunity cost of an activity includes the value of:

the next-best alternative that must be foregone

When a market is in equilibrium:

there is neither excess demand nor excess supply

Janie must choose to either mow the lawn or wash clothes. If she mows the lawn, she will earn $30, and if she washes clothes, she will earn $45. She dislikes both tasks equally and they both take the same amount of time. Janie will therefore choose to ____ because it generates a ____ economic surplus.

wash clothes; bigger