ECON 221 Midterm 1

Suppose the price of banana bread were to rise to $3.00 per slice. At this higher price, Cho would receive a producer surplus of ? from the 6th slice of banana bread she sells.

$1.50 Explanation: At the original price, since Cho is willing to supply the 6th slice of banana bread for $1.50 but receives $2.25, her producer surplus from the 6th slice is $2.25−$1.50=$0.75$2.25−$1.50=$0.75. When the price increases to $3.00, her willingness to supply a slice of banana bread remains the same at $1.50, but her producer surplus from the 6th slice rises to $3.00−$1.50=$1.50$3.00−$1.50=$1.50. The following graph shows the change in the market price: When the price of banana bread increases, Cho's overall producer surplus increases for two reasons: First, she receives more producer surplus from each slice she would have sold at the lower price; and second, she receives extra surplus from the additional slices she now supplies because the price is higher.

V3: Assume that Ciana considers both her opportunity costs and the price of boots when making her shopping decision. Ciana will minimize her cost of buying the boots if she shops at the

Rural Outlet Explanation: Ciana will base her decision on the total cost of the boots, including the opportunity cost of the time required to obtain the boots and the price of the boots. In this scenario, she incurs the lowest total cost if she buys her boots from the rural outlet.

Match each definition to its appropriate concept. 1. When a society gets the most it can from its scarce resources 2. When economic benefits are distributed uniformly across society Efficiency or Equality

1. efficiency 2. equality explanation: Efficiency means that society is utilizing its scarce resources to attain the maximum possible benefits. Equality, on the other hand, means that those benefits are distributed evenly among all members of society. Efficiency can be thought of as the size of the economic pie, while equality describes how that economic pie is divided into individual slices.

True or False: When both the demand and supply curves shift, the curve that shifts by the larger magnitude determines the effect on the undetermined equilibrium object.

True Explanation: As you can see on each of the previous graphs, the curve that shifts by the larger magnitude determines the effect on price in this case. If the supply curve shifts by a larger magnitude than the demand curve, the downward pressure on price that results from an increase in supply overpowers the upward pressure on price that results from an increase in demand. On the other hand, if the demand curve shifts with a larger magnitude than the supply curve, the upward pressure on price that results from an increase in demand overpowers the downward pressure on price that results from an increase in supply.

Suppose Larry is willing to pay a total of $150,000 for a hyperbaric chamber. True or False: Keeping his maximum willingness to pay for a hyperbaric chamber in mind, Larry will not buy the hyperbaric chamber because it would be worth less to him than its market price of $200,000.

True Explanation: Consumer surplus is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and what the buyer actually pays. Consumers will not purchase a good if its market price is above their willingness to pay, because purchasing it would make them worse off than not buying it. Thus, Larry will not purchase the hyperbaric chamber, because the market price ($200,000) is greater than his willingness to pay ($150,000).

True or False: A price ceiling below $25 per box is a binding price ceiling in this market.

True Explanation: In order for a price ceiling to be binding—that is, in order for it to prevent the market from reaching equilibrium—it must be set below the equilibrium price. In this case, you found that the equilibrium price was $25 per box. Therefore, any price ceiling below $25 per box would be binding, and any price ceiling set above $25 per box would not.

Suppose the price of grain bowls were to fall to $1.50 per bowl. At this lower price, Ana would receive a consumer surplus of ? from the 6th grain bowl she buys.

$1.50 Explanation: At the original price, because Ana is willing to pay $3.00 for the 6th grain bowl but has to pay only $2.25, her consumer surplus from the 6th bowl is $3.00−$2.25=$0.75$3.00−$2.25=$0.75. When the price drops to $1.50, her willingness to pay for the grain bowl remains the same at $3.00, but her consumer surplus rises to $3.00−$1.50=$1.50$3.00−$1.50=$1.50. The following graph shows the change in the market price: Note that at a price of $1.50 per bowl, Ana receives extra consumer surplus from the bowls that she would not even have bought at a price of $2.25 per bowl. Therefore, when the price of grain bowl decreases, Ana's overall consumer surplus increases for two reasons. First, she receives more consumer surplus from each bowl she would have bought at the higher price, and second, she receives extra surplus from the additional bowls she now buys because the price is lower.

12. Market equilibrium and disequilibrium The following graph shows the monthly demand and supply curves in the market for combs. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. The equilibrium price in this market is ? per comb, and the equilibrium quantity is ? combs per month.

$50; 250 Explanation: The market equilibrium occurs at the price at which quantity demanded equals quantity supplied. In this case, the demand and supply curves intersect at a price of $50 per comb and a quantity of 250 combs per month. You can see this by adjusting the values in the Price field until the black points (plus symbols) overlap, indicating the intersection of these two curves.

For each of the prices listed in the following table, determine the quantity of blueberries demanded, the quantity of blueberries supplied, and the direction of pressure exerted on prices in the absence of any price controls. Price - Quantity Demanded - Quantity Supplied - Pressure on Prices 15 - ? - ? - ? 13 - ? - ? - ?

Price - Quantity Demanded - Quantity Supplied - Pressure on Prices 15 - 500 - 210 - Upward 13 - 0 - 290 - Downward Explanation: At a price of $15 per box, consumers demand 500 million boxes of blueberries, but producers supply only 210 million boxes. Therefore, there is a shortage of 290 million boxes. In the absence of a price ceiling, a shortage exerts upward pressure on prices until there is neither a surplus nor a shortage. At a price of $35 per box, consumers demand 0 million boxes of blueberries, but producers supply 290 million boxes. Therefore, there is a surplus of 290 million boxes. In the absence of a price ceiling, a surplus exerts downward pressure on prices until there is neither a surplus nor a shortage.

6. Scarcity, opportunity cost, and marginal analysis Jake is training for a biathlon, a winter racing sport that combines cross-country skiing and rifle shooting. Consider the following scenario: In order to ski for one hour, Jake must take that time off of work, where he earns an hourly wage of $19. Additionally, there is a $8 entrance fee to the skiing facility. Which basic principle of individual choice do these statements best illustrate?

The cost of something is what you give up to get it. explanation: All choices have opportunity costs. The opportunity cost of a good or service measures what must be given up in order to obtain it. In this case, Jake is not only paying $8 for admission to the skiing facility, but he is also giving up the $19 he could have earned by working instead of skiing. In this sense, the $8 price of admission alone does not capture what must be given up to ski. Jake must give up $8+$19=$27$8+$19=$27, which represents the opportunity cost of skiing.

The following week, Riley's statistics faculty advisor gives her some advice. In all their years of teaching they claim to observe that working on 87.5 multiple choice questions boosts a student's test score by about the same amount as spending an hour reviewing lecture notes. For simplicity, assume students are able to review lecture notes at a constant pace during each hour spent studying. Given this information, in order to use her 4 hours of time spent studying to get the highest possible test score, how many hours should she have spent solving multiple choice problems, and how many hours should she have spent reviewing lecture notes?

1 hour working on problems, 3 hours reading Explanation: Riley should make her decision at the margin. Each hour, she should select the option that will improve her exam grade by the largest amount. If she can do more than 87.5 problems in an hour, working on problems will help raise her grade more for that hour than reviewing lecture notes would. The marginal gain from the first hour is 100 problems. She will stop there, because she will get only 75 problems done if she spends the second hour working on problems. Therefore, she should stop working on problems after 1 hour and spend her remaining time reviewing lecture notes.

Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces chinos will produce ... million pairs per day, and the country that produces pistachios will produce ... million pounds per day. In the following table, enter each country's production decision on the third row of the table (marked "Production").

48; 128 Explanation: Recall that Glacier has a comparative advantage in the production of chinos and that Congaree has a comparative advantage in the production of pistachios. If Glacier completely specializes in the production of chinos, it produces 48 million pairs of chinos (4 million hours×12 pairs of chinos per hour4 million hours×12 pairs of chinos per hour). Similarly, if Congaree completely specializes in the production of pistachios, it produces 128 million pounds of pistachios (4 million hours×32 pounds of pistachios per hour4 million hours×32 pounds of pistachios per hour).

4. A decision at the margin Suppose that Riley is a diligent second-year college student. One Saturday, she decides to start the day by working through 250 sample multiple choice problems to study for her statistics class. She starts work at 7:00 AM and uses a table to keep track of her progress throughout the day. She notices that as she the hours pass, it takes her more time to solve the problems. Time || Total Problems Solved 7:00 AM || 0 8:00 AM100 || 100 9:00 AM || 175 10:00 AM || 225 11:00AM || 250 Use the table to answer the following questions. The marginal, or additional, gain from Riley's first hour spent working, from 7:00 AM to 8:00 AM, is ? problems. The marginal gain from Riley's third hour spent working, from 9:00 AM to 10:00 AM, is x problems.

? = 100 x = 50 Explanation: At 7:00 AM, Riley has yet to answer any problems. By 8:00 AM, Riley has answered 100 problems. So the marginal, or additional, gain from her work between 7:00 AM and 8:00 AM is 100−0=100100−0=100 problems. By 9:00 AM, Riley has answered 175 problems. By 10:00 AM, Riley has answered 225 problems. So the marginal gain from the third hour, 9:00 AM to 10:00 AM, is 225−175=50225−175=50 problems.

Based on your answer to the last question, which of the following prices of trade (that is, price of liquor in terms of boots) would allow both Luxembourg and Hungary to gain from trade? Check all that apply. x2 pairs of boots per case of liquor x8 pairs of boots per case of liquor x11 pairs of boots per case of liquor x14 pairs of boots per case of liquor

Correct Answers: x8 pairs of boots per case of liquor x11 pairs of boots per case of liquor Explanation: Recall that Hungary will gain from trade if it gets more than 4 pairs of boots for each case of liquor it exports. Similarly, Luxembourg will trade boots only if it gets more than 1/12 case of liquor for each pair of boots it exports. Another way of saying this is that Luxembourg is willing to trade up to 12 pairs of boots for each case of liquor it imports. Therefore, any price ratio that involves liquor selling for between 4 and 12 pairs of boots per case of liquor will benefit both countries. Any price below 4 pairs of boots per case of liquor would benefit Luxembourg but not Hungary; similarly, any price above 12 pairs of boots per case of liquor would benefit Hungary but not Luxembourg.

V3: 2. Determining opportunity cost Suppose that Ciana is deciding whether or not to buy a pair of boots that she has been researching online, and also the best place to make her purchase. Three different stores in the area sell the boots she likes, but some stores are more convenient for Ciana to reach than others. One option is her local shoe store located only 15 minutes away from where she works, where they charge a marked-up price of $115 for the boots: Ciana earns an hourly wage of $20 at her job. In order to purchase her boots she will have to take time off work, so each hour away from her job costs her $20 in lost income. Assume that Ciana's travel time is the same each way (to and from the store) and that it will take her 30 minutes once she reaches a store to complete her shopping. Assume throughout the question that Ciana incurs no additional costs other than the boots, such as gas. Complete the following table by computing the opportunity cost of Ciana's time and the total cost of shopping at each location.

Store: Opportunity Cost, Price of Boots, Total Cost... Local Shoe Store: OC - $20, Price of Boots - $115, Total Cost - $135 Different Neighborhood in Town: OC - $30, Price of Boots - $98, Total Cost - $128 Rural Outlet: OC - $50, Price of Boots - $75, Total Cost - $125 Explanation: The opportunity cost of driving to each location is what Ciana gives up to make the trip. Getting to the local shoe store takes her 15 minutes, and returning to work takes her 15 minutes (a total of 30 minutes). Shopping takes her another 30 minutes. Since she loses $20 per hour by not working, the opportunity cost of her time is (0.5×$20)+(0.5×$20)=$200.5×$20+0.5×$20=$20. Because the price she pays at this store is $115, she faces a total cost of $20+$115=$135$20+$115=$135. If Ciana buys her boots at the store in the different neighborhood in town, the opportunity cost of her time is 90 minutes: 30 minutes each to drive there, shop, and return to work. The price she pays is $98, so she faces a total cost of $30+$98=$128$30+$98=$128. Finally, if Ciana buys her boots at the store in the rural outlet, the opportunity cost of her time is 2.5 hours: 60 minutes to drive there, 30 minutes to shop, and 60 minutes to return to work. The price she pays is $75, so she faces a total cost of $50+$75=$125$50+$75=$125.

2. The circular-flow model The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Based on this model, households earn income when ... purchase ... in factor markets.

firms; factor Explanation: In the circular-flow model of an economy, households own all the factors of production. Households earn their income when firms purchase or rent these factors of production to use them to produce goods and services. Firms, in turn, earn revenue when households buy goods and services.

Because he can now make more crochet hats per hour, Raphael's opportunity cost of producing pillows is ... it was previously.

higher than Explanation: The shift in Raphael's PPF is reflected in a corresponding change in his opportunity costs. Again, consider combination D, and consider the effects of moving from there to combination E. Both before and after Raphael buys the tool, he can produce 19 pillows if he devotes 6 hours to producing them and 20 pillows if he devotes 8 hours to producing them. Therefore, spending his last 2 hours producing pillows results in one additional pillow. Before he bought the tool, he would have to give up one crochet hat. However, now that he has the tool, it means giving up two crochet hats. Therefore, Raphael's increased ability to produce crochet hats increases his opportunity cost of producing pillows.

