econ 2102 exam 1

Which of the following is a determinant of supply? a. consumer tastes b. the prices of the factors of production c. income

B

the marginal benefit of an activity is the

extra benefit associated with an extra unit of the activity.

Suppose that the demand for electricity has been found to be price inelastic. The most likely explanation for this finding is that:

few substitutes for electricity exist

How to determine the effects on price and quantity when either one or both of supply and/or demand shift left or right. This includes the uncertain effects of simultaneous shifts.

** with 1 shift (supply or demand) we always know both outcomes (P & Q). With 2 shifts (demand and supply) we can only know ONE outcome (P or Q)

market economy

- price is the guiding force in a market economy - answers the questions what (how much), how and for whom things are produced.

Three determinates of price elasticity

1) number of substitutes 2) portion of income involved 3) the time available to make a purchase decision

economic surplus is

the difference between the benefit gained and the cost incurred of taking an action.

That elasticity along a demand line is computed as:

1/slope * (P/Q) or (change in Q/ change in P) * (P/Q)

If the total benefits of watching 1, 2, and 3 baseball games on TV are 100, 120, and 125, then the marginal benefits are

100, 20, 5 100 - 0 120 - 100 125 - 120

the marginal cost of upgrading from a 700 to an 800 Mhz computer is

1400 - 1000 = 400 TC 800 - TC 700

the total benefit of an 800 Mhz computer is

1500 + 400 = 1900 TB 700 + MB 800

If a 10 percent decrease in the price of a good leads to a 20 percent increase in the quantity demanded, then what is the price elasticity of demand?

2 The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here +20/-10 = -2. By convention, the price elasticity of demand is expressed in terms of its absolute value.

A skilled handyman is currently running his own business without any employees. In an effort to boost his profit, the handyman is considering employing some hired workers so that he can complete more jobs each week. In the table below are the handyman's estimates on the number of jobs that could be completed if he hired up to five employees. In addition, he knows that each new job pays $250 per week, while each employee will be paid $25 per hour and work for 40 hours a week.

2 employees marginal cost comes from $25 x 40 hours

If the absolute value of the price elasticity of demand for tickets to a football game is 2, then if the price increases by 1 percent, quantity demanded decreases by:

2% change quantity/ %change price 2/1

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

3 The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here -60/20 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value

To earn extra money in the summer, you grow tomatoes and sell them at the local farmers' market for 30 cents per pound. By adding compost to your garden, you can increase your yield as shown in the table below (image) If compost costs 80 cents per pound and your goal is to make as much profit as possible, how many pounds of compost should you add?

3 more 1) multiply the pounds of tomato by 30 to get total revenue 2) multiply the number of compost by 80 to get the cost 3) subtract TR by cost to get revenue 4) the highest revenue is how much you should add

If the price elasticity of demand for pineapples is 0.75, then a 4 percent increase in the price of pineapples will lead to a:

3 percent decrease in the quantity of pineapples demanded. The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. So, if the price elasticity of demand is 0.75 and price increases by 4 percent, then quantity demanded must fall by 3 (= 0.75 × 4) percent. Recall that price and quantity demanded move in opposite directions.

If the marginal costs of 1, 2, and 3 hours of talking on the phone are $50, $75, and $105, then the total costs are

50, 125, 230 50 + 0 50 + 75 = 125 125 + 105 = 230

Application of the cost-benefit principle would lead one to purchase a __________ computer because __________.

800 Mhz; the marginal benefits and marginal costs are equal (both 400)

the total cost of a 700 Mhz computer is

900 + 100 = 1000 TC 600 + MC 700

What will happen to the equilibrium price and quantity of beef if more lenient FDA inspections increase the number of cattle ranches? A. Equilibrium price will decrease and equilibrium quantity will increase. B. Both will decrease. C. Equilibrium price will increase and equilibrium quantity will decrease. D. Both will increase.

