EXAM 1 review

framing effect

the tendency for people's choices to be affected by how a choice is presented, or framed, such as whether it is worded in terms of potential losses or gains

Incentives

things that attract or lure people into action

Amanda goes to a local café and orders a sandwich. She is willing to pay $10 for it. The price of the sandwich is $4. The cost to the café to produce the sandwich is $1. How much economic surplus does the café receive when Amanda purchases the sandwich? $6 $4 $3 $1

$3

Cross-price elasticity

% change in Qx / % change in Py

price elasticity of demand

% change in quantity demanded / % change in price

Cross-price elasticity of demand

% change in quantity demanded / % change in price of another good

Shifters of a supply curve

1. input prices 2. technology 3. expectations 4. number of sellers 5. price of related outputs

Shep goes to his favorite coffee shop every morning and always buys one large latte, no matter whether there is a special or not (i.e., half-price Mondays). What is his price elasticity of demand for lattes? price elasticity of demand:

0

Shifters of a demand curve

1. Income 2. Preferences 3. Price of related goods 4. Expectations 5. Network effects 6. # of buyers

Supply Elasticity Factors

1. Inventories make supply more elastic 2. Easily available variable inputs make supply elastic 3. Extra capacity makes supply elastic 4. Easy entry and exit make supply more elastic 5. Over time, supply becomes more elastic

Four Core Principles of Economics

1. cost-benefit principle 2. opportunity cost principle 3. marginal principle 4. interdependence principle

Factors that shift demand curve

1. income 2. price of related goods 3. expectations of future prices 4. number of buyers 5. tastes and preferences

If Good C increases in price by 30% a pound, and this causes the quantity demanded for Good D to increase by 40%, what is the cross-price elasticity of the two goods? Round your answer to one decimal place. What is the relationship between the two goods?

1.3 Substitutes

Suppose that typically you pay $10 for an Uber ride to work. Today, you take the same trip, but find that the price has risen to $12. Which of the following options could result in the price change above? (select all that apply) A local convention has increased traffic in the area, resulting in a longer travel time for your trip. There is an increase in the number of Uber drivers available. Gas prices have significantly risen in the past day. The price of taxi cab rides has fallen.

A local convention has increased traffic in the area, resulting in a longer travel time for your trip / Gas prices have significantly risen in the past day.

Consider the following statement: "An increase in the cost of oil will cause the price of a plane ticket to increase. This increase in price will cause a decrease in demand for airline travel and a leftward shift in the demand curve." What is the flaw of this reasoning? An increase in the price of a ticket will not cause a decrease in demand, but rather a decrease in quantity demanded. The increase in the cost of oil will cause a decrease in the price of a plane ticket. A decrease in demand will shift the curve rightward, not leftward. The cost of oil affects supply and not demand so prices of tickets will remain the same.

An increase in the price of a ticket will not cause a decrease in demand, but rather a decrease in quantity demanded.

Your friend remarks that longer movies are a better deal than shorter movies because the ticket price is the same in both cases. Therefore, the longer movie provides more benefit for the same cost as a shorter movie. Which of the following is the best argument against your friend's claim that longer movies provide more benefit than shorter movies?

Based on the OPPURTUNITY cost principle, the length of the movie does not matter as long as watching a movie is the best way to spend your time compared to other alternatives. cost‑benefit principle, the benefits of a longer movie exceed the costs when compared to a shorter movie. marginal principle, you should only continue to watch an additional movie if it is shorter than the first movie. interdependence principle, longer movies are affected by the market for shorter movies.

Cost-Benefit Principle

CHOICES

Marginal Principle

Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost.

Rational Rule

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

In 2016, the top-selling pharmaceutical drug in the world was AbbVie's Humira, which is used for the treatment of several common, chronic conditions. The majority of its profits are derived from treatment of the most common diseases, but AbbVie also develops drugs for rare conditions. Why might AbbVie develop drugs for rare diseases instead of investing all of its resources toward drugs for common diseases?

It is possible that framing effects may be enticing AbbVie to develop and produce drugs for rare conditions. Since these drugs are more expensive, AbbVie will make a large profit. THE MARGINAL principle may be guiding AbbVie in determining if it is worth producing drugs for rare diseases. Since it is developing and producing treatments for rare diseases, the marginal benefits must exceed the costs. the interdependence principle may be guiding AbbVie to develop and produce drugs for rare conditions. Common chronic and rare conditions are often experienced by the same people, so AbbVie can easily produce drugs for both. the opportunity‑cost principle may encourage AbbVie to produce drugs for rare conditions, because the full benefits outweigh the costs. The company must be maximizing its total economic surplus.