1. Specialization and production possibilities Suppose Denmark produces only scooters and bikes. The resources that are used in the production of these two goods are not specialized—that is, the same set of resources is equally effective at producing both bikes and scooters. The shape of Denmark's production possibilities frontier (PPF) should reflect the fact that as Denmark produces more bikes and fewer scooters, the opportunity cost of producing each additional bike... .

remains constant Explanation: Recall that the same set of resources is equally effective at producing both bikes and scooters. This means that if Denmark decides to produce more scooters and fewer bikes, the resources that it uses to produce the additional scooters will be as well suited to the production of scooters as the resources already being used in scooter production. Therefore, the opportunity cost of producing each additional scooter remains constant as more scooters are produced.

Apply your understanding of the previous key terms by completing the following scenario with the appropriate terminology. Your manager requests your help on a marketing research project they are conducting on the relationship between the price of tuna and the quantity of tuna supplied. They hand you the following document: Price of Tuna (Dollars per can) Quantity of Tuna Supplied (Billions of cans) 0.50 750 0.75 1,000 1.00 1,500 1.25 2,000 Your task is to take this ? and construct a graphical representation of the data. In doing so, you determine that as the price of tuna rises, the quantity of tuna supplied increases. This confirms the ? .

supply schedule; law of supply Explanation: The table your manager provided shows the relationship between the price of tuna and the amount of tuna that sellers are willing and able to supply over a range of prices. This is known as a supply schedule. The graphical representation of this data is known as a supply curve. By plotting this data with price along the vertical axis and quantity along the horizontal axis, you see that the supply curve is upward sloping: This indicates that the quantity of tuna supplied rises when the price of tuna rises, also known as the law of supply.

9. Market efficiency and market failure The following graph shows equilibrium in a free market, with equilibrium quantity of QE��. For any level of output equal to QE��, a buyer values a unit of goods in this market ? the unit will cost a seller.

the same amount as Explanation: In a free market, the equilibrium quantity (QE��) maximizes the sum of consumer surplus and producer surplus, because QE�� is the level of output where the value to buyers is just equal to the cost to sellers. For units of output below QE��, the value to buyers is greater than the cost to sellers, while for units of output above QE��, the value to buyers is less than the cost to sellers.

Now, assume that the three mountain plots have been sold to the people that you indicated in the previous section. Suppose that a few weeks after the last of those mountain plots is sold, another basically identical mountain plot goes on the market for sale at a minimum price of $560,000. This fourth plot ? be sold, because ? will purchase it from the seller for at least the minimum price.

will not ; no one Explanation: To determine what will happen with the fourth plot, compare the minimum selling price with the willingness and ability to pay of the remaining buyers. The remaining buyer with the highest willingness and ability to pay is Eleanor at $550,000. However, since $550,000 is less than the minimum selling price of $560,000 for this plot, no one will purchase the parcel. The seller will have to lower their minimum selling price if they want to find a buyer.

Based on the information on the previous graph, you can tell that ? will buy motor scooters at the given market price, and total consumer surplus in this market will be ?.

three consumers; 160 Explanation: Three consumers are willing to pay at least the market price of $60 for a motor scooter: Edison, who is willing to pay up to $140; Hilary, who is willing to pay up to $120; and Kevin, who is willing to pay up to $80. Maria is willing to pay only $40 for a motor scooter, and Rajiv is willing to pay only $20 for a motor scooter, so neither of them will buy a motor scooter if the market price is $60. Total consumer surplus is the sum of consumer surpluses of each individual consumer in the market. Edison's consumer surplus is the difference between his willingness to pay and the market price. Because he demands only one motor scooter and is willing to pay $140 for it, you can compute his consumer surplus in the following way: Individual Consumer SurplusIndividual Consumer Surplus = = Willingness to Pay−Market PriceWillingness to Pay−Market Price = = $140−$60$140−$60 = = $80$80 Similar calculations show that Hilary and Kevin have consumer surpluses of $60 and $20, respectively. Because Maria and Rajiv do not purchase a motor scooter, they do not contribute to total consumer surplus. Therefore, total consumer surplus equals $80+$60+$20=$160$80+$60+$20=$160.

The second group of students attributes the decrease in the price of calzones to the increase in the price of beer. On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the decrease in the price of calzones.

Explanation: It is safe to conclude that calzones and beer are complements, since both are typically consumed together. When the price of beer increases, this causes people to sacrifice some of their calzone consumption. This causes the demand for calzones to decrease. Subsequently, the equilibrium price of calzones decreases, and, as a result, the quantity supplied decreases. This is illustrated by a movement along the supply curve rather than a shift in supply itself.

In order for Juanita to earn a producer surplus of exactly $45 from selling a used air fryer, the market price must be ?.

$180 Explanation: Remember that each recent graduate is interested in selling only one air fryer. Therefore, producer surplus is equal to the market price minus the seller's cost. You can think of Juanita's "cost" as the minimum amount she is willing to accept for her used air fryer. From the graph, you can see that the minimum amount Juanita is willing to accept for her used air fryer is $135. Therefore, if her producer surplus equals $45, the price of a used air fryer must be $180. To find this mathematically, substitute $135 for the seller's cost and $45 for the producer surplus in the previous equation, and solve for the market price: Producer SurplusProducer Surplus = = Market Price−Seller's CostMarket Price−Seller's Cost$45$45 = = Market Price−$135Market Price−$135Market PriceMarket Price = = $45+$135$45+$135 = = $180

Total surplus in this market is ? million.

$20,212.5 Explanation: Total surplus is the surplus that all the individual in an economy—in this case, consumers and producers—earn. Therefore, total surplus is the sum of consumer and producer surplus at the equilibrium price and quantity—that is, the price and quantity at which the supply and demand curves intersect. In this problem, that occurs at a price of $210 per camera and a quantity of 165 million cameras. To calculate the total surplus in the market, first find the area representing consumer surplus. It has a base of 165 million cameras and a height of $280−$210=$70$280−$210=$70 per camera. Likewise, the area representing producer surplus has a base of 165 million cameras and a height of $210−$35=$175$210−$35=$175 per camera. Using the formula for the area of a triangle (12×base×height12×base×height), you can calculate the areas of consumer and producer surplus as follows: Consumer SurplusConsumer Surplus = = 12×Base×Height12×Base×Height = = 12×165 million cameras×$70 per camera12×165 million cameras×$70 per camera = = 12×$11,550 million12×$11,550 million = = $5,775 million$5,775 million Producer SurplusProducer Surplus = = 12×Base×Height12×Base×Height = = 12×165 million cameras×$175 per camera12×165 million cameras×$175 per camera = = 12×$28,875 million12×$28,875 million = = $14,437.5 million$14,437.5 million Therefore, total surplus equals $5,775 million+$14,437.5 million=$20,212.5 million$5,775 million+$14,437.5 million=$20,212.5 million.

2. Price controls in the Florida orange market The following graph shows the annual market for Michigan blueberries, which are sold in units of 50-pound boxes. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. In this market, the equilibrium price is x per box, and the equilibrium quantity of blueberries is x million boxes.

$25 ; 250 Explanation: The equilibrium price and quantity of blueberries occur at the intersection of the demand and supply curves. Using the graph input tool, you can see that this occurs at a price of $25 per box, which is where the quantity of blueberries that producers are willing to supply is equal to the quantity consumers demand (250 million boxes).

4. Consumer surplus for an individual and a market The following graph plots Ana's monthly demand curve (blue line) for grain bowls. The point denoted by A gives a point along her monthly demand curve. The market price of grain bowls is $2.25 per bowl, given by the horizontal black line. From the previous graph, you can tell that Ana is willing to pay ? for her 6th grain bowl each week. Because she has to pay only ? per bowl, the consumer surplus she gains from the 6th grain bowl is ?.

$3.00; $2.25; $0.75 Explanation: The demand curve shows the consumer's marginal benefit from each additional grain bowl and, thus, his or her willingness to pay for grain bowls. The grey point (star symbol) on Ana's demand curve indicates that Ana is willing to pay up to $3.00 for the 6th grain bowl she eats. Consumer surplus is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays. If Ana is willing to pay $3.00 for the 6th grain bowl, but she has to pay only $2.25 for it, then her consumer surplus from the 6th bowl is $3.00−$2.25=$0.75$3.00−$2.25=$0.75.

1. Understanding opportunity cost Suppose you are currently employed as an assistant coach on a college track and field team and earn an hourly wage of $23. One night you decide to miss an optional one-hour practice and go to the skating rink instead, which costs $12. The total dollar cost of missing work and going to the rink, including the opportunity cost of your time, is

$35 Because: The opportunity cost of a choice includes both the monetary amount paid and the value of your time given up by making that choice over another. By skipping practice, you forgo earning your hourly wage of $23 per hour, so this is the opportunity cost of your time. You also choose to pay $12 to get into the skating rink. So your opportunity cost in dollars is $23+$12=$35$23+$12=$35.

6. Producer surplus and price changes The following graph plots a supply curve (orange line) for a group of recent graduates looking to sell used air fryers. Each seller has only a single used air fryer available for sale. Think of each rectangular area beneath the supply curve as the "cost," or minimum price that each seller is willing to accept. Assume that anyone who has a cost that equals the market price is willing to sell their used air fryer. ... Region X (the purple shaded area) represents total producer surplus when the market price is equal to x, while Region Y (the grey shaded area) represents x when the market price x .

$75; the change in total producer surplus; changes from $75 to $105 Explanation: Producer surplus is the difference between a seller's cost (that is, his or her minimum acceptable price) and the price the seller actually receives. On the graph, it is the area above the supply curve and below the market price. The top edge of Region X (the purple shaded area) is at a price of $75. Note that, at this price, four recent graduates are willing to sell a used air fryer: Yakov, Ana, Charles, and Dina. Region Y (the grey shaded area) represents the increase in producer surplus when the market price increases from $75 to $105. Note that, at a price of $105, the same four recent graduates are willing to sell a used air fryer. Therefore, this increase in price does not increase the quantity of used air fryers supplied. However, this higher price does increase the total producer surplus by $120 (equal to the total area of Region Y). Each of the four recent graduates willing to sell a used air fryer for $75 receives an additional $105−$75=$30$105−$75=$30 of producer surplus as a result of the price increase.

When the two countries did not specialize, the total production of chinos was 36 million pairs per day, and the total production of pistachios was 104 million pounds per day. Because of specialization, the total production of chinos has increased by ... million pairs per day, and the total production of pistachios has increased by ... million pounds per day. Because the two countries produce more chinos and more pistachios under specialization, each country is able to gain from trade. Calculate the gains from trade—that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

12; 24 Explanation: Initially, before the two countries specialized, Glacier produced (and consumed) 12 million pairs of chinos and 72 million pounds of pistachios per day, and Congaree produced (and consumed) 24 million pairs of chinos and 32 million pounds of pistachios per day. When they specialized, Glacier produced 48 million pairs of chinos per day, and Congaree produced 128 million pounds of pistachios per day. This is an increase of 12 million pairs of chinos and 24 million pounds of pistachios per day. If Glacier trades 26 million pairs of chinos for 78 million pounds of pistachios from Congaree, both countries will end up consuming more of both goods. In particular, there will be an increase of 10 million pairs of chinos and 6 million pounds of pistachios for Glacier and an increase of 2 million pairs of chinos and 18 million pounds of pistachios for Congaree.

3. Gains from trade Suppose there exist two imaginary countries, Glacier and Congaree. Their labor forces are each capable of supplying four million hours per day that can be used to produce chinos, pistachios, or some combination of the two. The following table shows the amount of chinos or pistachios that can be produced by one hour of labor. Country || Chinos (Pairs per hour of labor) || Pistachios (Pounds per hour of labor) Glacier || 12 || 24 Congaree || 8 || 32 Suppose that initially Glacier uses 1 million hours of labor per day to produce chinos and 3 million hours per day to produce pistachios, while Congaree uses 3 million hours of labor per day to produce chinos and 1 million hours per day to produce pistachios. As a result, Glacier produces 12 million pairs of chinos and 72 million pounds of pistachios, and Congaree produces 24 million pairs of chinos and 32 million pounds of pistachios. Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two countries, each country consumes the amount of chinos and pistachios it produces. Glacier's opportunity cost of producing 1 pair of chinos is ... of pistachios, and Congaree's opportunity cost of producing 1 pair of chinos is ... of pistachios. Therefore, ... has a comparative advantage in the production of chinos, and ... has a comparative advantage in the production of pistachios.

2 pounds ; 4 pounds; Glacier; Congaree Explanation: Using an hour of labor, Glacier can produce 12 pairs of chinos or 24 pounds of pistachios. Therefore, the opportunity cost of a pair of chinos is 2 pounds per pair (24 pounds12 pairs24 pounds12 pairs). Using an hour of labor, Congaree can produce 8 pairs of chinos or 32 pounds of pistachios. Therefore, the opportunity cost of a pair of chinos is 4 pounds per pair (32 pounds8 pairs32 pounds8 pairs). Since Glacier gives up fewer pounds per pair of chinos, it has a comparative advantage in the production of chinos. You can compute Glacier's opportunity cost of a pound of pistachios by taking the reciprocal of the opportunity cost of a pair of chinos. That is, the opportunity cost of a pound of pistachios, in this case, is 1/2 pair per pound. Similarly, Congaree's opportunity cost of a pound of pistachios is equal to 1/4 pair per pound. Since Congaree gives up fewer pairs of chinos per pound of pistachios, it has a comparative advantage in the production of pistachios.

