Micro Exam 1

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

normal good.

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

normal; positive

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

$0 (The non-refundable $600 you paid for your meal plan is a sunk cost; no matter how many meals you eat up to 150, your marginal cost is 0.)

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

$13,000 per year. (The benefit of staying Pat home with the kids is the $12,000 per year saved on childcare plus the value of Pat spending more time with the kids. The cost of Pat staying home with the kids is $25,000 in foregone earnings. Thus, weighing costs and benefits, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than $13,000 per year.)

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

$30

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

$35 (Opportunity cost includes both implicit costs and explicit costs. If she goes to the movies, Amy will give up the opportunity to earn $20 plus the $15 cost of the ticket.)

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

$35 (The opportunity cost of seeing the movie is the economic surplus you give up by not seeing your favorite band ($50-$30=$20) plus the $15 you could have received by selling your movie ticket.)

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

$70,000 (If Larry attends Elite U, he not only has to pay $50,000 in out-of-pocket expenses, but he also has to give up the value his next-best option. To determine the value of his next best option, note that the value to Larry from attending State College (net of tuition) is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition) is $15,000 - 0 = $15,000. Since going to State College is his next best option, and his opportunity cost of going to Elite U is $50,000 + $20,000 = $70,000.)

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

3

It is likely that for most people:

Answer: coffee and tea are substitutes. coffee and non-dairy creamer are substitutes. coffee and Coke are complements. coffee and coffee mugs are substitutes.

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

An increase in the price of a substitute.

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

Joe and Mary can make a mutually beneficial exchange.

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

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

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

State College (To determine what Larry should do, determine the value of each option as if it were his only choice. In this case, the value to Larry from attending Elite U (net of tuition) is $60,000 - $50,000 = $10,000. His value from attending State College (net of tuition) is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition) is $15,000 - 0 = $15,000. Thus, his economic surplus will be the highest if he attends State College.)

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

a fall in consumer income assuming corn is a normal good.

The price of bananas will increase in response to:

an excess demand for bananas.

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

cross-price elasticity of demand.

If two products are substitutes, then the cross price elasticity will be

cross-price elasticity of demand between them will be positive.

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

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

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

elastic

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

excess demand will lead the price of oranges to rise

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

excess supply will lead the price to fall.

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

greater than $4.50 but no more than $5.00.

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

her reservation price was at least $400.

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

higher than (If the production of meat imposes costs on people other than those who buy and sell the meat, then the equilibrium quantity will be higher than the socially optimal quantity.)

Economics is best defined as the study of:

how people make choices in the face of scarcity and the implications of those choices for society as a whole.

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

inelastic.

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

inelastic; increase

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

its benefits exceed its costs.

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

less elastic than

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

only the entertainment value of the concert. (The price of the non-refundable ticket is a sunk cost, so the only thing that Jody should include in calculating the opportunity cost of going out to dinner, is the entertainment value of the concert.)

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

perfectly elastic.

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

positive.

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

quantity demanded to a one percent change in price of that good.

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

the cross-price elasticity between plane tickets and train tickets is positive. (The cross-price elasticity of demand between substitutes is positive: an increase in the price of one will lead to an increase in demand for the other.

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

the demand for Joe's regular unleaded gasoline is perfectly elastic.

The economic surplus of an action is:

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

If pencils and paper are complements for most consumers, then if the price of paper increases, you would expect: (equilibrium movement)

the equilibrium price and quantity of pencils to fall

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

the law of demand.

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

the market

The opportunity cost of an activity includes the value of:

the next-best alternative that must be foregone.

When a market is in equilibrium:

there is neither excess demand nor excess supply.

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

wash clothes; bigger