Econ 202 Midterm Studyguide
Which change causes a movement along the demand curve?
price of the good itself
Which consumers will buy an electric car when the price is $50,000?
1, 3, and 4.
What is meant by comparative statics? Explain with an example.
A change in an outcome, such as work, that results from a change in a factor such as the wage
The diagram on the right shows the demand and supply for sneakers. Calculate consumer surplus, producer surplus, and social surplus in this market.
Consumer surplus is $1800 Producer surplus is $1200 Social surplus is $3000
Which of the following equations measures price elasticity of supply?
Percent change in quantity supplied/ percentage change in price
Which of the following represents how you would calculate the present value of a future payment?
Present value= Payment T periods from now/(1+interest rate)^T
A budget constraint represents _____
The bundles of goods or activities that a consumer can choose given her limited budget
In which of the following examples is the cause and the effect hard to untangle
The relation between dense forests and heavy rain
Suppose you have a flashlight that takes three batteries to power it. If you buy the batteries one at a time, for which purchase will diminishing benefits set in?
When you buy the fourth battery.
You should collect _____ amount of data to create ______ to test the _______ indicated by the economic model
a large, empirical evidence, hypotheses
All of the following could cause an increase in producer surplus except:
an upward shift in the marginal cost curve.
The discount weight is used to ___
compare delayed utils and immediate utils; it is usually less than 1.
Economists mostly use optimization in differences, as opposed to optimization in levels, because ___
comparing different features of alternatives is simple.
A difficult problem for central planners is bringing together those economic agents whose interests coincide in order to trade. This is known as the ____________ problem
coordination
Consider whether the Law of Demand holds in the following situations. The price of insulin injection kits, used by diabetic patients, increased from $45 to $52, but consumption has still remained the same. In this situation, the Law of Demand __________.
does not hold, since the product sold is required for survival, so increasing the price did not affect consumption.
Economists use the concept of utility to measure _____
general well-being, and it is not measured in terms of dollars.
The gambler's fallacy occurs when gamblers __
ignore the independence of outcomes in some games and believe they are on a hot streak.
Once planners have successfully brought economic agents together, a second problem of aligning the interests of the economic agents must be solved. This is known as the ___________ problem.
incentive
Two outcomes are said to be independent when ___
knowing about one outcome does not help you predict the other outcome.
Consider a market with many firms that have different cost structures. Unless shutdown or exit is optimal, every firm expands production until ___
marginal revenue, marginal cost, and price are all equal (MR = MC = P).
Most decisions have costs and benefits that occur at different times. To value the delayed benefits, economists weight the reward by ___________.
multiplying the reward by a positive factor that is less than 1. This process implies that future rewards are worth less than current rewards.
The statement that the United States saw the unemployment rate peak at 10 percent in 2009 is a ______ statement since it describes what people ______
positive, actually do
The amount of money the firm brings in from the sale of its outputs is called ______ while the change in total revenue associated with producing one more unit of output is called _________
revenue, marginal revenue
Purchasing an extended warranty is worth considering when
the net present value of the warranty is positive.
In the long run, the supply curve for a perfectly competitive firm is represented by __________
the portion of the marginal cost curve above average total cost.
Social surplus is the _______
total value from trade in a market.
Which firms will produce an electric car if the price is $50,000?
B ,C, and D.
Click on the table icon that shows the fixed costs, variable costs, and total costs for different output levels. Then use this data to help fill in the missing information in the table below. Using the same table what is the marginal cost of the first unit produced?
5
The demand curve for insulin injection kits is _____
near vertical, since even if the price rises diabetics will be willing to buy the same quantity.
In terms of economic profits, early market entrants earn __________ economic profits and the last entrant earns _______ economic profits.
positive, zero
You and your friend, Jim, have just moved out of your dorm and into a new apartment. Both of you decide that you need to get a couch. Jim thinks you should get a new one from a furniture store nearby. You feel that, given your budget, it is best to buy a used one. Your other options are to buy one online or get a couch custom-made at the same furniture store. How would you arrive at an optimal solution here? Assume that your opportunity cost of time is $5 per hour. You and Jim would need to consider ____
The direct costs and the indirect opportunity cost of your time required to shop. Now suppose that you have a summer job that pays you $15 per hour. How would your analysis change? With a $15-per-hour summer job, the opportunity cost of your time would increase.
The ethical implications of a hotly debated government policy would be considered a ______
normative question, since it deals with a subjective issue based on personal preferences
The statement that the United States should legalize same-sex marriage is a _____ statement since it describes what people ______
normative, ought to do
Suppose that in your senior year you find that you need to take out a student loan for the first time. You borrow $20,000 from a bank that gives you the option to make no payments now but to pay the entire amount back plus interest in 20 years.