Elijah's opportunity cost of producing 1 pound of maize is ... pounds of squash, whereas Aneesha's opportunity cost of producing 1 pound of maize is ... pounds of squash. Because Elijah has a ... opportunity cost of producing maize than Aneesha, ... has a comparative advantage in the production of maize, and ... has a comparative advantage in the production of squash.

2; 3; lower; Elijah; Aneesha Explanation: For each acre Elijah uses to produce squash, he produces 10 pounds of squash per year. But using that acre to produce squash means he must forgo the 5 pounds of maize he could have produced on that land. Therefore, Elijah's opportunity cost of producing 10 pounds of squash is 5 pounds of maize, so the opportunity cost of producing each pound of squash is 1/2 pound of maize per pound of squash (5 pounds of maize10 pounds of squash5 pounds of maize10 pounds of squash). (Note: The slope of Elijah's PPF is -1/2.) You can compute Elijah's opportunity cost of producing a pound of maize by taking the reciprocal of the opportunity cost of producing a pound of squash. That is, the opportunity cost of producing a pound of maize, in this case, is 2 pounds of squash per pound of maize. By the same logic, Aneesha could use an acre of land to produce either 18 pounds of squash or 6 pounds of maize, so her opportunity cost of producing squash is 1/3 pound of maize per pound of squash (6 pounds of maize18 pounds of squash6 pounds of maize18 pounds of squash). (Note: The slope of Aneesha's PPF is -1/3.) Comparative advantage is determined by the opportunity cost of producing a good rather than the amount of resources used to make that good. An individual has a comparative advantage in producing a good if he or she can produce it at a lower opportunity cost than someone else. In this case, Elijah has a lower opportunity cost of producing maize than Aneesha, so Elijah has a comparative advantage in the production of maize. Note that the opposite is true for squash: Repeating the previous calculations, you can see that Elijah's opportunity cost of producing a pound of squash is 1/2 pound of maize, and Aneesha's opportunity cost of producing a pound of squash is 1/3 pound of maize. Therefore, Aneesha has a comparative advantage in the production of squash, since she gives up less maize to produce squash. Notice that, although it is possible for one person to have an absolute advantage in the production of both goods, it is impossible for one person to have a comparative advantage in the production of both goods. Since Elijah has a lower opportunity cost of producing maize than Aneesha has, it must be the case that Aneesha has a lower opportunity cost of producing squash than Elijah has. On the other hand, if both individuals have the same opportunity cost of producing both goods, neither has a comparative advantage in the production of either good.

3. Efficiency in the production possibilities model Suppose the fictional country of Yosemite produces only two goods: rice and axles. The following graph plots Yosemite's current production possibilities frontier, and includes six different output combinations given by black points (plus symbols) labeled A to F. Complete the following table by indicating whether each point represents output combinations that are inefficient, efficient, or unattainable. Check all that apply. Inefficient Efficient Unattainable

A: Inefficient B: Inefficient C: Unattainable D: Unattainable E: Efficient F: Efficient Explanation: Every output combination on the production possibilities frontier shows an efficient output combination for Yosemite. The points on the production possibilities frontier represent all combinations of output produced using all of the nation's available resources and its current technology, such that the nation cannot produce more of one good without producing less of the other. Points located inside the production possibilities frontier, such as A and B, represent inefficient output combinations. At these points, it is possible to increase the production of both goods because some resources are unemployed. For example, point A is inefficient because it is possible for Yosemite to produce at point F instead, where the economy is producing both more rice and more axles. Points located on the production possibilities frontier, such as E and F, represent efficient output combinations. At these points, it is impossible to increase the production of one good without producing less of the other. For instance, if Yosemite is currently producing at point F and decides that it wants to produce more rice, it must produce fewer axles. Points located outside the production possibilities frontier, such as C and D, represent output combinations that are unattainable, given current resources and technology. Recall that each point on the production possibilities frontier shows the maximum quantity of rice Yosemite can produce if it also wants to produce the given quantity of axles. For example, compare point F (36 million axles and 46 million bushels of rice) with point D (36 million axles and 80 million bushels of rice). Because point F is on Yosemite's production possibilities frontier, you can see that if Yosemite is producing 36 million axles, it can produce at most 46 million bushels of rice. Therefore, point D must be unattainable, given current resources and technology.

16. How prices allocate resources Suppose that there are three plots of mountain resort land available for sale in Stowe and six potential buyers, each interested in purchasing one plot. Assume that all of the plots are basically indistinguishable and that the minimum selling price of each is $570,000. The following table lists each potential buyer's willingness and ability to purchase a plot of land. Which of these people will purchase one of the three mountain resort plots? Check all that apply. Andrew Beth Darnell Eleanor Jacques Kyoko

Andrew Beth Darnell Explanation: Andrew, Beth, and Darnell will purchase the plots because they are the only ones willing and able to meet the minimum selling price of $570,000. One or more of the other three people might have the ability, but not the willingness to pay the required price. Moreover, perhaps Eleanor, Jacques, and Kyoko have a strong desire to own mountain resort land in Stowe, but do not have the ability to pay the selling price.

... has an absolute advantage in the production of squash, and ... has an absolute advantage in the production of maize.

Aneesha; Aneesha Explanation: An individual has an absolute advantage in the production of a good if he or she can produce a unit of output using fewer resources than someone else. Here, the only resource you should consider is land. Elijah can produce 10 pounds of squash per acre of land, while Aneesha can produce 18 pounds of squash per acre of land. Therefore, Aneesha has an absolute advantage in the production of squash. Similarly, Elijah can produce 5 pounds of maize per acre of land, while Aneesha can produce 6 pounds of maize per acre of land. Therefore, Aneesha has an absolute advantage in the production of maize. Since Elijah and Aneesha own the same resources (in this case, the size of both plots of land is the same), another way you can determine who has the absolute advantage in the production of a good is to see who can produce more of that good if both people devote all of their resources to making it.

5. The price of trade Suppose that Hungary and Luxembourg both produce boots and liquor. Hungary's opportunity cost of producing a case of liquor is 4 pairs of boots while Luxembourg's opportunity cost of producing a case of liquor is 12 pairs of boots. By comparing the opportunity cost of producing liquor in the two countries, you can tell that ... has a comparative advantage in the production of liquor and ... has a comparative advantage in the production of boots.

Answer: Hungary; Luxembourg By comparing the opportunity cost of producing liquor in the two countries, you can tell that Hungary has a comparative advantage in the production of liquor and Luxembourg has a comparative advantage in the production of boots. Explanation: Hungary has a lower opportunity cost for the production of liquor than Luxembourg does; therefore, Hungary has a comparative advantage in the production of liquor. That is, Hungary has to give up only 4 pairs of boots to produce a case of liquor while Luxembourg must give up 12 pairs of boots to produce a case of liquor. Another way to think of it is that it is cheaper for Hungary to produce liquor than it is for Luxembourg. Therefore, it is better for Hungary to specialize in the production of liquor. You can determine the opportunity cost of boots in terms of liquor from the opportunity cost of liquor in terms of boots. For example, Hungary's opportunity cost of producing a case of liquor is 4 pairs of boots. Therefore, Hungary can produce 4 pairs of boots if it forgoes the production of 1 case of liquor. This means that Hungary's opportunity cost of producing a pair of boots is 1/4 of a case of liquor. Similarly, Luxembourg's opportunity cost of producing a case of liquor is 12 pairs of boots, so Luxembourg's opportunity cost of producing a pair of boots is 1/12 of a case of liquor. Since Luxembourg has a lower opportunity cost for the production of boots than Hungary does, it has a comparative advantage in the production of boots.

4. Specialization and trade When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFs) for Glacier and Congaree. Both countries produce peas and pistachios, each initially (i.e., before specialization and trade) producing 18 million pounds of peas and 9 million pounds of pistachios, as indicated by the grey stars marked with the letter A. Glacier has a comparative advantage in the production of ... , while Congaree has a comparative advantage in the production of ... . Suppose that Glacier and Congaree specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of ... million pounds of peas and ... million pounds of pistachios.

Answer: peas; pistachios; 36; 36 Glacier has a comparative advantage in the production of peas , while Congaree has a comparative advantage in the production of pistachios . Suppose that Glacier and Congaree specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of 36 million pounds of peas and 36 million pounds of pistachios. Explanation: The opportunity cost of a pound of peas in Glacier is 1/2 pound of pistachios, whereas the opportunity cost of a pound of peas in Congaree is 3/2 pounds of pistachios. Therefore, Glacier has a comparative advantage in the production of peas. (Note: One way to find the opportunity cost of a pound of peas in Glacier is to examine how many pounds of peas Glacier can produce if it produces only that good and then determine how many pounds of pistachios it gives up: 18 million pounds of pistachios36 million pounds of peas=1/2 pound of pistachios per pound of peas18 million pounds of pistachios36 million pounds of peas=1/2 pound of pistachios per pound of peas.) The opportunity cost of a pound of pistachios in Glacier is 2 pounds of peas, whereas the opportunity cost of a pound of pistachios in Congaree is 2/3 pound of peas. Therefore, Congaree has a comparative advantage in the production of pistachios. When the two countries specialize, Glacier will produce 36 million pounds of peas, and Congaree will produce 36 million pounds of pistachios because Glacier has a comparative advantage in producing peas and Congaree has a comparative advantage in producing pistachios.

Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or outputs. Check all that apply. xPoornima's labor xThe $225 per week Manuel earns working for Wally's Climbing Wall xThe $225 Manuel spends to purchase driving lessons from Passing Left xThe climbing session Poornima receives

Correct: xThe climbing session Poornima receives xThe $225 per week Manuel earns working for Wally's Climbing Wall Explanation: When Poornima (a household) supplies her labor to any firm, labor is an input (a factor of production) that flows from a household to a firm. When the climbing session is provided to Poornima (a household), the climbing session is an output that flows from a firm to a household. Wally's Climbing Wall (a firm) pays Manuel (a household) $225 for his labor. Therefore, the $225 is a payment that flows from a firm to a household. Manuel (a household) pays Passing Left (a firm) $225 for driving lessons. Therefore, the $225 is a payment that flows from a household to a firm.

Compare both the Scenario 1 and Scenario 2 graphs. Notice that after completing both graphs, you can now see a difference between them that wasn't apparent before the shifts because each graph indicates different magnitudes for the supply and demand shifts in the market for pens. Use the results of your answers on both the Scenario 1 and Scenario 2 graphs to complete the following table. Begin by indicating the overall change in the equilibrium price and quantity after the shift in demand or supply for each shift-magnitude scenario. Then, in the final column, indicate the resulting change in the equilibrium price and quantity when supply and demand shift in the direction you previously indicated on both graphs. If you cannot determine the answer without knowing the magnitude of the shifts, choose Cannot determine. Equilibrium Object - Change in Equilibrium Objects (Scenario 1, Scenario 2, When Shift Magnitudes Are Unknown) Price - (decreases, increase, cannot determine) Quantity - (Increases, Increases, ?)

Equilibrium Object - Change in Equilibrium Objects (Scenario 1, Scenario 2, When Shift Magnitudes Are Unknown) Price - (decreases, increase, cannot determine) Quantity - (Increases, Increases, ?) Explanation: Regardless of the magnitudes of the shifts, when both the demand and supply curves increase, the equilibrium quantity of pens must increase. However, you cannot determine the change in the equilibrium price of pens without more information about the relative magnitudes of the shifts. An increase in the supply curve puts downward pressure on price, but an increase in the demand curve puts upward pressure on price. In the first scenario, the magnitude of the supply shift is greater than that of demand, so the downward pressure on price must overpower the upward pressure on price, causing the equilibrium price to decrease in this case. In the second scenario, the magnitude of the demand shift is greater than that of supply, so the upward pressure on price must overpower the downward pressure on price, causing the equilibrium price to increase. The lesson here is to be careful when drawing conclusions about changes in the equilibrium outcome when both demand and supply change at the same time. Depending on how large the shifts are relative to one another, changes in the equilibrium price or quantity will differ. The following table illustrates the effects of shifts in demand or supply on the equilibrium price and quantity when the magnitudes of the shifts are unknown: It's also possible for the undetermined equilibrium object not to change at all. If the magnitudes of the two shifts are equal, then the undetermined equilibrium object will remain constant.

13. How shifts in demand and supply affect equilibrium Consider the market for pens. Suppose that the number of students who are allergic to the rubber used in pencil erasers increases, leading more students to switch from pencils to pens in school. Further, the price of plastic, a major input in the pen production process, has dropped sharply. On the following graph, labeled Scenario 1, indicate the effect these two events have on the demand for and supply of pens. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

Explanation pt 1: The medical concerns regarding allergies to erasers result in a decrease in the demand for pencils and an increase in the demand for pens. You can illustrate this in the market for pens by shifting the demand curve to the right. Intuitively, this means that, at a given quantity, consumers are willing to pay more for pens; alternatively, at a given price, consumers are willing to buy more pens.