Consider the following statement: "The market supply for natural gas is the sum of all prices that natural gas producers are willing and able to sell at for every quantity." What is the flaw in this statement? It should state that market supply is the quantity of natural gas that producers are willing and able to sell at one specific price. There is no flaw in this statement. It should state that market supply is the price of natural gas that one firm is willing and able to provide a specified quantity of its product at. It should state that market supply is the sum of the quantities of natural gas that producers are willing and able to sell at every price.

It should state that market supply is the sum of the quantities of natural gas that producers are willing and able to sell at every price.

Scarcity

Limited quantities of resources to meet unlimited wants

The Rational Rule for buyers

Marginal principle > cost benefit > opportunity cost = Rational Rule

During the economic downturn of 2008-2009, the unemployment rate increased to nearly 10%. At the same time, the price of higher education tuition and the number of enrollees increased. a. Which statement best explains why more people enrolled in higher education institutions during this time period even as the price of tuition increased?

More people enrolled because of the bandwagon effect. When something becomes popular or trendy, ever more people are willing to pay high prices for it. IF THE next best option was unemployment, many individuals may have preferred to enroll in higher education and gain new skills in hopes of increasing their future employment prospects. if the next best option was unemployment, many individuals may have preferred to enroll in higher education and live off of student loans while waiting for the job market to improve. of the social pressure people feel to go to college. Universities exploited this and increased the price of tuition without losing many students.

percent change in price

P2-P1/(P2+P1)/2 x 100

percent change in quantity

Q2-Q1/Q2+Q1 x 100

Rational rule for sellers

Sell one more item if the marginal revenue is greater than (or equal to) marginal cost.

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

Over time, a continual decrease in autoworkers' wages leads to an increase in the supply of trucks. During this same time, drivers start to prefer compact cars over trucks, leading to a decrease in the demand for trucks. Which of the statements most accurately describes what happens to the equilibrium price and quantity of trucks? The equilibrium quantity will decrease and it is unclear how the equilibrium price will change. The equilibrium price will decrease and the equilibrium quantity will decrease. The equilibrium price will increase and the equilibrium quantity will increase. The equilibrium price will decrease and it is unclear how the equilibrium quantity will change.

The equilibrium price will decrease and it is unclear how the equilibrium quantity will change.

You purchased a ticket to the musical Hamilton through a verified reseller for $457.00. When your ticket arrives, you see that the face value printed on it is $259.00. Which of the following is correct? The face value is above the equilibrium price because the rate in the secondary market is below the face value. The face value is below the equilibrium price because the rate in the secondary market exceeds the face value. The rate in the secondary market is below the equilibrium price because it falls below the face value. The rate in the secondary market is above the equilibrium price because it exceeds the face value.

The face value is below the equilibrium price because the rate in the secondary market exceeds the face value.

Determine which statement about the absolute value of the price elasticity of demand is correct. The price elasticity of demand for gasoline is greater than the price elasticity of demand for cereal because because more people eat cereal than use gasoline. The price elasticity of demand for laundry detergent in general is likely to be greater than the price elasticity of demand for Gain laundry detergent. The price elasticity of demand for gasoline is less than the price elasticity of demand for cereal because because more people eat cereal than use gasoline. The price elasticity of demand for Gain laundry detergent is likely to be greater than the price elasticity of demand for laundry detergent in general.

The price elasticity of demand for Gain laundry detergent is likely to be greater than the price elasticity of demand for laundry detergent in general.

Market supply is the sum of the quantity supplied by each seller, True / False

True

Consider the following statement: "Economists always put things into monetary terms; as a result, economics can most appropriately be called the study of money." Is this statement true or false?

True, financial markets are the primary focus of economics. False, ECONOMICS use monetary terms because they can be quantified and compared, but economics is better described as an approach to decision making. False, even though economists use monetary terms often, economics is better described as a governmental approach to improving market outcomes. False, even though economists use money as a form of measurement, economics is better described as the study of financial markets.

You have a part time job that pays $8 per hour. Your manager has asked you to work four extra hours on Friday night, but you already have plans for dinner and a movie with a friend on Friday night. Under what conditions will you choose to work on Friday night? Consider the economic way of thinking in answering this question; also assume that you are rational (even if you do not think you are rational) and can afford dinner and a movie. You have already seen the movie that has been chosen for Friday night. You value the Friday night activities more than the extra pay (in terms of marginal benefits, marginal costs, and your utility). You think the Friday night dinner will be expensive. You value the extra pay more than the Friday night activities (in terms of marginal benefits, marginal costs, and your utility).