If the interest rate is 10 percent, then the amount of money due after 20 years is $134,549 (Enter your response as an integer.)
Which of the following statements regarding marginal analysis is true?
If total cost is rising, marginal cost could be falling.
An argument against evidence-based economics would be:
It is only an approximation, often based on averages
Which of the following supports the characteristics of optimization?
Selection of the option that fits the budget at the time of the decision
How would the equilibrium price in a market be affected if there were a large decrease in demand and a small decrease in supply?
The equilibrium price decreases.
How would an increase in demand affect the equilibrium price in a market?
The equilibrium price increases.
How would the equilibrium price in a market be affected if there were a large increase in demand and a small increase in supply?
The equilibrium price increases.
The concept of opportunity cost is a measure of _____
The value of the best alternative use of a resource
If the graph on the right represents the market supply and demand curves for pizza, what do we know about the demand curve for an individual pizza shop if the pizza market is in perfect competition?
The shop's demand curve is horizontal at exactly $8.
Empiricism is a principle in economics that ______
Uses data to test economic models
Which of the following would maximize social surplus?
Trade at the competitive market equilibrium.
Which of the following is an example of a rational action by an individual
Walking down from the 5th floor of a building during an earthquake
Which of the following questions is not an example of an issue a researcher could stud to contribute to the welfare of society?
What combination of colors can one use to paint his bedroom wall
Would a profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short run?
Yes, but only if price stayed above average variable cost.
Therefore, the short-run supply curve for a perfectly competitive firm is represented by _
the portion of the marginal cost curve above average variable cost.
Debbie, a member of your team, advocates finding random people and then breaking them up into two groups. Group A would be shown an increase in the price of gas before taking the survey. Group B would be told there was no increase in the price of gas before taking the survey. Troy, another member of your team, recommends finding two groups of people already sorted by whether or not they have recently noticed an increase in the price of gas. Debbie's method is a ______ and Troy's method is a ________. Group A is the _______ and Group B is the ________
controlled experiment, natural experiment, treatment group, control group
Which of the following scenarios represents the concept of diminishing marginal benefit?
Sam's willingness to pay for additional units of apples declines as he receives more of them.
All else being equal, the flatter the demand curve, the ______ the social surplus in a market. All else being equal, the flatter the supply curve, the ________ the social surplus in a market.
smaller, smaller
You are considering renting a city apartment with 1,000 square feet for $1,500 per month. The monthly rent on a larger, 1,500-square-foot city apartment is $1,950.
The marginal cost of renting an apartment with 500 additional square feet is $0.90 per square foot per month. (Round your response to two decimal places.)
All of the following would fall under the study of microeconomics except: A. A labor union strike B. The stock market's response to an interest rate increase C. An international trade dispute D. A factory polluting a lake used for fishing
B. The stock market's response to an interest rate increase
Which of the following statements regarding the principle of optimization is true? (Check all that apply.) A. It means always choosing the best feasible option. B. It applies only in the case of monetary and financial matters. C. It takes into account and evaluates multiple trade-offs. Your answer is correct. D. It is the unifying principle that connects various seemingly unrelated decisions.
C. It takes into account and evaluates multiple trade-offs D. It is the unifying principle that connects various seemingly unrelated decisions
Which of the following is not one of the three key principles of economics? A. Empiricism B. Optimization C. Resource allocation D. Equilibrium
C. Resource allocation
Larry Krovitz is a salesman who works at a used-car showroom in Sydney, Australia. It's the last week of July, but he is yet to meet his sales target for the month. A customer, Harold Kumar, who wants to buy a Ford Fiesta, walks into the showroom. After taking one of the cars for a test drive, Harold decides to buy it. While $11,000 was the least that Larry would have been willing to accept for that car, he quotes a price of $19,000. After some bargaining, the car is sold for $12,000. In this case, the producer surplus is $1,000. If the cost of the car to Larry is $11,000, his profit is $1,000. Is producer surplus always equal to profit?
Producer surplus equals profit when marginal cost and average total cost can be represented with the same curve.
The concept of diminishing marginal benefits means that ____
each additional unit consumed is worth less to you than the previous one.
In a perfectly competitive market, a firm with multiple production plants will minimize total costs of production when
each plant produces where marginal revenue equals marginal cost.
The concept of diminishing marginal benefits _______ for goods that you like a lot.
holds true
The long-run supply curve in a perfectly competitive market is _______
horizontal
If opportunity cost were to suddenly increase, total cost would
increase and net benefit would decrease.
To construct the supply curve in a market with many firms with different cost structures, the ___
individual supply curves for each firm are added together.