A

shifts in demand/supply curves

A change in demand or a change in supply (a shift of the entire curve) is caused by a specific event impacting the benefit of buyers or the cost of suppliers. This creates the need for market price to change so that a new equilibrium can be reached. shifting demand curve: 1) expectations of future price - if future price will be lower then demand now will be lower (shift left) & vice versa 2) taste and preferences - in winter we need jackets which creates more demand (shift right) & vice versa 3) income - normal goods (income increase = shift right, income decreases = shift left) - inferior goods (income decreases = shift right, income increases = shift left) 4) price of related goods - substitutes (price of 7-up increases = right shift for sprite) - complements (price of pb increases = left shift for jelly) 5) number of buyers - more buyers = shift right - less buyers = shift left shifting the supply curve: 1) cost of production - if something makes cost of production cheaper (technology, availability of resources, etc.) then supply will shift right. more resources = more supply 2) number of sellers - more sellers = right - less sellers = left

What is the definition of economics and what kind of situations can be addressed by its theories

A social science of how scarcity (limited resources) and unlimited human wants forces us to make choices/ trade-offs. microeconomics = individual decision makers

You notice that your grocery store always has day-old bakery products at a reduced price. Why might that be?

At the original price, quantity supplied was greater than quantity demanded.

suppose the current issue of the New York Times reports an outbreak of mad cow disease in Nebraska, as well as the discovery of a new breed of chicken that gains more weight than existing breeds that consume the same amount of food. How will these developments affect the equilibrium price and quantity of chickens sold in the United States?

Equilibrium price may increase or decrease and quantity will increase.

What will happen to the equilibrium quantity and price of corn if the price of butter (a complement) increases and the price of fertilizer decreases?

Equilibrium price will decrease and quantity may increase or decrease.

How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and quantity in the market for new automobiles?

Equilibrium price will fall; quantity will fall.

Tom is a mushroom farmer. He invests all his spare cash in additional mushrooms, which grow on otherwise useless land behind his barn. The mushrooms increase by 50 percent in weight during their first year, after which time they are harvested and sold at a constant price per pound. Tom's friend Dick asks Tom for a loan of $300, which he promises to repay after 1 year. How much interest will Dick have to pay Tom in order for Tom to recover his implicit cost of making the loan? interest to be paid to Tom ___?

If Tom kept the $300 and invested it in additional mushrooms, at the end of a year's time he would have $450 worth of mushrooms to sell. Therefore, Dick must give Tom $150 in interest in order for Tom not to lose money on the loan. (300 + 150 = 540, 150 comes from the 50% increase)

How to judge the relative elasticity of a curve based on its slope

If steep think Inelastic and if flat think Elastic.

what does the value/ sign indicate for cross-price and income elasticity?

Income and cross-price elasticity values indicate the magnitude of a shift left or right of a demand curve, while the sign indicates the direction of the shift.

The marginal benefit of upgrading from a 600 Mhz computer to a 700 Mhz computer is

TB 700 - TB 600 1500- 1000 = 500

Tickets to a sporting event go on sale and sell out almost instantly. This implies that:

The price for the tickets is below the equilibrium price.

total revenue formula

Total Revenue (TR) = Price * Quantity dollar value of sales = is the benefit (only) of selling something (before cost).

The meal plan at University A lets students eat as much as they like for a fixed fee of $500 per semester. The average student there eats 250 pounds of food per semester. University B charges $500 for a book of meal tickets that entitles the student to eat 250 pounds of food per semester. If the student eats more than 250 pounds, he or she pays $2 for each additional pound; if the student eats less, he or she gets a $2 per pound refund. If students are rational, at which university will average food consumption be higher?

University A At University A, the marginal or extra cost for each additional pound of food is $0, so everybody will keep eating until the extra benefit from eating an extra pound is also equal to $0. At University B, however, the cost of eating an extra pound of food is $2, so people will stop eating when the benefit of eating an extra pound falls to $2. Food consumption will thus be higher at University A.

The Cost-Benefit principle

We undertake an action as long as the marginal benefit (such as marginal utility or marginal revenue) is equal to or exceeds the marginal cost MB > MC do it MB = MC one more MB < MC too much

If bagels and donuts are substitutes, then a decrease in the price of donuts will result in

a decrease in demand for bagels

eteris paribus, which of the following is most likely to cause an increase in the quantity demanded of perfume? - a decrease in price of perfume - a decrease in tastes for perfume - an increase in income - an increase in price of electrcity

a decrease in the price of perfume Quantity demanded and price are inversely related. Tastes and income changes would cause a change in demand (a shift) and the price of electricity would impact the supply of perfume.