Next, complete the following graph, labeled Scenario 2, by shifting the supply and demand curves in the same way that you did on the Scenario 1 graph.

Explanation pt. 2: As for supply, the decrease in the price of an important production input, such as the cost of plastic used to make pens, means that it's now cheaper to produce pens. Since a decrease in the cost of pen production leads to an increase in supply, you can illustrate the effect of a decrease in the price of plastic by shifting the supply curve down and to the right. Intuitively, this means that, at a given quantity, producers are willing to accept a lower price for pens; alternatively, at a given price, producers are willing to produce more pens. Therefore, you should have indicated a positive shift in demand and a positive shift in supply for both scenarios.

The following graph shows the same PPF for Congaree as before, as well as its initial consumption at point A. As you did for Glacier, place a black point (plus symbol) on the following graph to indicate Congaree's consumption after trade.

Explanation: Because Congaree has a comparative advantage in the production of pistachios, Congaree will produce 36 million pounds of pistachios and 0 pounds of peas. Congaree exports 6 million pounds of pistachios for 6 million pounds of peas. So, after trade, Sylvania consumes 6 million pounds of peas as well as 30 million pounds of pistachios.

Suppose that Glacier and Congaree agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 6 million pounds of peas for 6 million pounds of pistachios. This ratio of goods is known as the price of trade between Glacier and Congaree. The following graph shows the same PPF for Glacier as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Glacier's consumption after trade. Note: Dashed drop lines will automatically extend to both axes.

Explanation: Because Glacier has a comparative advantage in the production of peas, Glacier will produce 36 million pounds of peas and 0 pounds of pistachios. Glacier exports 6 million pounds of peas for 6 million pounds of pistachios. So, after trade, Glacier consumes 30 million pounds of peas as well as 6 million pounds of pistachios.

4. Shifts in production possibilities Suppose the fictional country of Rainier produces two types of goods: agricultural and capital. The following diagram shows its current production possibilities frontier for millet, an agricultural good, and telephoto lenses, a capital good. Drag the production possibilities frontier (PPF) on the graph to show the effects of an immigration law that results in fewer workers entering the country. Note: Select either end of the curve on the graph to make the endpoints appear. Then drag one or both endpoints to the desired position. Points will snap into position, so if you try to move a point and it snaps back to its original position, just drag it a little farther.

Explanation: Because of the immigration law, less labor is available for the production of both millet and telephoto lenses. For instance, when you look at the vertical axis, you see that if Rainier produces zero bushels of millet, it can initially produce a maximum of 150,000 telephoto lenses per year. Because the immigration law decreases the number of telephoto lenses Rainier can produce, you should have moved the point to 100,000 telephoto lenses per year. Similarly, when you look at the horizontal axis, you see that if Rainier produces zero telephoto lenses, it can initially produce a maximum of 240 million bushels of millet per year. Because the immigration law decreases the amount of millet Rainier can produce, you should have moved the point to 160 million bushels of millet per year.

Assume that Ciana considers both her opportunity costs and the price of sneakers when making her shopping decision. Ciana will minimize her cost of buying the sneakers if she shops at the

Explanation: Ciana will base her decision on the total cost of the sneakers, including the opportunity cost of the time required to obtain the sneakers and the price of the sneakers. In this scenario, she incurs the lowest total cost if she buys her sneakers from the local shoe store.

2. Individual demand and consumer surplus Consider the market for hyperbaric chambers. The market price of each hyperbaric chamber is $200,000, and each consumer demands no more than one hyperbaric chamber. Suppose that Felix is the only consumer in the hyperbaric chamber market. Their willingness to pay for a hyperbaric chamber is $350,000. Based on Felix's willingness to pay, the following graph shows his demand curve for hyperbaric chambers. Shade the area representing Felix's consumer surplus using the green rectangle (triangle symbols).

Explanation: Consumer surplus is defined as the difference between a buyer's willingness to pay (what the item is worth to the buyer) and what the buyer actually pays. The concept is the same, regardless of the number of consumers in the market. In this case, Felix's consumer surplus is bounded from above and to the right by the demand curve and from below by the market price of $200,000.

The following graph plots the monthly market demand curve (blue line) for grain bowls in a hypothetical small economy. Use the purple point (diamond symbol) to shade the area representing consumer surplus when the price (P) of grain bowls is $2.25 per bowl. Then, use the green point (triangle symbol) to shade the area representing additional consumer surplus when the price falls to $1.50 per bowl.

Explanation: Consumer surplus is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays. The demand curve shows consumers' marginal benefit from each additional grain bowl and, thus, their willingness to pay for grain bowls. Therefore, the consumer surplus in the market when the price of grain bowls is $2.25 per bowl is equal to the total area of the triangle below the demand curve, above the price of $2.25 per bowl, and to the left of the equilibrium quantity consumed (100,000 grain bowls per week). Similarly, the consumer surplus in the market when the price of grain bowls is $1.50 per bowl is equal to the total area below the demand curve, above the price of $1.50 per bowl, and to the left of the equilibrium quantity consumed (140,000 grain bowls per week). The additional surplus consumers gain when the price drops from $2.25 per bowl to $1.50 per bowl is the part of that area that lies below $2.25 per bowl. This increase in consumer surplus can be divided into two parts. First, the consumers who were originally willing to purchase grain bowls at a price of $2.25 per bowl will now receive an additional $0.75 of surplus from each of the 100,000 bowls they would have bought at the higher price; this is shown by the grey rectangle in the following graph. Second, the lower price of grain bowls causes consumers to purchase 40,000 additional grain bowls, which generates more consumer surplus; this is shown by the orange triangle in the graph.

3. Consumer surplus for a group of consumers The following graph plots the demand curve (blue line) for several consumers in the market for motor scooters in Mead, a small town located in Colorado. The Mead market price of a motor scooter is given by the horizontal black line at $60. Each rectangle you can place on the following graph corresponds to a particular buyer in this market: orange (square symbols) for Edison, green (triangle symbols) for Hilary, purple (diamond symbols) for Kevin, tan (dash symbols) for Maria, and blue (circle symbols) for Rajiv. Use the rectangles to shade the areas representing consumer surplus for each person who is willing and able to purchase a motor scooter at a market price of $60. (Note: If a person will not purchase a motor scooter at the market price, indicate this by leaving his or her rectangle in its original position on the palette.)

Explanation: Consumer surplus is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and what the buyer actually pays. For Edison, Hilary, and Kevin, consumer surplus is equal to the area below what each of them is willing to pay but above the market price of $60. For example, Edison's consumer surplus is $80, the difference between the $140 he was willing to pay for a motor scooter and the $60 he actually paid. There is no consumer surplus for Maria or Rajiv. Neither of them will buy a motor scooter, because neither is willing to pay $60 for it.

Now, suppose another buyer, Janet, enters the market for hyperbaric chambers, and her willingness to pay is $250,000. Based on Janet's and Felix's respective willingness to pay, plot the market demand curve on the following graph using the blue points (circle symbol). Next, shade Felix's consumer surplus using the green rectangle (triangle symbols), and shade Janet's consumer surplus using the purple rectangle (diamond symbols). Note: Plot your points as a step function in the order in which you would like them connected. Line segments will connect the points automatically.

Explanation: Each horizontal segment (or step) of the demand curve corresponds to one potential buyer's willingness to pay, starting with the person who has the highest willingness to pay. Therefore, the first step starts at the amount that Felix is willing to pay for a hyperbaric chamber, or $350,000, and the second step starts at the amount that Janet is willing to pay, or $250,000. Because each consumer will buy, at most, one hyperbaric chamber, each step occurs at a one-unit interval. The demand curve intersects the horizontal axis at a quantity of two, because Felix and Janet want one hyperbaric chamber each. Consumer surplus is equal to the area below the demand curve, above the market price, and to the left of the quantity of hyperbaric chambers consumed. Felix's consumer surplus is bounded from above by the demand curve at $350,000 and from below by the market price of $200,000. Likewise, Janet's consumer surplus is bounded from above by the demand curve at $250,000 and from below by the market price of $200,000.

3. Individual and market demand Suppose that Nick and Rosa represent the only two consumers of jeans in some hypothetical market. The following table presents their annual demand schedules for jeans: Price - 10 || Nicks Quantity demanded - 32 || Rosas Quantity Demanded - 56 Price - 20 || Nicks Quantity demanded - 20 || Rosas Quantity Demanded - 40 Price - 30 || Nicks Quantity demanded - 12 || Rosas Quantity Demanded - 24 Price - 40 || Nicks Quantity demanded - 4 || Rosas Quantity Demanded - 12 Price - 50 || Nicks Quantity demanded - 0 || Rosas Quantity Demanded - 4 On the following graph, plot Nick's demand for jeans using the green points (triangle symbol). Next, plot Rosa's demand for jeans using the purple points (diamond symbol). Finally, plot the market demand for jeans using the blue points (circle symbol). Note: Line segments will automatically connect the points. Remember to plot from left to right.

Explanation: Each point on an individual's demand curve corresponds to one of the entries in the individual's demand schedule. For example, when the price of jeans is $10, Nick demands 32 pairs per year and Rosa demands 56 pairs per year. Therefore, the point (32, 10) lies on Nick's demand curve, and the point (56, 10) lies on Rosa's demand curve. You can find the points of the market demand curve by adding up the quantity demanded by each individual in the market. For example, when the price of jeans is $10, Nick demands 32 pairs and Rosa demands 56 pairs; therefore, total market demand is 32+56=8832+56=88 pairs per year. Repeating this process, you can construct the following market demand schedule: Price ($) Nick's Qty Demanded (Pairs) Rosa's Qty Demanded (Pairs) Market Qty Demanded (Pairs) 10 32 56 88 20 20 40 60 30 12 24 36 40 4 12 16 50 0 4 4 Visually, this corresponds to a horizontal summation of the demand curves. In other words, although each point on an individual's demand curve refers to a price and a quantity, it's best to think of that point as the quantity the individual would buy at that price, rather than as the price the individual would be willing to pay for that quantity. Therefore, to find the total quantity demanded in a market at a given price, add up the quantity demanded by each individual at that price—that is, you add the horizontal component of each point on each individual's demand curve.

6. Individual and market supply Suppose that Charles and Dina are the only suppliers of boots in some hypothetical market. Their annual supply schedules are given by the following table: Price (Dollars per pair) Charles's Quantity Supplied (Pairs) Dina's Quantity Supplied (Pairs) 10 0 16 20 16 32 30 24 44 40 28 52 50 32 56 On the following graph, plot Charles's supply of boots using the green points (triangle symbol). Next, plot Dina's supply of boots using the purple points (diamond symbol). Finally, plot the market supply of boots using the orange points (square symbol). Note: Line segments will automatically connect the points. Remember to plot from left to right.

Explanation: Each point on an individual's supply curve corresponds to one of the entries in the individual's supply schedule. For example, when the price of boots is $50, Charles supplies 32 pairs per year and Dina supplies 56 pairs per year. Therefore, the point (32, 50) lies on Charles's supply curve, and the point (56, 50) lies on Dina's supply curve. You can find the points for the market supply curve by adding up the quantity supplied by each individual in the market. For example, when the price of boots is $50, Charles supplies 32 pairs and Dina supplies 56 pairs; therefore, total market supply is 32+56=8832+56=88 pairs per year. Repeating this process, you can construct the following market supply schedule: Price (Dollars per pair) Charles's Qty Supplied (Pairs) Dina's Qty Supplied (Pairs) Market Qty Supplied (Pairs) 10 0 16 16 20 16 32 48 30 24 44 68 40 28 52 80 50 32 56 88 Visually, this corresponds to a horizontal summation of the supply curves. In other words, although each point on an individual's supply curve refers to a price and a quantity, it's best to think of that point as the quantity the individual would sell at that price rather than as the price the individual would be willing to accept for that quantity. Therefore, to find the total quantity supplied in a market at a given price, add up the quantity supplied by each individual at that price—that is, you add the horizontal component of each point on each individual's supply curve.

8. Total economic surplus The following graph plots the supply and demand curves in the market for polaroid cameras. Use the black point (plus symbol) to indicate the equilibrium price and quantity of polaroid cameras. Then use the green point (triangle symbol) to fill the area representing consumer surplus, and use the purple point (diamond symbol) to fill the area representing producer surplus.

Explanation: The market equilibrium price and quantity are determined by the intersection of the demand and supply curves. In this case, this occurs at a price of $210 per camera and a quantity of 165 million cameras. Consumer surplus is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays. Consumer surplus for the entire market is the triangular area below the demand curve, above the market price of $210 per camera, and to the left of the market quantity of 165 million cameras. Producer surplus is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item (the additional cost to the seller of providing another unit of the item). Producer surplus for the entire market is the triangular area above the supply curve, below the market price of $210 per camera, and to the left of the market quantity of 165 million cameras.