A newly married couple plans to go on a trip to Hawaii on their third wedding anniversary. The total approximate cost for a trip after three years is $10,000. Their relative is willing to make them a future payment of $10,000 in 3 years if the couple lends him $8,000 today. The next best option available for the couple to raise $10,000 is to invest in a risk-free investment for 3 years with an interest rate of 4.5%. When the newly married couple lends money to their relative the discounted value of the future payment exceeds the upfront cost. Therefore in this case, the net present value is positive The newly married couple will gain by ___
lending $8,000 to their relative and receiving a positive net present value
The equilibrium price is the _____
long-run average total cost of the last entrant into the market.
Assume that you are buying a $200 iPhone from Verizon. The phone automatically comes with a 1-year warranty. Suppose that you can extend that warranty to cover years two and three. Now suppose that you decide to purchase the extended warranty that costs $100—the typical cost of an extended warranty on a $200 iPhone. This example demonstrates ____________.
loss aversion.
(216 continued) Using the information given above, the equilibrium quantity is 2 units. Suppose the market is in equilibrium. Using the equilibrium price, the social surplus is $6. What if in your experiment, seller X and buyer C agree to a price of $2.50, seller Y and buyer B agree to a price of $4.50, and seller Z and buyer A agree to a price of $6.50? All participants have managed to find a trade that benefits them individually. Given this information, the new social surplus will be
lower than the social surplus at the market equilibrium.
A perfectly competitive firm will choose to shut down when the ______ intersects the marginal cost curve below the ______
price (marginal revenue), average variable cost curve
Suppose conditions arise in the sugar market that would lead to a competitive equilibrium price that is below 18.75 cents per pound. In this situation, sugar mills will __
not sell to private buyers at this lower price and will sell to the government instead, which will drive up the domestic price until it reaches 18.75 cents per pound.
In a market economy, the alignment of interests is accomplished through the use of
prices
When one of the four major factors changes, causing an increase in supply, the supply curve shifts
rightward
Economists have done numerous studies on how much risk people willing to take in a variety of situations. They have found that in most situations people overall are ____.
risk averse
Given your response to the previous question and the fact that most extended warranties that are offered on smaller electronic purchases tend to cost more than the benefits they provide it is likely true that firms ____
sell many extended warranties since people are willing to pay extra to avoid the risk of a loss
The long-run supply curve in a perfectly competitive market states that __
the long-run quantity can vary while the equilibrium price returns to the price at the minimum of the average total cost
You are interested in playing a card game. The rules of the game are such that you pick a card from a deck of cards and if the card is a diamond, you win $20. The catch is, every time you want to pick a card you have to pay the dealer a fee of $8. A standard deck of cards consists of 52 cards, with 13 diamonds in the deck of cards. The probability of picking a diamond is ___________ and the probability of not picking a diamond is ___________
1/4; 3/4. The expected value of this gamble is $−3.00
There are many identical firms with a simple cost structure: Total cost for Q = 0 is $6 and total cost for Q = 1 is $8. Each firm is incapable of producing anything more; in other words, total cost is infinite for any Q larger than 1. In the given scenario, the fixed cost for each firm is $_____ In the short run, the equilibrium price will be $_______ If firms are free to enter and exit this market, the long-run price will be $______
6,2,8
Which of the following statements are true? (Check all that apply.) A. Equilibrium is attained when prices are allowed to respond to market pressure. B. A binding price ceiling will always cause the quantity demanded to exceed the quantity supplied. C. A government price control can be used to bring markets into equilibrium. D. A government price control will always cause the quantity demanded to exceed the quantity supplied.
A. Equilibrium is attained when prices are allowed to respond to market pressure. B. A binding price ceiling will always cause the quantity demanded to exceed the quantity supplied.
Which of the following statements are true regarding the present value? (Check all that apply.) A. Compounding brings back money to the present. B. Discounting brings back money to the present. C. It involves an increase in magnitude. D. It involves a reduction in magnitude.
B. Discounting brings back money to the present. D. It involves a reduction in magnitude.
In the given graph, the horizontal price line intersects the demand curve at a point labeled with a dot. At this intersection, where the quantity demanded of the product is 40 units, the buyers' willingness to pay is equal to the market price of the product. For a quantity below 40 units the buyers' willingness to pay is above the market price, so the buyers would gain by purchasing more of the product. For a quantity above 40 units the buyers' willingness to pay is below the market price, so the buyers would lose by purchasing more of the product. In which of the following examples, will the demand curve shift to the right? (Check all that apply.) A. Mike's willingness to buy beer increases due to a decrease in its price. B. Jason's demand for butter increases due to a decrease in the price of bread. C. Robert's demand for a normal good increases due to a decrease in his income. D. Ron's demand for an inferior good increases due to a decrease in his income.