a) using the graph, identify the equilibrium price and quantity in this market b) at the price of $130, the market will experience ___ in the amount of ___ units c) at the price of $20, the market will experience ____ in the amount of ___ units

a) price = 70, quantity = 210 b) excess supply, 360 c) excess demand, 300

A landowner has just acquired 370 acres of new land, and is using the Cost-Benefit Principle to decide between three alternative uses for the land: growing corn, growing soybeans, or renting it to a local farmer. If corn is planted, the landowner expects to earn $980 per acre, while soybeans pay only $575 per acre. Renting the land earns the landowner $400 per acre. In addition, the cost of growing and harvesting corn is estimated to be $203,500, while only $88,800 for soybeans. We can assume there are no costs associated with renting the land. a. For this landowner, the opportunity, or implicit cost, of growing corn is $____ from _____ b. the opportunity, or implicit, cost of growing soybeans is ____ from ____ c. the landowner maximizes economic surplus by ____

a. $1480,000 from renting the land - renting is the next best option to corn multiply 370 (the acres) by price per acre for each option, then subtract the cost corn = 159100 soybeans = 123950 renting = 14800 b. 159100 from growing corn c. growing corn

The campus bookstore at No Name U usually charges $14 for a license plate holder displaying the school insignia, selling 100 holders per week. During homecoming week, the bookstore changes the price to $17.50 per plate, selling 65 of them. a. What is the price elasticity of demand for license plate holders? b. As a result of the price change, the total revenue from selling license plate holders will c. The price elasticity of demand for license plate holders is ___ at the original price.

a. 1.4 % change quantity (65-100/65 =-.35) / % change price (14-17.5/14=-.25) b. decrease As a result of the price change, total revenue (price × quantity) will decrease from 1,400 to 1,137.5. c. elastic because an increase in price decreases TR

Indicate how you think each of the following would shift demand in the indicated market: a. The incomes of buyers in the market for used Ford Fusions decreases. The demand curve would _____ b. Buyers in the market for pizza read a study linking pepperoni consumption to weight gain. The demand curve would _____. c. Buyers in the market for gas-powered cars learn of a decrease in the price of electric cars (a substitute for gas-powered cars). The demand curve would ____ d. Buyers in the market for electric cars learn of a decrease in the price of electric cars. The demand curve would ______

a. shift right b. shift left c. shift left d. remain unchanged

How would each of the following affect the U.S. market supply curve for corn? a. Over-grazing occurs. The supply curve for corn would ____ b. The price of tractors falls. The supply curve for corn would ____ c. The government increases taxes on fertilizer. The supply curve for corn would ____ d. A tornado sweeps through Iowa. The supply curve for corn would ____

a. shift left b. shift right c. shift left d. shift left

identify which of the following scenarios illustrate the scarcity principle: 1) a middle-class family trying to decide if they can go to Florida on vacation 2) new parents deciding if one should quit their job and stay home 3) a single mother considering getting a 2nd job to pay for her kids education 4) members of congress negotiating the budget

all of them

Assume consumers eat either rice or pasta for dinner every night. If the price of rice increases, then one would expect to see

an increase in demand for pasta

Peanut butter and jelly are complements. A decrease in the price of one will result in:

an increase in demand for the other

demand curves

are downward sloping and indicated the level of benefit the buyer (think he/she) will obtain.

supply curves

are upward sloping and measures the cost of producing something for the seller.

When a slice of pizza at the student union sold for $2, Moe did not purchase any. When the price fell to $1.75, Moe purchased a slice each day for lunch. Moe's reservation price for a slice of pizza must be

at least $1.75 but less than $2 We assume that buyers will purchase an item if its price is less than or equal to the buyer's reservation price. If Moe buys pizza at $1.75, his reservation price must be at least $1.75. But since he did not buy pizza when it was $2.00 we assume that his reservation price was less than $2.00.