10. Market equilibrium The following table presents the monthly demand and supply in the market for oat milk in San Francisco. Price (Dollars per gallon of oat milk) Quantity Demanded (Gallons of oat milk) Quantity Supplied (Gallons of oat milk) 2 500 50 4 400 150 6 300 200 8 200 300 10 100 450 On the following graph, plot the demand for oat milk using the blue point (circle symbol). Next, plot the supply of oat milk using the orange point (square symbol). Finally, use the black point (plus symbol) to indicate the equilibrium price and quantity in the market for oat milk. Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

Explanation: Each point on the market demand curve for oat milk corresponds to an entry in the demand schedule. For example, at a price of $4 per gallon, the quantity of oat milk demanded is 400 gallons per month. Therefore, the point (400, 4) lies on the market demand curve for oat milk. Similarly, each point on the market supply curve corresponds to an entry from the market supply column. For example, at a price of $8 per gallon, the quantity of oat milk supplied is 300 gallons per month. Therefore, the point (300, 8) lies on the market supply curve. To generate market demand and supply curves, plot a point for each entry in the demand column and each entry in the supply column. The market equilibrium occurs at the price at which the quantity demanded equals the quantity supplied. In this case, the demand and supply curves intersect at a price of $7 per gallon of oat milk and a quantity of 250 gallons per month. Therefore, the point (250, 7) represents the equilibrium in this market.

5. Opportunity cost and production possibilities Raphael is a talented artist who sells hand-crafted goods on his website. Raphael currently crafts and sells both crochet hats and pillows. He spends 8 hours a day working on crafts. The following table gives different daily output scenarios depending on how much of his time is spent on each good. Choice || Hours Crafting (Crochet Hats) || (Pillows) || Produced (Crochet Hats) || (Pillows) A || 8 || 0 || 4 || 0 B || 6 || 2 || 3 || 10 C || 4 || 4 || 2 || 16 D || 2 || 6 || 1 || 19 E || 0 || 8 || 0 || 20 On the following graph, use the blue points (circle symbol) to plot Raphael's initial production possibilities frontier (PPF).

Explanation: Each row of the table refers to one point on the production possibilities frontier. For example, if Raphael chooses to spend all of his time producing crochet hats, then he can produce four crochet hats and zero pillows; so (4, 0) is one of the points on his initial PPF. Similarly, if he splits his time evenly between producing crochet hats and pillows, he will produce two crochet hats and 16 pillows; therefore, (2, 16) is another point on his initial PPF.

5. Producer surplus for a group of sellers The following graph plots a supply curve (orange line) for several sellers in the market for polaroid cameras in College Park, a university town in Maryland. Each seller has a single polaroid camera for sale. The market price of polaroid cameras is given by the horizontal black line at $70. Each rectangle on the graph corresponds to a particular seller in this market: blue (circle symbols) for Sean, green (triangle symbols) for Yvette, purple (diamond symbols) for Bob, tan (dash symbols) for Cho, and orange (square symbols) for Eric. (Note: The name labels are to the right of the corresponding segment on the supply curve.) Use the rectangles to shade the areas representing producer surplus for each person who is willing to sell a polaroid camera at a market price of $70. (Note: If a person will not sell a polaroid camera at the market price, indicate this by leaving their rectangle in its original position on the palette.)

Explanation: Producer surplus is the difference between a seller's cost (that is, their minimum acceptable price) and the price the seller actually receives. For Sean, Yvette, and Bob, producer surplus is equal to the area above the price each of them is willing to accept but below the market price of $70. For example, Sean's producer surplus is $60, the difference between the $10 he was willing to sell a polaroid camera for and the $70 he actually received. There is no producer surplus for Cho or Eric. Neither of them is willing to sell a polaroid camera at the market price of $70.

The following graph plots the weekly market supply curve (orange line) for banana bread in a hypothetical small economy. Use the purple point (diamond symbol) to shade the area representing producer surplus (PS) when the price (P) of banana bread is $2.25 per slice. Then, use the green point (triangle symbol) to shade the area representing additional producer surplus when the price rises to $3.00 per slice.

Explanation: Producer surplus is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item (the additional cost to the seller of providing another unit of the item). The supply curve shows sellers' marginal cost of supplying each additional slice of banana bread and, thus, their willingness to supply banana bread. Therefore, the producer surplus in the market when the price of banana bread is $2.25 per slice is equal to the total area of the triangle above the supply curve, below the price of $2.25 per slice, and to the left of the equilibrium quantity supplied (120,000 slices of banana bread per week). Similarly, the producer surplus in the market when the price of banana bread is $3.00 per slice is equal to the total area above the supply curve, below the price of $3.00 per slice, and to the left of the equilibrium quantity supplied (168,000 slices of banana bread per week). The additional surplus sellers gain when the price rises from $2.25 per slice to $3.00 per slice is the part of that area that lies above $2.25 per slice. This increase in producer surplus can be divided into two parts: First, sellers who were originally willing to supply banana bread at a price of $2.25 per slice will now receive an additional $0.75 of surplus from each of the 120,000 slices they would have sold at the lower price. This is shown by the grey rectangle in the following graph. Second, the higher price of banana bread causes suppliers to supply 48,000 additional slices of banana bread, which generates more producer surplus; this is shown by the blue triangle in the following graph.

9. Shifts in supply or demand II The following graph plots the market for pizzas in Chicago, where you can assume there are always over 1,000 pizzerias. Suppose an innovation in the baking process makes it possible to produce more pizzas at a lower cost than ever before. Show the effect of this change on the market for pizzas by shifting one or both of the curves on the following graph, holding all else constant. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

Explanation: The innovation in the baking process lowers the cost of producing pizzas. Therefore, for any given price of a pizza, sellers are willing and able to supply more pizzas. Visually, this is seen as a rightward shift of the supply curve. Note that the demand curve does not shift, because none of the factors affecting demand have changed. In particular, the demand curve shifts in response to changes in any of the following: Factors Affecting Demand •Price of a related good (complement or substitute)•Income of consumers•Tastes of consumers•Number of consumers•Expectations of consumers

Suppose Raphael buys a new tool that enables him to produce twice as many crochet hats per hour as before, but it doesn't affect his ability to produce pillows. Use the green points (triangle symbol) to plot his new PPF on the previous graph.

Explanation: The new tool causes Raphael's PPF to pivot to the right. In other words, for each point on his PPF, the vertical coordinate is the same as before, but the horizontal coordinate is twice its initial value. For example, under combination D, Raphael spends 2 hours producing crochet hats and 6 hours producing pillows. Before he bought the new tool, he could have produced one crochet hat and 19 pillows, so (1, 19) was a point on his initial PPF. With the new tool, the same allocation of time results in two crochet hats and 19 pillows, so (2, 19) is a point on his new PPF. Notice that one point is the same on the initial PPF and the new PPF. Because the new tool helps Raphael make only crochet hats, the tool does not change his output when he spends all of his time making pillows. This occurs at output combination E.

2. Determining opportunity cost Suppose that Ciana is deciding whether or not to buy a pair of sneakers that she has been researching online, and also the best place to make her purchase. Three different stores in the area sell the sneakers she likes, but some stores are more convenient for Ciana to reach than others. One option is her local shoe store located only 15 minutes away from where she works, where they charge a marked-up price of $114 for the sneakers: Ciana earns an hourly wage of $36 at her job. In order to purchase her sneakers she will have to take time off work, so each hour away from her job costs her $36 in lost income. Assume that Ciana's travel time is the same each way (to and from the store) and that it will take her 30 minutes once she reaches a store to complete her shopping. Assume throughout the question that Ciana incurs no additional costs other than the sneakers, such as gas. Complete the following table by computing the opportunity cost of Ciana's time and the total cost of shopping at each location.

Explanation: The opportunity cost of driving to each location is what Ciana gives up to make the trip. Getting to the local shoe store takes her 15 minutes, and returning to work takes her 15 minutes (a total of 30 minutes). Shopping takes her another 30 minutes. Since she loses $36 per hour by not working, the opportunity cost of her time is (0.5×$36)+(0.5×$36)=$360.5×$36+0.5×$36=$36. Because the price she pays at this store is $114, she faces a total cost of $36+$114=$150$36+$114=$150. If Ciana buys her sneakers at the store in the different neighborhood in town, the opportunity cost of her time is 90 minutes: 30 minutes each to drive there, shop, and return to work. The price she pays is $101, so she faces a total cost of $54+$101=$155$54+$101=$155. Finally, if Ciana buys her sneakers at the store in the rural outlet, the opportunity cost of her time is 2.5 hours: 60 minutes to drive there, 30 minutes to shop, and 60 minutes to return to work. The price she pays is $90, so she faces a total cost of $90+$90=$180$90+$90=$180.

Version 2: Suppose that Ciana is deciding whether or not to buy a pair of sandals that she has been researching online, and also the best place to make her purchase. Three different stores in the area sell the sandals she likes, but some stores are more convenient for Ciana to reach than others. One option is her local shoe store located only 15 minutes away from where she works, where they charge a marked-up price of $139 for the sandals: Ciana earns an hourly wage of $50 at her job. In order to purchase her sandals she will have to take time off work, so each hour away from her job costs her $50 in lost income. Assume that Ciana's travel time is the same each way (to and from the store) and that it will take her 30 minutes once she reaches a store to complete her shopping. Assume throughout the question that Ciana incurs no additional costs other than the sandals, such as gas. Complete the following table by computing the opportunity cost of Ciana's time and the total cost of shopping at each location.

Explanation: The opportunity cost of driving to each location is what Ciana gives up to make the trip. Getting to the local shoe store takes her 15 minutes, and returning to work takes her 15 minutes (a total of 30 minutes). Shopping takes her another 30 minutes. Since she loses $50 per hour by not working, the opportunity cost of her time is (0.5×$50)+(0.5×$50)=$500.5×$50+0.5×$50=$50. Because the price she pays at this store is $139, she faces a total cost of $50+$139=$189$50+$139=$189. If Ciana buys her sandals at the store in the different neighborhood in town, the opportunity cost of her time is 90 minutes: 30 minutes each to drive there, shop, and return to work. The price she pays is $104, so she faces a total cost of $75+$104=$179$75+$104=$179. Finally, if Ciana buys her sandals at the store in the rural outlet, the opportunity cost of her time is 2.5 hours: 60 minutes to drive there, 30 minutes to shop, and 60 minutes to return to work. The price she pays is $73, so she faces a total cost of $125+$73=$198$125+$73=$198.

8. Shifts in supply or demand I The following graph plots the market for coffee in Houston, where there are always over 1,000 coffee stalls. Suppose the Surgeon General issues a public statement saying that consuming coffee is bad for your health. Show the effect of this change on the market for coffee by shifting one or both of the curves on the following graph, holding all else constant. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

Explanation: When consumers find out that eating coffee is bad for your health, this causes people to decrease their consumption of coffee. Therefore, the demand for coffee decreases, and the demand curve shifts to the left. Note that the supply curve does not shift because none of the factors affecting supply have changed. In particular, the supply curve shifts in response to changes in the following: Factors Affecting Supply •Price of inputs•Production technology•Number of producers•Expectations of producers

15. Another supply and demand puzzle Suppose the market price of calzones in a university town recently decreased. Economics students studying at the university are discussing potential causes of the price decrease. One group of students theorize that the price decreased because several new pizza parlors have recently opened in the area. Others claim the decrease in the price of calzones is because of a recent increase in the price of beer. Everyone agrees that the increase in the price of beer was caused by a recent increase in the price of hops, which are not generally used in making calzones. The first group of students claim the decrease in the price of calzones can be attributed to the fact that several new pizza parlors have recently opened in the area. On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the decrease in the price of calzones. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

Explanation: When pizza parlors enter the market, the supply curve shifts to the right because more calzones are supplied at every given price. Note that according to this model, the price decreases, and, as a result, the quantity demanded increases. This is illustrated by a movement along the demand curve rather than a shift in demand itself.

Suppose the country that produces chinos trades 26 million pairs of chinos to the other country in exchange for 78 million pounds of pistachios. In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption."

Explanation: When they specialize, Glacier produces 48 million pairs of chinos per day, and Congaree produces 128 million pounds of pistachios per day. If Glacier trades 26 million pairs of chinos for 78 million pounds of pistachios from Congaree, Glacier will consume 22 million pairs of chinos and 78 million pounds of pistachios, and Congaree will consume 26 million pairs of chinos and 50 million pounds of pistachios. Note that when a country imports goods, it brings them into the country. In this case, the consumption of that good must be larger than what the country produces itself. Similarly, when a country exports goods, it sends them out of the country. In this case, the consumption of that good must be smaller than what the country produces itself.

2. Comparative and absolute advantage Elijah and Aneesha are farmers. Each one owns a 14-acre plot of land. The following table shows the amount of squash and maize each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing squash or maize or to produce squash on some of the land and maize on the rest. Person || Squash (Pounds per acre) || Maize (Pounds per acre) Elijah || 10 || 5 Aneesha || 18 || 6 On the following graph, use the blue line (circle symbol) to plot Elijah's production possibilities frontier (PPF), and use the purple line (diamond symbol) to plot Aneesha's PPF.

Explanation: You can see that when Elijah devotes all 14 acres to producing squash, he can produce 140 pounds of squash per year (14 acres×10 pounds per acre14 acres×10 pounds per acre). On the other hand, when he uses all 14 acres to produce maize, he produces 70 pounds of maize per year (14 acres×5 pounds per acre14 acres×5 pounds per acre). Therefore, his PPF extends from (140, 0) to (0, 70). You can do similar calculations for Aneesha to show that when she devotes all of her land to producing squash, she can produce 252 pounds of squash per year. On the other hand, when she uses all 14 acres to produce maize, she produces 84 pounds of maize per year. Therefore, her PPF extends from (252, 0) to (0, 84). Notice that both PPFs are linear rather than bowed outward because there is a constant trade-off between the two goods.