B. Jason's demand for butter increases due to a decrease in the price of bread. D. Ron's demand for an inferior good increases due to a decrease in his income.
Suppose the market price of corn is $5.50 per bushel. Which of the following is not one of the three conditions that will need to be satisfied for the corn market to be in equilibrium at this price?
Both the buyers and sellers of corn could benefit by making small changes to their market behaviors
In a command economy, a planning agency sets prices for various inputs and final goods. In a market economy, supply and demand decide the prices of various goods. In both cases, there is a set of prices operating in the economy. Then why are market economies considered more efficient than planned economies? A. The prices set by central planners tend to be inflexible, responding to changing conditions only when planners recognize that circumstances are changing and then figure out the significance of the underlying change. B. The price mechanism utilized by market economies reflects all that is collectively known and thus ensures that economic agents make trades that are in their best interest and maximize social surplus. C. The prices set by central planners reflect their very incomplete knowledge regarding the multitude of factors that determine the interests and decisions of economic agents. D. All of the above.
D. All of the above.
There are four consumers willing to pay the following amounts for an electric car: There are four firms that can produce electric cars. Each can produce one car at the following costs: Each firm can produce at most one car. Suppose the market for electric cars is competitive. Why is the equilibrium price in this market $50,000? A. At this price, the quantity demanded (three cars) equals the quantity supplied (three cars). B. At this price, three consumers are willing to buy an electric car and three firms are willing to sell an electric car. C. At $50,000, three consumers have reservation values equal to or above $50,000 and three firms have reservation values equal to or below $50,000.
D. All of the above.
Imagine you are a buyer in a double oral auction with a reservation value of $14 and there is a seller asking for $8. If you accept this offer, you will gain $6. (Enter your answer as an integer.) If you are the only buyer, and you know that the lowest ask price is $3, should you accept this offer? A. Yes, accepting an offer from any other seller will reduce your surplus. B. No, as the only buyer you can extract a lower ask price. C. Yes, since you will gain $11. D. Both A and C are correct.
D. Both A and C are correct.
Social surplus is maximized when the _____ A. buyers and sellers as distinct groups are doing as well as they possibly can. B. highest-value buyers are making a purchase and the lowest-cost sellers are selling. C. competitive market is in equilibrium. D. all of the above.
D. all of the above.
Suppose you have been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. Your client would like your team to perform a study on customers' gasoline purchasing habits when they notice price increases. You suggest that the team _____
Design and execute an experiment
Suppose you had information on the sales of similar homes just east and just west of the boundary between two school districts. Also suppose schools on one side of the school boundary are better than the schools on the other side in terms of test scores. You could estimate the average value that parents place on a one-point increase in test scores by ____
Dividing the difference in the prices of similar homes between districts by the difference in test scores between districts
Suppose Sam is considering whether to eat junk food. It offers him an immediate pleasure of 20 utils and a delayed cost of 36 utils. He always discounts in the following special way: This type of preference pattern is called present bias. Today, Sam decides to eat junk food. From today's perspective, the value of eating junk food tomorrow is −8. Therefore, today Sam decides not to eat junk food tomorrow. Which of the following statements is true for Sam when tomorrow actually comes?
He eats junk food because the net benefit is positive.
Suppose you and your friend decide to gamble on the roll of a single, six-sided dice. If it lands on an even number, you must give your friend $10, and if it lands on an odd number, your friend must pay you $10.
If you play the game many times, then the average payoff, or expected value, from this bet is $0. (Enter your response as an integer.) Suppose instead you play this same game with two of your friends (resulting in three total players in the game). Each player is assigned 2 numbers from the dice. If either of your numbers is rolled, then each player must pay you $10, and if either of your numbers are not rolled, then you must pay the winning player $10. If you play the game many times, then the average payoff, or expected value, from this bet is $0. (Enter your response as an integer.) Suppose that after playing the game several times you were unable to win, so your friends made a new rule that if you win each player must give you $20 (which would result in a total winning of $40) and if you lose you still only have to pay $10. If you play the game many times, then the average payoff, or expected value, from this bet is $6.66 (Round your response to two decimal places.)
In which of the following examples is prescriptive economic analysis necessary?
Jay chooses to go to Europe rather than China because of the huge discounts
Assume that the market for chocolates is perfectly competitive. Which of the following statements would be true in this case?
Jill starts to produce chocolates today, but the addition of her supply into the market does not decrease the market price
The graph on the right shows the cost curves for a random firm competing in a perfectly competitive market. Given the shape of the curves, we know that curve A represents __________, curve B represents __________, and curve C represents _________.
MC; ATC; AVC
In a perfectly competitive market, all of the following statements are true except:
Marginal revenue is equal to price times quantity.