The equilibrium price and quantity of any good or service is established by:

both demanders and suppliers

What will happen to the equilibrium price and quantity of beef if the price of chickenfeed (and therefore the price of chicken) increases?

both will increase beef demand shifts right

What will happen to the equilibrium price and quantity of fish if fish oils are found to help prevent heart disease?

both will increase demand curve would shift right

Martha and Sarah have the same preferences and incomes. Just as Martha arrived at the theater to see a play, she discovered that she had lost the $10 ticket she had purchased earlier. Sarah also just arrived at the theater planning to buy a ticket to see the same play when she discovered that she had lost a $10 bill from her wallet. If both Martha and Sarah are rational and both still have enough money to pay for a ticket, is one of them more likely than the other to go ahead and see the play anyway?

both would make the same decision

Suppose you notice that more and more people are driving gas-guzzling cars. Since you drive an economy car, their increased demand for gas:

causes the price you pay for gas to increase

A movement along a demand curve from one price-quantity combination to another is called a

change in quantity demanded

the marginal cost of an activity is the

change in the cost of an activity that results from an extra unit of the activity

Residents of your city are charged a fixed weekly fee of $6 for garbage collection. They are allowed to put out as many cans as they wish. The average household disposes of three cans of garbage per week under this plan. Now suppose that your city changes to a "tag" system. Each can of garbage to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of garbage collected in your city?Under the "tag" system, the total quantity of garbage collected in the city will

decrease In the current system, the cost is $6 per week no matter how many cans you put out, so the cost of disposing of an extra can of garbage (the marginal cost) is $0. Under the tag system, the cost of putting out an extra can is $2, regardless of the number of cans. Since the marginal cost of putting out cans is higher under the tag system while the marginal benefit remains unchanged, we would expect this system to reduce the number of cans collected.

Use the supply and demand for hotel rooms to show the shortage that would result near your campus during events such as parents' weekend and graduation unless hotel room rates would be allowed to vary based on changes in demand. In a free market, an ___ in price of the rooms will cause an _____, shown graphically as a _____the supply curve.

demand curve shifts right an increase, an increase in the quantity supplied, movement up along

One reason for the ________ slope of the demand curve is that as prices fall ________.

downward; more people find that the price is less than their reservation price We assume that buyers will purchase an item if its price is less than or equal to the buyer's reservation price. As prices fall, the price becomes lower than people's reservation price.

Once a week, Smith purchases a six-pack of cola and puts it in his refrigerator for his two children. He invariably discovers that all six cans are gone on the first day. Jones also purchases a six-pack of cola once a week for his two children, but unlike Smith, he tells them that each may drink no more than three cans. If the children use cost-benefit analysis each time they decide whether to drink a can of cola, Explain why the cola lasts much longer at Jones's house than at Smith's.

each smith child has a higher marginal cost of not drinking a cola At Smith's house, each child knows that the cost of not drinking a can of cola now is that it is likely to end up being drunk by the sibling. Each thus has an incentive to consume the cola as rapidly as possible to prevent the other from encroaching on his/her share. Jones, by contrast, has eliminated that incentive by making sure that neither child can drink more than half the cans. This step permits his children to consume at a slower, more enjoyable pace.

If consumers can easily switch to a close substitute when the price of a good increases, demand for that good is likely to be:

elastic

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

elastic If the percentage change in quantity is less than the percentage change in price, then the price elasticity of demand will be less than one in absolute value, implying that demand is inelastic.

What will happen to the equilibrium price and quantity of apples if apples are discovered to help prevent colds and a fungus kills 10 percent of existing apple trees?

equilibrium price will increase and quantity may increase or decrease

If one should raise, lower, or keep the same prices to maximize total revenue with elastic, unit elastic and inelastic values respectively.

example: price = 750 quantity = 30 slope= 5 EQXPX = 1/slope x p/q so 1/5 x 750/30 = 5 5 = elastic because it's bigger than 1 750 x 30 = 22,500 (total revenue) *** do this for all prices to determine if TR will increase or decrease by changing the price

how is price elasticity of demand presented?

in absolute numbers, where values greater than 1 are referred to as elastic (found at higher prices); values smaller than 1 are referred to as inelastic (found at lower prices); and the value 1 is know as unit elastic (found at the midpoint of a demand curve that is a straight line).

what is included/excluded in marginal cost of a action

include: - implicit cost (what must be sacrificed aka the next best alternative) - opportunity cost exclude: - sunk costs (a cost that is beyond recovery)

As the price of cookies increases, firms that produce cookies will

increase the quantity of cookies supplied

In general, rational decision making requires one to choose the actions that yield the

largest economic surplus

The buyer's reservation price for a particular good or service is the

largest price the buyer would be willing to pay for it

Demand tends to be ______ in the short run than in the long run.

