Microeconomics Test 1

substitute goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

complementary goods

Goods that are commonly used with other goods

Which of the following items is a normal good?

Steak

For normal goods

a tax cut on consumer income will lead to a rise in their demand.

Complements-in-production

allows a business to produce goods together.

The demand curve for one particular brand of cough syrup will _____ the demand curve for cough syrup as a general category.

be more elastic than

If demand is _____, a higher price yields _____ total revenue.

elastic; lower

elastic

elasticity is greater than 1

inelastic

elasticity is less than 1

Frank is a barley farmer in a perfectly competitive market. The market price of barley is $250 per ton. If Frank charges $245 per ton, he will

lower his profitability by $5 per ton.

Juan McDonald is willing to pay $900 for a new iPad. He offers to pay $800 for an iPad at the Apple store. It costs Apple $700 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because ____ would be better off due to the transaction.

will; both Juan and Apple

Price elasticity of demand =

Percent change in quantity demanded/Percent change in price

right; left

An increase in demand is a shift of the curve to the _________. A decrease in demand is a shift of the curve to the ________

Which of the following market changes would lead to a shift of the supply curve from Old supply to New supply? (supply curve shifts to the left)

An increase in the price of an input used in production

Diminishing marginal benefit:

is when buying an additional item yields a smaller marginal benefit than the previous item.

The cost-benefit principle says that you should

evaluate the full set of costs and benefits of any choice; pursue only those choices whose benefits are at least as large as their costs.

An equilibrium price is a price where the

quantity supplied equals the quantity demanded.

If a firm produces a product that has easily available variable inputs, its supply curve will be:

relatively flat.

If a consumer has more time to search for a low-cost alternative for an item, the demand curve for that item will be:

relatively more elastic.

Diminishing marginal product leads to

rising marginal costs for a seller.

You are given data on four products — toothpaste, shampoo, soap, and laundry detergent. The absolute value of the price elasticity of demand for toothpaste is 4. The absolute value of the price elasticity of demand for shampoo is 0.2. The absolute value of the price elasticity of demand for soap is 0.5. The absolute value of the price elasticity of demand for laundry detergent is 2. Which product has the most inelastic demand?

shampoo

willingness to pay

the maximum amount that a buyer will pay for a good

Alan Patel is a college student living alone in a campus apartment. He finished cooking dinner when his friends text him to join them at the dining hall on campus for dinner. He now has to decide whether to eat the dinner he prepared or walk to campus to meet his friends at the dining hall. Alan should consider all the following costs when making this decision EXCEPT the

time he spent cooking the dinner.

opportunity cost

The true cost of something is the next best alternative you must give up to get it

The aim of a marketing campaign is to

increase the demand for the product.

diminishing marginal benefit

Each additional item yields a smaller marginal benefit than the previous item

Sunk costs are costs that

are incurred in the past and cannot be reversed.

As part of a market research project, you survey six random people to see how much gas per week they would buy at various prices. The data you collect is in the accompanying table. What is the change in the total demand for gasoline in your survey when the price changes from $3 per gallon to $2.50 per gallon? ​ Quantity of Gallons of Gas Demanded Per Week (comes with graph)

The total quantity demanded in the market rises by 13 gallons.

Jonathan Mendez is deciding whether to study for his economics exam at a café down the street or go to a concert a few cities over. The time spent commuting to the concert is ____ in his opportunity cost calculations and represents a _____ cost.

included; nonfinancial

When using the marginal principle, a seller has to

decide whether to supply one more unit of the item.

How will the demand for Gucci shoes change today, if the government decides to tax designer shoes next year?

The demand for Gucci shoes will shift to the right today.

Consider the supply of chicken patties at a chicken-processing plant. Holding all else constant, for each of the following, identify whether the market would experience a change in quantity supplied or a change in supply, and specify the direction of the change.(i) Raw chicken can now be acquired at lower prices.(ii) There is only one producer of chicken patties, but several new producers of chicken patties enter the market.(iii) The demand for chicken patties increases.