The following graphs show two possible PPFs for Denmark's economy: a straight-line PPF (PPF1PPF1) and a bowed-out PPF (PPF2PPF2). Based on the previous description, the trade-off Denmark faces between producing bikes and scooters is best represented by ... .

Graph 1 Explanation: For bowed-out PPFs, the opportunity cost of producing scooters is reflected in the curvature of the PPF. In flatter regions, producing an additional bike requires giving up fewer scooters. However, in steeper regions, producing an additional bike requires giving up more scooters. In other words, the opportunity cost of producing bikes changes as you move along the PPF. For linear PPFs, the opportunity cost of producing bikes is constant and reflected in the slope of the PPF. If the PPF is flatter, producing an additional bike requires giving up fewer scooters. If the PPF is steeper, producing an additional bike requires giving up more scooters. In this case, because the opportunity cost of producing additional bikes remains constant as more resources are shifted to the production of bikes, the PPF must be linear. Therefore, Graph 1 best represents the trade-off Denmark faces between producing bikes and scooters.

True or False: The market for grapes exhibits the two primary characteristics that define perfectly competitive markets.

True Explanation: Perfectly competitive markets are characterized by large numbers of buyers and sellers who cannot influence market prices and who buy and sell identical products. Although in reality, most markets do not perfectly adhere to the assumptions of the perfectly competitive markets, some markets are very close to perfect competition. For example, the market for grapes has millions of consumers who buy grapes, as well as thousands of farmers producing and selling grapes. These consumers and producers take the market price as given and make their production and consumption decisions based on this prevailing price.

True or False: Without engaging in international trade, Glacier and Congaree would not have been able to consume at the after-trade consumption bundles. (Hint: Base this question on the answers you previously entered on this page.)

True Explanation: Without engaging in international trade, any quantity outside a country's original PPF is considered infeasible. In other words, given an individual country's resources, the bundles on the PPF are the greatest quantities of the goods that a country can produce (and, therefore, consume) without trade. By exploiting each country's comparative advantage to realize gains from trade, Glacier and Congaree can actually consume outside their individual PPFs through specialization.

7. Producer surplus for an individual and a market Suppose the market for banana bread is perfectly competitive, so sellers take the market price as given. Cho manages a restaurant that offers banana bread for sale. The following graph plots Cho's weekly supply curve (orange line). Point A represents a point along her supply curve. The price of banana bread is $2.25 per slice, which is given by the black horizontal line. Using the previous graph, you can determine that Cho is willing to supply her 6th weekly slice of banana bread for $1.50. Since she receives $2.25 per slice, the producer surplus earned from supplying the 6th slice of banana bread is $0.75.

Using the previous graph, you can determine that Cho is willing to supply her 6th weekly slice of banana bread for $1.50. Since she receives $2.25 per slice, the producer surplus earned from supplying the 6th slice of banana bread is $0.75. Explanation: The supply curve shows the sellers' marginal cost of supplying each additional slice of banana bread and, thus, their willingness to supply banana bread. The grey point (star symbol) on Cho's supply curve indicates that Cho is willing to supply the 6th slice of banana bread for as little as $1.50. Producer surplus is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item (the additional cost to the seller of providing another unit of the item). If Cho is willing to supply the 6th slice of banana bread for $1.50 but she receives $2.25, then her producer surplus from the 6th slice is $2.25−$1.50=$0.75$2.25−$1.50=$0.75.

a. Suppose Raphael is currently using combination D, producing one crochet hat per day. His opportunity cost of producing a second crochet hat per day is ... per day. b. Now, suppose Raphael is currently using combination C, producing two crochet hats per day. His opportunity cost of producing a third crochet hat per day is ... per day. c. From the previous analysis, you can determine that as Raphael increases his production of crochet hats, his opportunity cost of producing one more crochet hat ... .

a. 3 pillows b. 6 pillows c. increases Explanation: When using combination D, Raphael is producing one crochet hat and 19 pillows per day. Producing a second crochet hat per day would require him to move to combination C, reducing his production of pillows to 16 per day. Since this change involves producing 3 fewer pillows per day (19−16=319−16=3), the opportunity cost of producing the second crochet hat per day is 3 pillows per day. Similarly, using combination C, Raphael is producing two crochet hats and 16 pillows per day. Producing a third crochet hat per day would require him to move to combination B, reducing his production of pillows to 10 per day. Since this change involves producing 6 fewer pillows per day (16−10=616−10=6), the opportunity cost of producing the third crochet hat per day is 6 pillows per day. Raphael's opportunity cost of producing the second crochet hat per day is 3 pillows per day while the opportunity cost of producing the third crochet hat per day is 6 pillows per day. Hence, as Raphael increases his production of crochet hats, his opportunity cost of producing more crochet hats increases. This change is an example of the law of increasing opportunity costs.

2. Demand terminology Complete the following table by selecting the term that matches each definition. a. A graphical object showing the relationship between the price of a good and the amount of the good that buyers are willing and able to purchase at various prices b. A table showing the relationship between the price of a good and the amount that buyers are willing and able to purchase at various prices c. The claim that, with other things being equal, the quantity demanded of a good falls when the price of that good rises d. The amount of a good that buyers are willing and able to purchase at a given price

a. Demand Curve b. Demand Schedule c. Law of Demand d. Quantity Demanded Explanation: The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase at a given price. This is different from a demand curve, which is a graph that shows the entire relationship between the price of a good and the quantity of the good demanded. A demand schedule, on the other hand, is a table that shows this relationship. The law of demand states that, other things being equal, the quantity demanded of a good falls when the price of the good rises. You can see the law of demand graphically in the downward-sloping demand curve.

1. The language of price controls Suppose that, in a competitive market without government regulations, the equilibrium price of cold brew is $4.00 per cup. Complete the following table by indicating whether each of the statements is an example of a price ceiling or a price floor and whether it is binding or nonbinding. Statement: a. The government prohibits coffee shops from selling cold brew for more than $6.00 per cup. [price control, binding or Not] b. The government has instituted a legal minimum price of $6.00 per cup for cold brew. [price control, binding or Not] c. Due to new regulations, coffee shops that would like to pay better wages in order to hire more workers are prohibited from doing so. [price control, binding or Not]

a. Price ceiling ; Non-binding b. Price floor ; Binding c. Price Ceiling ; Binding Explanation: A price ceiling is a legal maximum on the price at which a good can be sold. Therefore, prohibiting coffee shops from selling cold brew for more than a particular price is an example of a price ceiling. A binding price ceiling is a price ceiling that is set below the equilibrium price. Because the equilibrium price is $4.00 per cup for cold brew, a legal maximum price of $6.00 is a non-binding price ceiling. A binding price ceiling will ultimately cause a shortage, while a non-binding price ceiling has no effect on the equilibrium price and quantity. A price floor is a legal minimum on the price at which a good can be sold. Therefore, prohibiting coffee shops from selling cold brew for less than a particular price is an example of a price floor. A binding price floor is a price floor that is set above the equilibrium price. Because the equilibrium price is $4.00 per cup, a legal minimum price of $6.00 per cup is a binding price floor. A binding price floor will ultimately cause a surplus, while a non-binding price floor has no effect on the equilibrium price and quantity. In the labor market, minimum wage laws are an example of a price floor while a cap on wages is an example of a price ceiling. Moreover, the impact of the minimum wage laws depends on the skill and experience of the worker. In this case, new regulations restrict coffee shops from increasing wages and, thus, attracting more workers. This binding price ceiling causes a shortage of workers in this labor market.

5. Supply: Basic concepts Complete the following table by selecting the term that matches each definition. a. A table showing the relationship between the price of a good and the amount of it that sellers are willing and able to supply at various prices b. A graphical object showing the relationship between the price of a good and the amount that sellers are willing and able to supply at various prices c. The claim that, other things being equal, the quantity supplied of a good increases when the price of that good rises d. The amount of a good that sellers are willing and able to supply at a given price

a. Supply Schedule b. Supply curve c. Law of Supply d. Quantity Supplied Explanation: The quantity supplied of a good is the amount of the good that sellers are willing and able to supply at a given price. This is different from a supply curve, which shows the entire relationship between the price of a good and the quantity of the good supplied. A supply schedule is a table that shows this relationship. The law of supply states that, other things being equal, the quantity supplied of a good increases when the price of that good rises. You can see the law of supply graphically in the upward-sloping supply curve.

1. Welfare analysis: Basic concepts Identify whether each of the following statements best illustrates the concept of consumer surplus, producer surplus, or neither. Statement: a. Even though I was willing to pay as much as $35 for a crew neck, I bought a crew neck for just $28. b. Even though I would have paid up to $185 for a swimsuit and despite the fact that the seller was willing to go as low as $175 in order to sell it, we couldn't agree to a deal because the government instituted a price ceiling of $169 on all sales of swimsuits. c. I sold a polaroid camera for $179, even though I was willing to accept as little as $170 in exchange for it.

a. consumer surplus b. neither c. producer surplus Explanation: Consumer surplus is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays. The crew neck buyer gained a surplus of $7, which is the difference between the buyer's willingness to pay ($35) and the price the buyer actually paid ($28). Producer surplus is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item (the additional cost to the seller of providing another unit of the item). The camera seller earned a surplus of $9, which is the difference between the price the seller received ($179) and the lowest price at which the seller would have been willing to sell the polaroid camera ($170). The remaining statement about swimsuits does not illustrate the concept of either consumer surplus or producer surplus.

Public policy can improve economic efficiency in the presence of market failures. Complete the following table by classifying the source of market failure in each case. Market Failure: a. A single gas station has exclusive rights to operate along a private toll-road. As a result, the company can set the price of gasoline. b. A sewage company opened a wastewater treatment facility near a housing plan, introducing unwanted smells. market power or externality

a. market power b. externality Explanation: While markets, guided by the invisible hand, usually produce efficient outcomes, there are instances in which markets do not allocate resources efficiently and thus fail to maximize the size of the economic pie. Economists use the term market failure to refer to situations in which the market, left to itself, fails to allocate resources efficiently. Two common sources of market failures are externalities and market power. Market power is the ability of an individual economic agent, or small number of economic agents, to influence the market price of a good or service. In this case, because the gas station is the only source of gasoline, the gas station faces no competition from other potential suppliers, enabling the gas station the ability, or market power, to restrict the output of gasoline and charge higher prices. In short, the market power of the gas station prevents the invisible hand from guiding the market to the efficient outcome. An externality is an impact, positive or negative, of one individual's activities on the well-being of a bystander. In this case, since the residents of the housing plan, as bystanders, are harmed by the activities of the sewage company, the smells of sewage causes a negative externality. The presence of externalities can cause markets to produce too much or too little of a good or service, leading to an inefficient allocation of resources. In cases of externalities and market power, the government can intervene to promote efficiency in the market.

6. Microeconomics and macroeconomics Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics. a. The effects of advertising on the pricing of used cars b. The effect of federal government spending on the national unemployment rate c. The effect of government regulation on a monopolist's production decisions

a. microeconomics b. macroeconomics c. microeconomics Explanation: Microeconomics is the study of how prices and quantities are determined through interactions between buyers and sellers (individuals and firms) in individual markets. Therefore, microeconomists are more likely to create models to analyze the decisions of firms (such as pricing) and those of consumers (such as shopping choices), as well as how government policies affect those decisions. Macroeconomics is the study of factors that affect the entire economy. Therefore, macroeconomists tend to create models to analyze how aggregate phenomena such as growth, inflation, and unemployment respond to policy decisions of governments and central banks, changes in aggregate spending or savings, and supply or demand shocks.

7. Movements along versus shifts of supply curves Consider the market supply of scones. Complete the following table by indicating whether an event will cause a movement along the supply curve for scones or a shift of the supply curve for scones, holding everything else constant. a. A change in expectations about the future price of scones b. A decrease in the number of producers c. An increase in the price of scones

a. shift b. shift c. movement along Explanation: The supply curve for scones shows the relationship between the price of scones and the quantity of scones supplied by producers, assuming that all of the determinants of supply are held constant. The following list displays determinants of supply, which are the factors that affect the quantity of scones producers want to sell at a given price: Determinants of Supply •Price of inputs•Production technology•Number of producers•Expectations of producers Therefore, if the price of scones changes, the result is a movement along the supply curve from the old price to the new one. However, if a change occurs in any of the factors that determine supply, the result is a shift of the supply curve. The following graphs illustrate an example of a movement along the supply curve and a shift of the supply curve:

7. Normative and positive statements The following table presents statements analyzing policies regarding globalization. Classify each of the listed statements as either positive or normative. Statement: a. In the past decade, U.S. companies have outsourced millions of jobs overseas. b. Companies that outsource jobs are acting immorally. c. If the U.S. government were to institute higher tariffs on imports, companies would stop outsourcing jobs. d. The U.S. government should institute higher tariffs on imports.

a. positive b. normative c. positive d. normative Explanation: A positive statement is one that seeks to describe the world as it is. The first and third statements fall into this category. A normative statement is one that offers an opinion as to the way the world should be. The second and fourth statements fall into this category. Note that describing a statement as positive or normative is not the same as describing it as true or false. Positive statements may be false (for example, "You are the king of Spain"), and normative statements may reflect the value judgments of a large majority of people (for example, "It is wrong to kill innocent children"). However, positive statements can always be supported or refuted by data, while normative statements require a larger philosophical framework to evaluate. It's quite easy to prove that you are not the king of Spain, but to argue that it is wrong to kill innocent children, you must appeal to a larger moral framework. Such a framework is based on values and cannot be confirmed or refuted by evidence.