less elastic

Suppose the price of a Snickers candy bar is $2.00 at both the airport and the grocery store. The price elasticity of demand for a Snickers candy bar at an airport is likely to be ______ the price elasticity of demand for a Snickers candy bar at the grocery store.

less than

All else equal, the price elasticity of demand for small-budget items such as soap tends to be ______ than the price elasticity of demand for big-ticket items such as flat-screen TVs.

lower

A decrease in the demand for bananas with no concurrent change in the supply of bananas will result in a ________ equilibrium price and a(n) ________ equilibrium quantity.

lower, lower

If the demand for a good is highly elastic, that good is likely to have:

many close substitutes

what needs to be taken into account when deciding what quantity of something to do

marginal cost and benefits must be taken into account rather than totals or averages whenever you are deciding how many (what quantity) of something you should have/do. - marginal cost = extra negative of one more - marginal benefit = extra positive of one more

A change in demand means there has been a shift in the demand curve, and a change in quantity demanded

means that price has changed and there is movement along the demand curve

price elasticity of demand (EQXPX)

measures the sensitivity in the quantity demanded in response to change in a good's own price (a movement up or down along a stationary demand curve). percent change in quantity demanded for each 1 % change in the price of the good. %change quantity (response) / %change price (cause)

if the demand curve is horizontal then demand is

perfectly elastic EQXPX = infinite slope = 0

What price control is, the difference between a price floor and a price ceiling, and know which one causes a surplus and which one causes a shortage.

price control = government mandated minimum or maximum prices set for specified goods A price ceiling keeps a price from rising above a certain level—the "ceiling" (think rent). more demand than supply = shortage A price floor keeps a price from falling below a certain level—the "floor" (think minimum wage). less demand than supply = surplus

Jessica's marginal cost for producing a pitcher of lemonade is $0.25. Therefore, $0.25 can also be called her

reservation price

If one fails to account for implicit costs in decision making, then applying the cost-benefit rule will be flawed because

the costs will be understated

Economic Surplus

the difference between benefit and cost.

Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than spending an equal amount of money to go to a movie. The opportunity cost of going to the beach is:

the movie she missed seeing

the implicit cost of an activity is the value of

the next-best alternative forgone

cross-price elasticity

the percent change in quantity demanded for GOOD X for each 1 % change in the price of GOOD Y. So we are comparing across prices or products. -positive value = substitute goods -negative value = complement goods

income elasticity

the percent change in quantity demanded for each 1 % change in the INCOME of buyers. - positive value = normal good - negative value = inferior good

Which of the following would cause an increase in quantity supplied of wheat? - The price farmers receive for their wheat rises - The price of fertilizer farmers' use in their fields decreases. - The price firms pay for liability insurance falls. - New, better technology for farming is introduced.

the price farmers receive for their wheat rises

A seller's reservation price is generally equal to

the seller's marginal cost

Whenever the quantity demanded is not equal to the quantity supplied, the quantity that is actually sold in the market is:

the smaller of the quantity demanded and the quantity supplied

Assume that steel is used to produce monkey wrenches. Ceteris paribus, if the price of steel rises, then:

the supply curve for monkey wrenches shifts left

just before the semester starts, you notice that the campus bookstore has a sale on new laptop computers, which is something you have been planning to purchase in the coming months. The campus bookstore is offering 10 percent off on a laptop that normally costs $600. However, you are also considering buying a new TV for your apartment, and you know that the electronics store, Media-ocre Buy, is offering 15 percent off on a TV, which normally costs $420. Assuming you are currently unable to make both purchases due to budget constraints, which product offers the best deal?

the tv because it offers a larger dollar savings ($60 vs $63)

movement along demand/supply curves

they do not shift in reaction to changes in a good's own price. This is instead seen as movements along the curve and is called a change in the quantity demanded or quantity supplied. Note that something must be causing the price to change.

Supply curves are generally _______ sloping because _____________

upward; of the principle of increasing opportunity costs.

For two goods, X and Y, to be classified as substitutes, it must be the case that:

when the price of X rises, the demand for Y increases

if the slope of a demand curve is infinite then the price elasticity of demand is

zero vertical line demand curve slope = infinity