(i) When raw chicken can be acquired at lower prices, there will be an increase in the supply of chicken patties.(ii) When there is only one producer of chicken patties but several new producers of chicken patties enter the market, there will be an increase in the supply of chicken patties.(iii) When there is an increase in the demand for chicken patties, there will be a rise in the price of chicken patties, and as a result, the quantity supplied of chicken patties will rise.

four types of inter dependencies

1.Dependencies between 2.Dependencies between 3.Dependencies between 4.Dependencies

Important lessons about opportunity costs

1.Some out-of-pocket costs are opportunity costs, such as the cost of MBA tuition and fees. 2.Opportunity costs don't need to involve out-of- pocket financial costs. 3.Not all out-of-pocket costs are real opportunity costs. 4.Some nonfinancial costs are not opportunity costs.

Uber increases the price of a ride in New York City by 10%, and the quantity of rides demanded falls by 30%. The absolute value of the price elasticity of demand for Uber rides is _____, and the price elasticity of demand is _____.

3; elastic

Which of the following lists only factors that would cause a decrease in the demand for a good?

A decrease in popularity of a good; a rise in income (if the good is an inferior good); a fall in the price of a substitute good.

Which of the following market changes would lead to a shift of the demand curve from Old demand to New demand? (demand curve shifts to the left)

A fall in the price of a substitute product.

Albert grows coffee beans and faces a decision about how many tons to produce. He can sell each ton of coffee for $2,000. The total cost of production depends on the number of tons he decides to produce, as shown in the accompanying table. How many tons of coffee beans should Albert produce? (comes with graph)

Albert should produce six tons of coffee beans. The marginal benefit to him of each ton of coffee beans is $2,000. The marginal cost of the sixth ton of coffee is $2,000. According to the Rational Rule, Albert should produce six tons of coffee beans.

Consider your decision to attend class in college or skip it. Which of the four core principles of economics applies to the notion that attending class today will require you to give up time and energy to pay attention, but in doing so you will gain a better understanding of the material?

Cost-benefit principle

Marginal Principle

Decisions about quantities are best made incrementally. You should break "how many" decisions down into a series of smaller, or marginal decisions.

In 2017, Kenya banned the use of disposable plastic shopping bags due to concern over plastics pollution. Which graph depicts what happened in the country's market for reusable cloth bags?

Graph A (supply curve does not move - demand curve shifts to the right (moves up the supply curve))

Fish farmers find that a form of bacteria is negatively affecting the reproductive capability of the fish in the fish farms. Which graph depicts what will happen in the market for farmed fish?

Graph C (demand curve does not move - supply curve shifts to the left (moves up the demand curve))

(Figure: Peanut Butter and Jelly) In the United States, peanut butter and jelly are considered complementary items. Which graph illustrates the impact of a rise in the price of peanut butter on the jelly market?

Graph C (moves up the demand curve line - no shift)

(Figure: Market for Stevia) Stevia is a natural sweetener that is used as a substitute for sugar. Which of the following graphs shows the effect on the supply of bakery desserts made with stevia when the price of stevia rises?

Graph C (supply curve shifts to the left)

You are studying the market for a particular brand of perfume. You notice that a couple of changes are happening in the market at the same time. The flower that creates the perfume scent has been affected by a disease. In addition, consumers begin to worry about the safety of the ingredients that are used in the perfume. What do you expect will happen to the equilibrium price and the equilibrium quantity? Explain your answer.

If the flower that creates the perfume scent has been affected by a disease, this will cause the supply of the flower to decrease. This will, in turn, cause input prices for the perfume supplier to rise. Rising input prices cause the supply curve to shift to the left. This shift puts upward pressure on the price and downward pressure on quantity demanded. If consumers begin to worry about the safety of the ingredients in the perfume, the demand for the perfume will decrease. This will lead to a lower price and less quantity. Supply and demand are decreasing simultaneously, but we do not know the relative sizes of the shifts. We cannot determine the new equilibrium price, but we can conclude the equilibrium quantity will fall.