Suppose Poornima earns $675 per week working as a driving instructor for Passing Left. She uses $9 to go climbing at Wally's Climbing Wall. Wally's Climbing Wall pays Manuel $225 per week to work as a safety instructor. Manuel uses $225 to purchase driving lessons from Passing Left. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event: a. Poornima spends $9 to go climbing. b. Manuel spends $225 to purchase driving lessons from Passing Left. c. Manuel earns $225 per week working for Wally's Climbing Wall.

a. product market b. product market c. factor market Explanation: In this scenario, households sell factors of production in factor markets when Poornima supplies her labor to Passing Left and when Manuel supplies his labor to Wally's Climbing Wall. Moreover, a firm sells goods and services to a household in product markets when Wally's Climbing Wall provides the climbing session to Poornima and Passing Left provides the driving lessons to Manuel.

4. Movements along versus shifts of demand curves Consider the market demand for chicken wings. Complete the following table by indicating whether an event will cause a movement along the demand curve for chicken wings or a shift of the demand curve for chicken wings, holding all else constant. a. An increase in the price of burgers (a substitute for chicken wings) b. A decrease in the number of consumers c. A decrease in the price of chicken wings

a. shift b. shift c. movement along Explanation The demand curve for chicken wings shows the relationship between the price of chicken wings and the quantity of chicken wings demanded by consumers, assuming that all of the determinants of demand are held constant. The following list displays determinants of demand, which are the factors that affect the quantity of chicken wings consumers want to buy at a given price: Factors That Determine Demand •Price of a related good (complement or substitute)•Income of consumers•Tastes of consumers•Number of consumers•Expectations of consumers Therefore, if the price of chicken wings changes, the result is a movement along the demand curve from the old price to the new one. However, if a change occurs in any of the factors that determine demand, the result is a shift of the demand curve. The following graphs illustrate an example of a movement along the demand curve and a shift of the demand curve:

Complete the following table by indicating at each price whether there is a shortage or surplus in the market, the amount of that shortage or surplus, and whether this places upward or downward pressure on prices. Price || Shortage or Surplus || Shortage or Surplus Amount || Pressure 40 || a || b || c 60 || d || e || f

a. shortage || b. 40 || c. upward || d. surplus || e. 40 || f. downward Explanation: At a price of $40 per comb, consumers demand 270 combs per month, but producers are willing to supply 230 combs per month. Therefore, quantity demanded exceeds quantity supplied by 40 combs per month. Because consumers want to buy more combs than producers are willing to sell at that price, there will be a shortage (excess demand) of combs, and sellers will realize that they can raise their prices and still sell out their entire inventory. Thus, the shortage (excess demand) will put upward pressure on the price of a comb, causing it to rise. At a price of $60 per comb, consumers demand 230 combs per month, but producers supply 270 combs per month. Therefore, supply exceeds demand by 40 combs per month. Because producers want to sell more combs than consumers are willing to buy at that price, there will be a surplus (excess supply) of combs, and sellers will start lowering prices to sell off their excess inventory. Thus, the surplus (excess supply) will put downward pressure on the price of a comb, causing it to fall.

In the following table, indicate which statements are true or false based on the information provided on the previous graph. Statement: a. Assuming each seller receives a positive surplus, Charles will always receive more producer surplus than Dina. b. Producer surplus is smaller when the price is $105 than when it is $75.

a. true b. false Explanation: Recall that producer surplus is defined as the difference between a seller's cost (that is, his or her minimum acceptable price) and the price the seller actually receives. Because Charles's willingness to sell a used air fryer is lower than Dina's, he will always receive more producer surplus than Dina when both have a positive producer surplus, because the price received is the same for both sellers. As the price of a used air fryer rises, more sellers may be willing to enter the market and sell their air fryers. Additionally, each seller who was already willing to participate at the lower price now receives more producer surplus, thanks to the increase in price. Therefore, producer surplus must be larger when the price is $105 than when it is $75. You can confirm this mathematically by checking the areas of regions X and Y. Region X ($105) represents producer surplus when the market price is $75, while regions X and Y together ($225) represent producer surplus when the market price is $105.

3. Equality versus efficiency All societies face a trade-off between efficiency and equality. If the government lowers income taxes on Americans in the top one percent of earners, while decreasing welfare payments to citizens with incomes below the federal poverty threshold, the most likely result is ... in efficiency and... in equality in the United States.

an increase, a decrease Explanation: When governments design policies aimed at increasing equality, society must also be prepared to accept a decrease in efficiency. For example, if the U.S. government decreases income taxes on the wealthiest Americans, it gives them an incentive to work harder to produce goods and services, since they will keep a higher percentage of what they earn. The result is more goods and services produced for society overall. In other words, the economic pie would become larger and the economy would be more efficient. At the same time, however, a lower tax rate on wealthy Americans, with a corresponding decrease in transfer payments to poorer Americans, can decrease equality since the income gap between wealthy and poor Americans will have gotten larger.

Fill out the table: Without Trade: Production || Glacier - Chinos (millions of pairs): 12 \ Pistachios (millions of pounds): 72 || Congaree - Chinos (millions of pairs): 24 \ Pistachios (millions of pounds): 32 Consumption || Glacier - Chinos (millions of pairs): 12 \ Pistachios (millions of pounds): 72 || Congaree - Chinos (millions of pairs): 24 \ Pistachios (millions of pounds): 32 With Trade: Production || Glacier - Chinos (millions of pairs): ? \ Pistachios (millions of pounds): ? || Congaree - Chinos (millions of pairs): ? \ Pistachios (millions of pounds): ? Trade Action || Glacier - Chinos (millions of pairs): ? ? \ Pistachios (millions of pounds): ? ? || Congaree - Chinos (millions of pairs): ? ? \ Pistachios (millions of pounds): ? ? Consumption || Glacier - Chinos (millions of pairs): ? \ Pistachios (millions of pounds): ? || Congaree - Chinos (millions of pairs): ? \ Pistachios (millions of pounds): ? Gains from Trade: Increase in Consumption || Glacier - Chinos (millions of pairs): ? \ Pistachios (millions of pounds): ? || Congaree - Chinos (millions of pairs): ? \ Pistachios (millions of pounds): ?

answer: With Trade: Production || Glacier - Chinos (millions of pairs): 48 \ Pistachios (millions of pounds): 0 || Congaree - Chinos (millions of pairs): 0 \ Pistachios (millions of pounds): 128 Trade Action || Glacier - Chinos (millions of pairs): exports 26 \ Pistachios (millions of pounds): Imports 78 || Congaree - Chinos (millions of pairs): Imports 26 \ Pistachios (millions of pounds): Exports 78 Consumption || Glacier - Chinos (millions of pairs): 22 \ Pistachios (millions of pounds): 78 || Congaree - Chinos (millions of pairs): 26 \ Pistachios (millions of pounds): 50 Gains from Trade: Increase in Consumption || Glacier - Chinos (millions of pairs): 10 \ Pistachios (millions of pounds): 6 || Congaree - Chinos (millions of pairs): 2 \ Pistachios (millions of pounds): 18 Explanation: You can also see how each country gains from trade by using a production possibilities frontier (PPF) diagram. The blue lines on the following diagrams show the PPFs of Glacier and Congaree. The black points (plus symbol) show their initial consumption of chinos and pistachios. The orange points (square symbol) show the amount of chinos and pistachios each consumes after specialization and trade. Note that the total gains from trade are 12 million pairs of chinos and 24 million pounds of pistachios per day, which is the total increase in production you calculated earlier. Visually, you can see that there are gains from trade, because countries are able to consume at points that were previously not feasible (that is, points outside of their PPF).

Suppose that Hungary and Luxembourg consider trading liquor and boots with each other. Hungary can gain from specialization and trade as long as it receives more than ? of boots for each case of liquor it exports to Luxembourg. Similarly, Luxembourg can gain from trade as long as it receives more than ? of liquor for each pair of boots it exports to Hungary.

answer: 4 pairs; 1/12 case Explanation: Hungary's opportunity cost of producing a case of liquor is 4 pairs of boots. Therefore, if it can import more than 4 pairs of boots for each case of liquor it exports, it will be better off importing boots than producing it domestically. Luxembourg's opportunity cost of producing a case of liquor is 12 pairs of boots. Another way of thinking about this is that for each pair of boots it produces, it must give up 1/12 of a case of liquor. Therefore, if it can import more than 1/12 of a case of liquor for each pair of boots it exports, it will be better off importing liquor than producing liquor domestically.

Now suppose Congress passes a new tax that decreases the income of Houston residents. If coffee is a normal good, this will cause the demand for coffee to ? .

decrease Explanation: The demand for normal goods increases when income increases; that is, an increase in income causes an increase in the demand for coffee. On the other hand, a decrease in income causes a decrease in the demand for the good. Because you are told that the new tax decreases the income of Houston residents, this causes demand to decrease, or shift to the left.

5. Changes in incentives Due to the brutal nature of American football, collegiate athletes run the risk of sustaining head injuries over the course of playing the game. High-speed collisions involving blows to the head are especially dangerous. Suppose the president of the National Collegiate Athletic Association (NCAA) imposes a new rule that requires college football players at all levels to wear a soft, protective covering over their helmet, designed to reduce the impact of hits to the head that occur when playing the sport. While the new protective coverings worn over helmets ... the probability of injury resulting from blows to the head, the additional safety measures could also incentivize football players to play more ... , which could potentially ... the amount of high-speed collisions and thus the number head injuries suffered by college players, all else equal.

decrease; recklessly; increase explanation: Although the new helmets may have the direct effect of reducing the probability of a head injury during a given collision on the football field, this reduction in concussion probability can also change the incentives of players. In particular, it may give football players an incentive to alter their behavior and style of play. A rational football player compares the costs and benefits of playing safely on the field. For instance, if football players played with no helmet at all, the marginal benefit of playing safely (e.g., not leading with one's head during a tackle) would be high, giving players an incentive to play more carefully to avoid head trauma. The new helmet covers, however, change these incentives by altering the cost-benefit analysis that a rational football player would undertake. If the helmets reduce head trauma during collisions, the marginal benefits of playing safely are reduced, giving players an incentive to play less cautiously (or more recklessly). This change in behavior may even lead to an increase in the number of violent collisions. If the increase in violent collisions is large enough, the number of head injuries could actually increase. These days, the NCAA also imposes penalties and suspensions for violent hits to the head and takes other measures to reduce the number of injuries.

Suppose the market price of a motor scooter increases to $100. On the following graph, use the rectangles once again to shade the areas representing consumer surplus for each person who is willing and able to purchase a motor scooter at the new market price: orange (square symbols) for Edison, green (triangle symbols) for Hilary, purple (diamond symbols) for Kevin, tan (dash symbols) for Maria, and blue (circle symbols) for Rajiv. (Note: If a person will not purchase a motor scooter at the new market price, indicate this by leaving his or her rectangle in its original position on the palette.) Based on the information in the second graph, when the market price of a motor scooter increases to $100, the number of consumers willing to buy a motor scooter x to x , and total consumer surplus x to x.

decreases; two consumers; decreases; $60 Explanation: At a price of $60, Edison, Hilary, and Kevin are willing to buy a motor scooter, but Maria and Rajiv are not. When the price increases to $100, Kevin, who is willing to pay $80 for a motor scooter, will no longer be willing to buy one. Two consumers are now willing to buy a motor scooter because everyone else's choice remains the same. At the old price of $60, total consumer surplus was $160. At the new price of $100, Edison and Hilary each receive $40 less of consumer surplus because they each have to pay $40 more. Additionally, Kevin, who previously received $20 of consumer surplus, will now receive no consumer surplus because he will no longer be willing to buy a motor scooter at the market price. Therefore, the new total consumer surplus is $60. The following table summarizes these results: Consumers Willingness to Pay Consumer Surplus If... (Dollars) P = $60 P = $100 (Dollars) (Dollars) Edison1408040Hilary1206020Kevin8020Doesn't buyMaria40Doesn't buyDoesn't buyRajiv20Doesn't buyDoesn't buyTotal Consumer Surplus:16060

Apply your understanding of the previous key terms by completing the following scenario with the appropriate terminology. Your boss would like your help on a marketing research project she is conducting on the relationship between the price of tomato paste and the quantity of tomato paste demanded. She hands you the following document: Price of Tomato paste - 0.50 || Quantity of Tomato Pate Demanded - 2,000 Price of Tomato paste - 0.75 || Quantity of Tomato Pate Demanded - 1,500 Price of Tomato paste - 1.00 || Quantity of Tomato Pate Demanded - 1,000 Price of Tomato paste - 1.25 || Quantity of Tomato Pate Demanded - 750 ... Your task is to take this ? and construct a graphical representation of the data. In doing so, you determine that as the price of tomato paste rises, the quantity of tomato paste demanded decreases. This confirms the ? .

demand schedule; law of demand . Explanation: The table your boss provided shows the relationship between the price of tomato paste and the amount of tomato paste that buyers are willing and able to purchase over a range of prices. This is known as a demand schedule. The graphical representation of these data is known as a demand curve. By plotting these data with price along the vertical axis and quantity along the horizontal axis, you see that the demand curve is downward sloping: This indicates that the quantity of tomato paste demanded falls when the price of tomato paste rises, also known as the law of demand.