Suppose one firm accounts for 55 percent of the global market share for a product, while 147 other firms account for the remaining 45 percent of the market. With such a large number of buyers and sellers, is this market likely to be competitive?
No, even though there are many firms in the market, there is one firm large enough to influence the market price.
Does price gouging have the same effect as setting prices above equilibrium level?
No, price gouging is actually an equilibrium outcome, while the setting of prices above equilibrium is not.
Are all markets perfectly competitive?
No, there are other market types where firms have considerable power to control the price
Sofia, a political science student, thinks that the government should intervene to revive declining industries like video stores and print newspapers. The government, she reasons, can resolve the coordination problem of getting the agents in these markets to trade. Do you agree with her? Explain your answer.
No, these industries are declining not because of coordination problems but, rather, because of falling demand.
Suppose Sarah is out at a local club with her friends and finds out that it is "Ladies' Night" and that all women can drink for free. She knows that if she drinks it will give her immediate pleasure equal to 70.00 utils, but she also knows that if she drinks she will feel bad the next morning and will therefore have a cost of drinking equal to 160.00 utils. If Sarah's discount weight for tomorrow is 0.50, will she drink at the club?
No, her net benefit from drinking is negative; therefore, the costs of drinking outweigh the benefits.
Determine if the following statements better describe optimization in levels or optimization in differences. John is attempting to decide on a movie. He determines that the new Batman movie provides him with $5 more of a net benefit than the new Spiderman movie.
Optimization in differences, since he is calculating the change in net benefits between alternatives.
In equilibrium, everyone _____
Simultaneously optimizes, so that nobody benefits by changing his or her own behavior
Consider a perfectly competitive market as shown in the given graph. Suppose the initial price of a product is $1.40 per unit. At this price, the marginal revenue (MR) curve faced by a firm is MR1. If the market price increases from $1.40 to $2.70 per unit, the firm would increase production from 272 to 350 units. If the market price decreases from $1.40 to $0.80 per unit, the firm would produce 200 units because at this price MR2=MC. Which of the following statements is not true?
The short-run supply curve of a firm is the portion of its marginal cost (MC) curve that lies below AVC.
You are a professor of economics at a university. You've been offered the position of serving as department head, which comes with an annual salary that is $9,500 higher than your current salary. However, the position will require you to work 200 additional hours per year. Suppose the next best use of your time is spending it with your family, which has value of $50 per hour. What is the difference in the net benefit from becoming the department head?
The change in net benefit is $-500. (Enter your response as an integer.) To optimize, you should not become a department head.
During the process of optimization economists believe that people are considering ______.
The feasibility of a choice, given the information available at the time
Which of the following is not one of the four major factors that shifts the supply curve when it changes?
The income of consumers.
Compared to the market for cars, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for cars than in the vintage button market. Using the concept of Pareto efficiency, which of the following statements is likely to be true?
The outcome in the market for cars is Pareto efficient because it is a perfectly competitive market.
Allison bought a Blu-ray DVD player from the store for $300 that came with a one-year warranty. At checkout, she was asked if she would like to buy a two-year extended warranty that would replace her DVD player with an identical one if it broke down. The extended warranty costs $50, and Allison expects that the DVD player will depreciate in value by $50 every year as new models come out (this means a replacement would cost $200 after 2 years and $150 after 3 years). Suppose Allison pays for the purchase of the extended warranty with her credit card, which has a 15 percent interest rate. Also assume that Allison knows there is a 10 percent chance that the DVD player will break in any given year.
The present value of buying the extended warranty is $-24.79. (Round your response to two decimal places and use a minus sign if necessary.) Based on this information, Allison should not buy the extended warranty, since the expected value to Allison from buying the warranty is negative.
According to reports in the Chinese media, commuters in Beijing are facing a somewhat paradoxical situation: They find it difficult to get a cab while hundreds of cabs lie idle during rush hour. The demand for taxis in Beijing has increased as average incomes have risen. Government-determined gasoline prices have also increased. But the government, worried about rising prices for cab rides, has left the cabs' base fare unchanged. Which of the following statements is true of the market for cabs in Beijing? Based on your understanding of how the invisible hand works, which of the following decisions is likely to correct the problem of shortages of cabs in Beijing?
There has been a rightward shift of the demand curve, while the supply curve has remained unchanged. The government should lift the price control imposed on the base fare of cabs.
Are all efficient outcomes also equitable? Explain.
There is really no definitive answer to this question since issues surrounding efficiency and equity are the domain of normative economics, where subjective value judgments are made.
Land in Sonoma, California, can be used to either grow grapes for pinot noir wine or to grow Gravenstein apples. Given this information, what is the relationship between pinot noir wine and Gravenstein apples?