Individual demand

Individual demand curve is constructed by holding all other things content

Law of demand

The quantity demanded is higher when the price is lower

decisions and demand curves

Your purchase choices in a demand curve are based on the opportunity cost of the choice and the marginal benefit of the purchase

The cost-benefit principle states that a decision should be pursued only if the

benefits are greater than the costs.

Demand for soda outside an airport is more elastic than inside of the airport because:

fewer choices means more inelastic demand.

You are given some data for four different products — milk, eggs, beef, and orange juice. The absolute value of the price elasticity of demand for milk is 3. The absolute value of the price elasticity of demand for eggs is 1.2. The absolute value of the price elasticity of demand for beef is 0.9. The absolute value of the price elasticity of demand for orange juice is 3.5. Which product has the most elastic demand?

orange juice

An upward-sloping supply curve shows that

there is a positive relationship between price and quantity supplied.

A downward-sloping demand curve implies:

there is an inverse relationship between price and quantity demanded.

Variable costs are the costs that

vary with the quantity of output produced.

Amanda Mendez goes to a local cafe and orders a sandwich. Her willingness to pay for that sandwich is $10. The price of the sandwich is $4. The cost to the cafe to produce that sandwich is $1. How much economic surplus does the café receive when Amanda purchases the sandwich?

$3

Fill in the blanks below using the following choices: increases OR decreases.(A) As the price of gold increases, the quantity supplied of gold _____.(B) As the expected price of copper rises, the supply of copper _____.(C) As the supply of steel falls, the price of steel _____.(D) When a new all-terrain vehicle (ATV) tour company opens in Bali, the supply of ATV tours _____.

(A) increases(B) decreases(C) increases(D) increases

In each of the cases below, explain whether the change will lead to a shift in supply or a shift in demand and in which direction.(i) You are studying the market for gasoline-powered cars in the United States. Suppose that there is a major shift in auto production from gasoline-powered vehicles to electric vehicles.(ii) You are studying the tourism market in Egypt. Suppose that there is a political disturbance that causes a heightened sense of insecurity in the country.(iii) You are studying the market for acai berry juice. Suppose that there is a significant increase in the price of acai berries.

(i) If there is a major shift in auto production from gasoline-powered vehicles to electric vehicles, then the supply of gasoline-powered vehicles would be expected to shift left.(ii) If there is a political disturbance that causes a heightened sense of insecurity in Egypt, then the demand for tourism in Egypt would be expected to shift left.(iii) If there is a significant increase in the price of acai berries, then the supply of acai berry juice would be expected to shift left.

The price of product A is cut by 50%. As a result, the quantity demanded of product B rises by 50%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.

-1; complements

Income elasticity of demand =

Percent change in quantity demanded/Percent change in income

Cross-price elasticity of demand =

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

Price elasticity of supply =

Percent change in the quantity supplied/Percent change in the price

Production Possibilities Frontier

The PPF illustrates the trade-offs you experience when deciding how to allocate scarce resources. These scarce resources include time, money, raw inputs, and production capacity. The PPF illustrates the different sets of output that are attainable with scarce resources.

Amul Food Factory in India makes ice cream and produces processed and condensed milk. In the factory, the firm's employees use raw milk and sugar. The firm runs on electricity and purchases raw milk every day. Large robotic assembly lines fill and package the ice cream containers. Large industrial freezers store the ice cream. Based on this scenario, can you identify the fixed costs for Amul Food Factory?

The cost of building the factory, purchasing the robotic assembly lines and industrial freezers.

As a part of a market research project, you survey six food trucks across the city to gather data on how many meals they would plan to sale at various prices. The data you collect is in the accompanying table. What is the change in the total supply of meals in your survey when the price increases from $8 per meal to $9 per meal? ​(comes with graph)

The quantity supplied rises by 165.