11. Disequilibrium Suppose the market for trucks is unregulated. In other words, the price of trucks can adjust freely based on supply and demand forces. If a surplus exists in the truck market, then the current price must be ? than the equilibrium price. For equilibrium to be reached in the market, you would expect ?

higher; sellers to offer lower prices . Explanation: Prices above the equilibrium price generate excess supply because sellers are willing to sell more trucks than buyers are willing to purchase—the quantity supplied is greater than the quantity demanded at that price. Some sellers who wish to sell trucks at the current price will be unable to do so. In order to attract buyers, some sellers will offer lower prices, increasing the number of trucks buyers are willing to purchase. Therefore, the market will move toward the equilibrium price, where the quantity of trucks demanded by buyers equals the quantity supplied by sellers.

1. Markets and competition In a perfectly competitive market, all producers sell ? goods or services. Additionally, there are ? buyers and sellers. Because of these two characteristics, both buyers and sellers in perfectly competitive markets are price ? .

identical; many; takers Explanation: Perfectly competitive markets have two characteristics: 1.The goods and services bought and sold are all exactly the same.2.There are large numbers of buyers and sellers, such that no single buyer or seller can affect the market price. Taken together, these two characteristics imply that both buyers and sellers are price takers. That is, both must accept the price as determined by the broader market.

14. A supply and demand puzzle The following graph presents the market for keyboards in 2017. Between 2017 and 2018, the equilibrium quantity of keyboards remained constant, but the equilibrium price of keyboards increased. Given this information, you can conclude that between 2017 and 2018, the supply of keyboards ? and the demand for keyboards ? . Make changes to the graph to illustrate your answer by showing the positions of the supply and demand curves in 2018. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.`

increased; increased Explanation: To solve this puzzle, start by thinking about the individual effects of shifts in supply and demand on the equilibrium price and quantity of keyboards. If the demand for keyboards remains constant, a shift in the supply curve would result in a movement along the demand curve. If the supply of keyboards remains constant, a shift in the demand curve would result in a movement along the supply curve. Either way, this causes a change in both the equilibrium price and the equilibrium quantity. However, because the quantity of keyboards remained constant in this case, both the supply curve and the demand curve must have shifted, and the effects of those shifts on the equilibrium quantity offset each other. Therefore, the curves shifted in opposite directions. Because the price of keyboards increased, the supply of keyboards decreased and the demand for keyboards increased. Effects of Shifts in Demand or Supply on Equilibrium No Change in Supply Increase in Supply Decrease in Supply No Change in DemandP and Q unchangedP ↓, Q ↑P ↑, Q ↓Increase in DemandP ↑, Q ↑P ?, Q ↑P ↑, Q ?Decrease in DemandP ↓, Q ↓P ↓, Q ?P ?, Q ↓ (Note: The ↑ (up arrow) indicates that the equilibrium object increases; the ↓ (down arrow) indicates that it decreases; and the ? (question mark) indicates that the direction of the change is unknown.)

Suppose the market price of a polaroid camera increases to $110. On the following graph, use the rectangles once again to shade the areas representing producer surplus for each person who is willing to sell a polaroid camera at the new market price: blue (circle symbols) for Sean, green (triangle symbols) for Yvette, purple (diamond symbols) for Bob, tan (dash symbols) for Cho, and orange (square symbols) for Eric. (Note: If a person will not sell a polaroid camera at the new market price, indicate this by leaving their rectangle in its original position on the palette.) Based on the information in the second graph, when the market price of a polaroid camera increases to $110, the number of sellers willing to sell a polaroid camera x to x , and total producer surplus x to x.

increases; four sellers; increases; $260 Explanation: At a price of $70, Sean, Yvette, and Bob are willing to sell a polaroid camera, but Cho and Eric are not. When the price increases to $110, Cho, who is willing to sell a polaroid camera for $90, will now be willing to sell one. Four sellers are now willing to sell a polaroid camera because everyone else's choice remains the same. At the old price of $70, you found that total producer surplus was $120. At the new price of $110, Sean, Yvette, and Bob each receive $40 more of producer surplus because the price they get is $40 higher than the original price. Additionally, Cho—who is willing to accept $90, but receives $110—now receives $20 of producer surplus. Therefore, the new total producer surplus is $260. The following table summarizes these results: Sellers Cost Producer Surplus If... (Dollars) P = $70 P = $110 (Dollars) Sean1060100Yvette304080Bob502060Cho90Doesn't sell20Eric130Doesn't sellDoesn't sellTotal Producer Surplus:120260

Suppose now that an individual firm that produces goods in this market has the power to influence market price, leading to an outcome different from the free market equilibrium illustrated in the previous graph. This is an example of ? due to ?.

inefficiency; market power Explanation: A firm that can influence the market price is said to have market power. Because firms with market power produce less output at a higher price than a competitive market would, market power is a source of inefficiency: an inefficient allocation of resources.

7. Property rights and market failures Musicians are much ... likely to supply recordings to the market if property rights are not enforced.

less Explanation: Property rights are the ability of individuals to own and control their own scarce resources. The enforcement of property rights, usually through the police and court systems, is essential for markets to function efficiently, since in the absence of secure property rights, individuals will have less incentive to produce goods and services. For example, without enforcement of property rights, musicians will be less likely to produce recordings, as any recordings produced can potentially be stolen without compensation paid to the musicians. On the other hand, if property rights are enforced, musicians can be more confident that they will be compensated for their recordings and thus will be more likely to produce recordings in the first place. In this way, the enforcement of property rights can help move the market toward a more efficient level of production of goods and services.

Because it takes six to eight years before newly planted blueberry plants reach full production, the supply curve in the short run is almost vertical. In the long run, farmers can decide whether to plant blueberries on their land, to plant something else, or to sell their land altogether. Therefore, the long-run supply of blueberries is much more price sensitive than the short-run supply of blueberries. Assuming that the long-run demand for blueberries is the same as the short-run demand, you would expect a binding price ceiling to result in a ? that is ? in the long run than in the short run.

shortage; larger Explanation: A binding price ceiling always creates a shortage, but the severity of the shortage may differ between the short run and the long run. In the short run, farmers may have no choice but to continue producing blueberries since they already have blueberry plants. In the long run, if they cannot sell their blueberries at the free-market equilibrium price, more and more farmers will switch to other crops or sell their land. Therefore, at the same price set by the price ceiling, fewer and fewer blueberries will be produced. The following graphs show the short-run and long-run effects of a binding price ceiling set at PC��: At a price of PC��, the quantity demanded is QD��. In the short run, the supply curve is nearly vertical, and there is a relatively small shortage of blueberries (QD−QS��−��). In the long run, the supply curve is much flatter, and the shortage is more severe. Because QS�� is much less than before, QD−QS��−�� is much greater.

Assume that Ciana considers both her opportunity costs and the price of sandals when making her shopping decision. Ciana will minimize her cost of buying the sandals if she shops at the

store in the different neighborhood in town . Explanation: Ciana will base her decision on the total cost of the sandals, including the opportunity cost of the time required to obtain the sandals and the price of the sandals. In this scenario, she incurs the lowest total cost if she buys her sandals from the store in the different neighborhood in town.

Based on the information on the preceding graph, you can tell that ? will sell polaroid cameras at the given market price, and total producer surplus in this market will be ?.

three sellers; $120 Explanation: Three sellers are willing to sell a polaroid camera at the market price of $70: Sean, who is willing to sell a polaroid camera for at least $10; Yvette, who is willing to accept at least $30; and Bob, who is willing to accept at least $50. Cho is willing to sell a polaroid camera only for $90 or more, and Eric is willing to sell a polaroid camera only for $130 or more, so neither of them will sell a polaroid camera if the market price is $70. Total producer surplus is the sum of the producer surpluses of each seller in the market. Sean's producer surplus is the difference between his cost and the market price. Because he supplies only one polaroid camera and is willing to sell for $10, you can compute his producer surplus in the following way: Individual Producer SurplusIndividual Producer Surplus = = Market Price−CostMarket Price−Cost = = $70−$10$70−$10 = = $60$60 Similar calculations show that Yvette and Bob have producer surpluses of $40 and $20, respectively. Because Cho and Eric do not sell a polaroid camera, they do not contribute to total producer surplus. Therefore, total producer surplus equals $60+$40+$20=$120

Suppose that both groups of students are on the right track, and each of the events described above are partially responsible for the decrease in the price of calzones. Based on your analysis of the explanations offered by the two groups of students, how would you determine which of the possible causes was the dominant cause of the decrease in the price of calzones? xIf the equilibrium quantity of calzones increases, then the supply shift in the market for calzones must have been larger than the demand shift. xWhichever change occurred first must have been the primary cause of the change in the price of calzones. xIf the price decrease was small, then the supply shift in the market for calzones must have been larger than the demand shift. xIf the equilibrium quantity of calzones increases, then the demand shift in the market for calzones must have been larger than the supply shift.

xIf the equilibrium quantity of calzones increases, then the supply shift in the market for calzones must have been larger than the demand shift. Explanation: Both student groups' explanations could account for the decrease in the price of calzones. The increase in the supply of calzones—caused by the fact that several new pizza parlors have recently opened in the area—causes the equilibrium price of calzones to decrease and the equilibrium quantity to increase. On the other hand, the decrease in demand for calzones—caused by the increase in the price of beer—causes both the equilibrium price and the equilibrium quantity of calzones to decrease. This means that if both events are contributing, you can't tell which shift is bigger, or more important, simply by looking at the price change. Recall that when both curves shift, either the price or the quantity change will be ambiguous without more information about which shift dominates. When demand and supply shift in opposite directions, the change in price is clear, but the quantity shift is determined by which curve moves more. The following graphs both illustrate a decrease in demand and an increase in supply—causing the equilibrium price to decrease—but the magnitudes of the shifts vary, causing different results for the change in the equilibrium quantity: Therefore, if you know that the equilibrium quantity has increased, then the dominant cause of the price change must have been the increase in the supply of calzones, as shown by the Supply Shift Dominates diagram. If you know that the equilibrium quantity has decreased, then the decrease in demand for calzones must have been the dominant cause of the price change, as shown by the Demand Shift Dominates diagram.

3. Effects of rent control Rent controls require that landlords set apartment prices below the equilibrium price level. An immediate effect is an apartment rental shortage (excess demand for apartments), because at the regulated price the quantity of apartments demanded is greater than the quantity supplied. When landlords are prevented by cities from charging market rents, which of the following listed outcomes are common in the long run? Check all that apply. xThe quality of rental housing units falls. xThe quantity of available rental housing units falls. xNonprice methods of rationing emerge. xBlack markets develop.

xThe quality of rental housing units falls. xThe quantity of available rental housing units falls. xNonprice methods of rationing emerge. xBlack markets develop. Explanation: The following list captures the most common long-run outcomes that result from rent-control laws: Results of Rental-Control Laws •Landlords provide less maintenance under rent control and are unlikely to upgrade their units because they cannot pass on these costs to tenants through higher rents. Because of reduced maintenance, quality suffers and housing units deteriorate more quickly.•Because the profitability of owning and renting apartment units decreases with rent control, landlords construct fewer new units and may even convert existing apartments to more profitable uses. This decreases the number of units available to renters in the future.•A shortage (excess demand) of housing units may lead renters to make under-the-table payments to secure an apartment. This can lead to the development of a black market for rental units.•Because price is no longer an effective mechanism of rationing apartments, alternative methods of rationing will emerge, such as screening processes or personal networking connections.

1. Economic models The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the associated flow of inputs and outputs. Which of the following statements regarding this economic model are true? xBecause it does not take into account international trade, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy. xWhile simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars and resources move throughout an economy. xBecause, in reality, the economy is very large, the simplicity of the circular-flow diagram makes it useless for the purposes of modeling how dollars and resources move throughout an economy. xBecause it does not take into account the role of government, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy.

xWhile simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars and resources move throughout an economy. Explanation: Scientists of all types make assumptions in their models to simplify the complex world they are trying to describe. These simplifying assumptions allow scientists to focus on only the most important and generalizable components of the topic of study. Economists also make simplifying assumptions to focus on only the most important and generalizable aspects of the economy. Economies typically consist of millions of individuals interacting in many different ways, and no model can include every detail of a system as complex as an economy. To make sense of all of the different aspects of an economy, economists must make simplifying assumptions and generalizations in order to focus on only the most important economic ideas. By grouping all individuals into households and firms and all markets into markets for goods and services and markets for factors of production, economists can model how dollars and resources flow back and forth among agents in the economy. The simplicity of the model allows those without formal backgrounds in economics to understand, at a high level, the economic activities that take place in an economy.