You value the extra pay more than the Friday night activities (in terms of marginal benefits, marginal costs, and your utility).

interdependence principle

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change.

Mateo works eight hours per day. Today he has to decide whether to work overtime and stay one more hour in the office, or go back home and spend that hour studying for his economics exam. His company pays him $80 per day if he works eight hours, and $100 per day if he works nine hours. If Mateo studies one more hour, his exam score increases from 75 to 80, what is Mateo 's rational decision? Mateo decides to work overtime only if he values getting an 80 on his exam more than $100. an 80 on his exam less than $100. a five point increase on his exam score more than $20. a five point increase on his exam score less than $20.

a five point increase on his exam score less than $20.

Identify the scenarios as examples of elastic, inelastic, or unit elastic demand. a. When Ruko, a device used to stream movies at home, increases prices by 42 percent, total revenue decreases by 57percent. b. When Cinema Supreme increases ticket prices by 26 percent, total revenue does not change. c. When Bluebox, a streaming service for foreign television shows and movies, increases its prices by 41 percent, total revenue increases by 22 percent.

a. elastic b. unit elastic c. inelastic

etermine whether each statement describes the income effect, the substitution effect, or neither. Assume that all other variables are held constant. a. The price of lobster doubles, making Henri feel less wealthy. As a result, Henri buysfewer lobsters. income effect b. The price of chicken falls by $0.75 a pound. Since chicken is now relatively less expensivethan ground beef, Mary buys more chicken and less beef. substitution effect c. The average price of a DVD falls by 15 percent. Tom buys more DVDs because hismonthly movie budget can now stretch further. income effect

a. income effect b. substitution effect c. income effect

Almonds are a crop that grows on trees. Farmers do not need to replant trees every year to produce a crop of almonds. It takes at least five years after planting for trees to bear fruit. Several factors such as weather, disease, and long term projections about price impact the supply of almonds available. Barley is a grass that must be planted each year to produce a crop. The growing season is short, about three to four months. Several factors influence farmers' decisions to plant barley each year, including price, weather, and disease. a. Based on this information, barley has a more inelastic supply in the short run because barley is more dependent on price in the short run. it is impossible to infer anything about the price elasticity of supply for these two crops. almonds have a more inelastic supply in the short run because little can be done to change production in the short run. the crops have the same price elasticity of supply because they are both agricultural commodities.

almonds have a more inelastic supply in the short run because little can be done to change production in the short run.

Trinh quits his $80,000-a-year job to become a full-time volunteer at a museum. What is the opportunity cost of his decision? 0 since he will no longer be earning a salary at least $80,000 the value he attributes to the joy of working at a museum depends on the wages paid to museum employees, for comparison

at least $80,000

During the Obama administration, firms developing low‑cost batteries for electric cars received large amounts of federal funding via subsidies. Meanwhile, American households gave a higher priority towards minimizing their environmental impact. Consider the market for zero‑emissions electric vehicles, where there is an upward‑sloping supply curve and a downward‑sloping demand curve. In which direction will demand and supply shift? ambiguous/right/left. What will happen to the equilibrium price? ambiguous/right/left.

both curves shift right/the price will change ambiguously

The law of demand

consumers buy more of a good when its price decreases and less when its price increases

Sugarcane is vulnerable to the cane beetle, which can substantially reduce crop yields. Suppose that a new beetle‑resistant species of sugarcane is developed and productivity increases as a result. Use the terms to identify the effect on each of the related factors. As productivity increases, the price of sugar will decrease / increase. The quantity demanded for sugar will then decrease / increase. Given the change in the price of sugar, the price of cookies will decrease / increase. The price of honey, also used as a sweetener, will decrease / increase. Responding to changes in the sugar market, the price of textiles will not change.

decrease/increase/decrease/decrease/not change

You just took an Uber from home to campus for the first time and were willing to pay $13 for the trip. It was so much easier than driving yourself that you are willing to pay $21 for the same trip tomorrow. Determine if you have violated the law of demand based on your choices, and why or why not that is the case. Your decisions do violate the law of demand because you have chosen to buy the same amount of the product at two different prices. do not violate the law of demand because your preference for the product changed after you experienced the good. do not violate the law of demand because the law of demand states that quantity demanded increases as price increases. do violate the law of demand because the law of demand states that quantity demanded decreases as price increases.

do not violate the law of demand because your preference for the product changed after you experienced the good.