At the store, Hershey's Kit Kat candy bars are now cheaper than usual. Which of the following explains why Kit Kats are cheaper?

There is a surplus of Kit Kats.

Economists use money equivalents to compare costs and benefits because money is

a common measuring stick.

Surpluses always occur

at prices above the equilibrium price.

Joshua Murphy is planning on studying late into the night for his economics exam. How many cups of coffee should he buy tonight? Joshua should keep buying coffee throughout the evening until the marginal:

benefit of purchasing one more coffee equals the marginal cost.

Charles McCoy is a manager at a coffee shop, and he has to decide how many workers to hire. One worker can make 25 drinks that sell for $5 on average in one hour. A second worker can make another 20 drinks in one hour. The marginal benefit of each additional worker decreases by five drinks, with each additional hire. Given that workers are paid $15 per hour and have eight-hour shifts, how many employees should Charles hire for each hour?

five

If a firm expects lower prices in the future

it will increase supply today.

Two products have a cross-price elasticity of demand of 1.5. Based on this value of cross-price elasticity, which of the following products are they most likely to be?

two competing brands of soft drinks

If income rises by 20% and the quantity demanded of an item falls by 20%, the income elasticity of demand for this item is:

-1.

At the local grocery store, the blueberry jam is less expensive than last month. Which of the following can explain why blueberry jam costs less now?

Consumers are now purchasing fewer jars of blueberry jam as compared to other types of jam.

A grocery store raises the price of organic oranges from $1.50 per orange to $1.95 per orange. The quantity of oranges sold then changes from 4000 oranges per month to 3200 oranges per month. (a) Calculate the change in total revenue. (b) Based on the change in total revenue, can you tell whether the demand for organic oranges is elastic or inelastic?

Quantity demanded will ALWAYS go down when price goes up. The question here is about the size of the drop in quantity compared with the size of the increase in price. (a) The total revenue at $1.50 per orange is ($1.50*4000) = $6000. The total revenue at $1.95 per orange is ($1.95*3200) = $6240. Thus the total revenue changes by $240. (b) The change in total revenue is positive when the price per orange is increased, and so the demand for organic oranges is inelastic.

Consider the demand for antibiotic-free eggs. For each of the following scenarios, identify whether the market would experience a change in quantity demanded or a change in demand, and specify the direction of the change.a. A major news article is published, which shows that eating antibiotic-free eggs is much healthier than eating eggs from farms where antibiotics are used.b. Where there used to be just one producer of antibiotic-free eggs, now several new producers of antibiotic-free eggs also begin to supply eggs to supermarkets in the region. This causes a fall in the price of antibiotic-free eggs.c. The price of eggs produced using antibiotics falls significantly.

a. An increase in the demand for antibiotic-free eggs.b. An increase in the quantity demanded of antiobiotic-free eggs.c. A decrease in demand for antiobiotic-free egg, as some onsumers will now switch back to the eggs produced using antiobiotics (since they are now much cheaper).

A new economic report discusses the high probability that sugar prices will rise soon. The expectation of sugar prices rising soon will lead to

decreased supply today and a rise in sugar prices.

Bruce has midterm exams tomorrow in economics and chemistry. He only has four hours left to study tonight. The accompanying table provides the combinations of time spent studying economics and chemistry and his expected exam scores.Suppose that Bruce spends the first three hours studying economics. What is the opportunity cost of spending a fourth hour? If Bruce's goal is to maximize his combined scores, how many hours should he spend studying economics, and how many hours should he spend studying astronomy? (comes with graph)

The opportunity cost to Bruce of spending a fourth hour studying economics is 10 points on his chemistry exam. That is, if he spends the fourth hour studying chemistry, he will improve his chemistry grade by 10 points. If Bruce wants to maximize his combined score of the two exams, he should study two hours for each exam.