They share a common input.
The greater your discount weight, the more your current decisions are driven by the future consequences of those decisions. Do you agree? Explain.
Yes, a larger discount rate results in a larger weight on the utils you receive from future events. Thus, you will consider future consequences more when making decisions.
Suppose your utility function exhibits diminishing marginal utility of consumption. Should you buy this insurance policy? Defend your answer.
Yes, buying the policy gives you wealth of $747,500 with certainty, which is the same as the expected value of wealth you get without insurance and thus added risk. If your marginal utility of consumption declines, you would prefer the certainty over the risk.
Your house is worth $500,000 and you have $250,000 in a savings account. There is a 1 percent chance of a fire in your house. If the fire occurs, there will be $250,000 of damage. Suppose you do not have fire insurance. If the fire occurs, you will have to pay $300,000 to repair your house. The expected value of your wealth (including both the value of your home and your savings account) at the end of the year is $747500 We will say that an insurance policy is fair insurance if the premium for the policy equals the expected value of the claims the insurance company will have to pay. An insurance company offers you a fire insurance policy. If a fire occurs, it will pay to repair your home. The premium for the policy is $2,500. Has the insurance company offered you fair insurance?
Yes, the premium is exactly equal to the expected value of the claim the insurance company would have to pay in the event of a fire.
A drought in the grape growing regions of the country increases the cost of producing jelly. At the same time, we see the price of peanut butter falls. Suppose that after both of these events the consumption of jelly is left unchanged. In this situation, the Law of Demand _________
holds, since the demand curves for both jelly and peanut butter are downward-sloping; it is their shifts that are determining the impact on the quantity consumed.
Suppose Louis Corporation could increase its profits considerably if it decided to shift from the clothing industry to the IT industry. In this case, the economic profits of Louis Corporation in the clothing industry are ________. In contrast, suppose Louis Corporation wouldn't be able to increase its profits if it decided to shift from the clothing industry to the IT industry. In this case, the economic profits of Louis Corporation in the clothing industry are ________.
negative, zero
What is the difference between the industry demand curve for a typical good and the demand curve for an individual firm in the market, assuming the market is in perfect competition? 1.) Using the line drawing tool, draw the industry demand curve for a typical good in a perfectly competitive market. Label your curve 'Demand'. Carefully follow the instructions above and only draw the required object. Using your graph, the slope of the industry demand curve demonstrates __________.
the realistic assumption that the Law of Demand holds for the good under consideration.
Suppose there is a firm in a perfectly competitive market that has a market equilibrium price of $6. Use a graph to show the demand curve faced by this perfectly competitive firm. 1.) Using the line drawing tool, draw the demand curve for a firm in a perfectly competitive market where the market price is $6. Label your curve 'D'. Carefully follow the instructions above and only draw the required object. Using your graph, demand for this perfectly competitive firm is perfectly elastic. This occurs because ______
there are many producers all selling identical goods, meaning no one firm can impact the market price
Martha runs a business that makes designer jeans. Each of the seamstresses she employs uses one of the sewing machines on the factory floor. In the short run, the seamstresses are a _______ factor of production and the sewing machines are a ______ factor of production. The output of each seamstress is considered the ________ product.
variable, fixed, marginal
Fixing up old houses requires plumbing and carpentry. Jack (who is a jack of all trades but is a master of none) is a decent carpenter and a decent plumber, but is not particularly good at either. He can fix up two houses in a year if he does all of the carpentry and plumbing himself. His wage is $50,000 per year.
Jack's average total cost of fixing up two old houses is $25,000 (Round your response to the nearest dollar.) George is an excellent plumber and Harriet is an excellent carpenter. George can do all of the plumbing and Harriet can do all of the carpentry to fix up seven houses per year. Each earns a wage of $50,000 per year. If George and Harriet work together and fix up seven old houses each year, their average cost is $14,286 (Round your response to the nearest dollar.) This problem tells us that one of the sources of economies of scale is specialization.
You have been invited to play a 4-hour round of golf that has a value to you of $70. The total price to play the round of golf is $45. The net benefit of the round of golf is $______. (Enter your response as an integer.) Now assume that you have a job that pays you $10 per hour. Would you be optimizing to accept the invitation to play golf? To optimize, you should ______ golf.
25, not play
Suppose you have been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. Your client would like your team to perform a study on customers' gasoline purchasing habits when they notice an increase in the price of gas. You have access to the following groups of people: To set up your experiment on how price-increase awareness impacts customer behavior, you would have _____ people in your treatment group and ______ people in your control group.