Price elasticity of the supply is negative ( true/false)

false

perfectly elastic demand curve

horizontal

You are thinking of going out to dinner at a restaurant with your friends. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $20. You value the restaurant meal at $20, and the time spent with your friends at $30. If you did not go out to the restaurant, you would eat at home using groceries that cost you $10. You should _____ to dinner with your friends because the benefit of doing so is _____ than the cost. go; greater go; less not go; greater not go; less

not go: less

When you arrive at a gas station, there is a line of cars wrapped around the block waiting for gas, so you go to the gas station down the road only to find another line of cars! You get in line and end up waiting over an hour just to get to the pump and be told that they've run out of gas. This market is............because

not in equilibrium because / people are still willing and able to purchase gasoline, even though the quantity supplied has been exhausted

Madeline spends all of her spare money on widgets, which cost $2 each, and gizmos, which cost $3 each. What is her opportunity cost if Madeline buys 12 widgets?

opportunity cost is 8 gizmos

Income elasticity of demand

percent change in quantity demanded / percent change in income

Amy can study for an hour or spend that hour sleeping or going out for dinner. If she decides to study for the hour, the opportunity cost of the hour spent studying is definitely going to sleep. going out to dinner because she must eat at some time. sleeping and going out for dinner. studying, by revealed preference since this is the choice she opted for. sleeping or going out for dinner, whichever she would have preferred the most.

sleeping or going out for dinner, whichever she would have preferred the most.

You have been appointed head of marketing for Barry's Younique Yachts. Barry, the CEO, is interested in determining whether offering his yachts at a lower price would increase the firm's revenue. He asks you for advice. Using your knowledge of elasticity, you should tell Barrythat he should increase his prices. Demand for yachts is likely to be elastic because they are so much fun to drive. Thus, increasing prices would increase revenue.that he should reduce his prices. Yachts are a necessity and therefore have a low price elasticity of demand. Thus, reducing prices would increase revenue.that he should increase his prices. Demand for yachts is perfectly inelastic, so a price increase will cause total revenue to increase.that he should reduce his prices. Yachts are luxury goods and therefore exhibit a high price elasticity of demand. Thus, reducing prices would increase revenue.

that he should reduce his prices. Yachts are luxury goods and therefore exhibit a high price elasticity of demand. Thus, reducing prices would increase revenue.

willingness to pay

the maximum amount that a buyer will pay for a good

opportunity cost

the most desirable alternative given up as the result of a decision

Rose's parents have booked a family trip to Aspen, Colorado, during her spring break. They have agreed to pay for everything except her plane ticket. Rose's friends recently decided to drive to Destin, Florida, for spring break. Rose must now decide whether to join her parents in Aspen or drive to the beach with her friends. The opportunity costs of joining her parents in Aspen include each of these EXCEPT: the cost of her plane ticket to Aspen. memories she will miss with her friends. the stress of traveling via plane and navigating airports. the nonrefundable deposit her friends paid for the beach house in Destin.

the nonrefundable deposit her friends paid for the beach house in Destin.

When asked to write the definition of the "Law of Demand" on an exam, Chris wrote, "When the price of a good increases, consumers will decrease the amount that they purchase." Chris' professor deducted one point for this response. The professor most likely deducted one point because Chris forgot to include that producers will stop producing the good if the price is too high. the phrase "holding everything else constant. "that wealthy consumers can buy as much as they want at any price. the price of inputs into the production process.

the phrase "holding everything else constant."

The average price of gasoline is $3.25 per gallon in your town. a. At a price of $0.50 per gallon, .................. as the amount of gasoline people are willing and able to buy ............. the amount of gasoline gas stations are willing and able to sell. (there would be a shortage / surplus) ( is less than / exceeds) b. At a price of $6.00 per gallon, ............. as the amount of gasoline people are willing and able to buy ........... the amount of gasoline gas stations are willing and able to sell. (shortage / exceeds) (exceeds / less that)

there would be a shortage / exceeds there would be a surplus / less than

Quantity is relatively unresponsive when supply is inelastic (true/false)

true

Supply is inverse / demand is direct relationship, true/false

true

very inelastic (0>>>1) elastic (true/false)

true

Perfectly Inelastic

vertical line

It is a rainy day, and you are considering taking an Uber one mile to meet some friends. You have decided you are willing to pay $20 to avoid getting wet from the rain. The trip would normally cost you $8, but due to the weather the surcharge is triple the regular cost. You should _____ because the benefit to you of taking the Uber is _____ than the cost. walk; less walk; more take an Uber; less take an Uber; more

walk; less

Stated Preference

what people say they want

Juan is willing to pay $600 for a new iPad. Apple is selling its new iPad for $700. It costs Apple $400 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because _____ would be better off due to the transaction. will; neither Juan nor Apple will; both Juan and Apple will not; only Juan will not; only Apple

will not; only Apple