60, 40
Instead of relying on Debbie's college story to make a conclusion, you decide it is smarter to collect and analyze
A large amount of empirical data
Which of the following statements are true regarding future rewards and risky rewards? (Check all that apply.) A. A current reward is worth more than a future reward. B. The economic tools used to value them use weights. C. The value of a future reward is obtained by multiplying the reward by a positive factor that is less than 1. D. The value of a risky reward is obtained by multiplying the reward by a positive factor that is less than 1.
A. A current reward is worth more than a future reward. B. The economic tools used to value them use weights. C. The value of a future reward is obtained by multiplying the reward by a positive factor that is less than 1.
Which of the following does not support the concept of an economic agent? (Check all that apply) A. All economic agents are individuals B. Groups are considered as a single decision maker C. They make decisions by solving choice problems D. Their decisions do not have an effect on the economy of a country
A. All economic agents are individuals D. Their decisions do not have an effect on the economy of a country
Which of the following cases can create a free-rider problem? (Check all that apply) A. The street light on the road B. Opening a savings account in a bank C. Use of personal television b the owner D. Use of public parks by locals
A. The street light on the road D. Use of public parks by locals
Which of the following are addressed in the study of economics? (Check all that apply) A. Inflation Rates B. The benefits associated with a decision C. Optimal tax policies D. Financial markets
All of them
Which of the following statements about the principles of economics is false?
An investor selecting and investing in a stock or a combination of stocks that always earns him 15% returns on his investment is an example of optimization.
Which of the following statements explain positive economics? (Check all that apply) A. It is not factual B. It can be rejected or amended depending on the evidence available C. The predictions are testable D. It depends upon value judgements
B. It can be rejected or amended depending on the evidence available C. The predictions are testable
Which of the following statements is not a correct explanation of empiricism? (Check all that apply) A. It involves data analysis and drawing inferences B. It cannot be monitored C. It has nothing to do with optimization and equilibrium D. It tests whether theories are applicable to real life situations
B. It cannot be monitored C. It has nothing to do with optimization and equilibrium
The "Rule of 70" is a simple way to estimate how long it will take something to double in value: divide 70 by the annual percentage growth rate; the number you calculate is the doubling time, in years. For example, 704=17.5; thus it takes about 17.5 years for a bank account to double in value, assuming 4 percent interest.
Based on this method, the doubling time given an interest rate of 10 percent is 7 years. (Round your answer to 2 decimal places as needed)
In the virtual model developed by Professor, when demand for a particular share consists of 10% of all student investors, the share price is $10. When demand increases to 30% of the student investors, the price increases to $12. However, in an actual stock market, it is generally noticed, when demand consists of 10% of all investors, a share price of $125 increases to $210 when demand for the share is increases to 30% of the total investors. Therefore, by testing the accuracy of the model and the real data, we find that the share prices in the virtual stock market increases by 20% compared to 68% increase in actual stock market. (Round your answer to the nearest percent.) Therefore, we conclude that the model is inaccurate compared to the actual data. Which of the following are true about a model? (Check all that apply.) A. It makes hypotheses on empirical evidence B. It is a simplified description of a theory C. It is not always the exact replica of the data D. The outcomes of the model are used in comparison with the actual data
C. It is not always the exact replica of the data D. The outcomes of the model are used in comparison with the actual data
Assume every semester after finals you fly back to your hometown using a $300 ticket you buy online. You have 40,000 frequent flier miles. You could exchange your miles for a round-trip ticket to Bermuda over spring break. If you choose to exchange your airline miles for a free trip to Bermuda over spring break, then your trip ______
Cost $300, since your next-best alternative for your miles was to use them to fly home at the end of the semester
Suppose you hear about a business opportunity where you will give a small firm $1,000 now to help set up its web platform to sell its items online with the promise that you will receive $5,000 back in 10 years. What do you need to take into consideration when deciding whether or not to lend this money? A. Prevailing interest rate. B. Opportunity cost of the investment. C. Time value of money. D. All of the above
D. All of the above
Which of the following is not an item studied under microeconomics? A. Individual preferences B. Cigarette taxes C. The well-being of agents D. Economic output
D. Economic output
Which of the following would not be considered one of the possible opportunity costs of a recent high school graduate starting college right away. A. Spending a year backpacking across Europe. B. Getting a full−time job. C. Using your college fund to buy a new car.. D. None of these would be considered an opportunity cost. E. All of these is a possible opportunity cost.
E. All of these is a possible opportunity cost
What tool would you employ to analyze the relationship between gasoline prices and consumer behavior?
Economic models
Suppose you win the Powerball lottery this year, which is worth $500 million. You can choose to take a lump sum now of $475 million or you can "annuitize" your winnings. Annuitization means that you will receive the total jackpot money in 5 equal annual payments of $100 million starting next year. Assume that your lottery winnings are not taxed.
If the interest rate is 1.0 percent, the present value of the 5 equal payments is $485.93million. (Round your response to two decimal places.) Given this information, you would be more likely to choose the 5 payments.
You win the state lottery jackpot of $30,000 and are given the following three options: getting a lump-sum payment for the entire amount 10 years from now, receiving three equal payments of $10,000 over 3 years with the first payment starting next year, or receiving three equal payments of $10,000 with the first payment starting today and the next payments occurring over the following 2 years.
If the interest rate is 5 percent, then receiving the lump-sum payment 10 years from now would have a present value of $18,417.40 (Round your response to two decimal places.) If the interest rate is 5 percent, then receiving three equal payments of $10,000 over 3 years with the first payment starting next year would have a present value of $27,232.48. (Round your response to two decimal places.) If the interest rate is 5 percent, then receiving three equal payments of $10,000 with the first payment starting today and the next payments occurring over the following 2 years would have a present value of $28,594.10 (Round your response to two decimal places.)
Suppose there are four products that Samuel can purchase. Samuel obtains a discount on each of the products. The total benefit obtained by Samuel through discounts is calculated by finding out the difference in the actual price of the product and the discounted price of the product. This is shown on the Y axis of the graph. The X axis of the graph represents the products which Samuel can purchase.
In this case, Samuel will purchase product 2 as an optimal product.
Professor Adams decides to teach his 10 students how the stock market works. Therefore, he plans to develop a virtual stock market for the class that includes five different shares. Students are given $50 each to invest in any of the five shares. This exercise helps the students understand the overall stock market investing process. Which of the following statements is true for the above case?
It is a model, and its predictions can be checked with empirical evidence
This chapter discussed natural and randomized experiments. Which of the following is not a characteristic of a natural experiment?
It is an inferior approach to a randomized method
Suppose you are on a date with an economics major, and you want to impress them by asking good economic questions. Two characteristics of a good economic question are
It is important to individuals or society and it can be answered
Which of the following statements regarding risk is not true? A. It affects economic value. B. It occurs when all of the costs are predictable. Your answer is correct. C. Both good and bad choices involve risks. D. It means some of the costs and benefits are not fixed in advance.
It occurs when all of the costs are predictable.
Which of the following is not an important property of an economic model
It predicts actual results over half the time
Assume that the average price for a 2,000-square-foot house in the city is $350,000 and the average rent for a 2,000-square-foot apartment in the city is $1,500 per month. Also assume that the average price for a 2,000-square-foot house in the suburbs is $210,000, the average price for a 2,000-square-foot house in the county is $336,667, and the average price for a 3,000-square-foot house in the suburbs is $450,000. Using comparative statics and the information above, what is the best estimate of the effect of living in the city (relative to living in the suburbs) on home prices?
Living in the city changes home prices by $140,000.00
What is the difference between marginal values and average values?
Marginal values show the additional benefit or cost from consuming an additional unit of a good, while average values are the benefit or cost per unit of a good.
How does microeconomics differ from macroeconomics?
Microeconomics is the study of how individuals, households, firms, and governments make choices, while macroeconomics is the study of the economy as a whole.
Suppose you have been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. Your client wants to know what will happen to gasoline demand if it increases gasoline prices by one cent higher than its nearest competitors. One of the members of your consulting team, Debbie, shares that one time in college she stopped buying gasoline from a service station that was one cent more expensive. Based on this story, should you conclude that demand will fall to zero if the client raises gas prices by one cent?
No ,since this is an argument by anecdote, which can lead to wrong conclusions
A simple economic model predicts that a fall in the price of bus tickets means that more people will take the bus. However, you observe that some people still do not take the bus even after the price of a ticket fell. Is the model incorrect? How would you test this model?
No, because it predicts the outcome of increased bus ridership on average You should run a natural experiment by analyzing bus ridership and price changes
Some studies have found that people who owned guns were more likely to be killed with a gun. On this evidence alone, do you think there is conclusive evidence in favor of stricter gun control laws? _____, because it is possible that the studies may be confusing _______ with ______.
No, correlation, causation
Nikki decided to take the first available parking space as she entered the student lot. She felt that the first available space had a $5 premium compared with all other possible spaces since she did not want to risk being late for her exam.
Optimization in differences, since she is calculating the change in net benefits between alternatives.
Marcia finds that the net benefit of flying from Chicago to Honolulu on a non-stop United Airlines flight is $400, and the net benefit for the same trip flying on a one-stop American Airlines flight is $200.
Optimization in levels, since she is comparing the net benefits between alternatives.
Reagan determined that the net benefit of taking the combination of two lecture courses and an online lecture course was $100. The same three courses online gave her a net benefit of $80, and all three in a lecture-based format gave her a net benefit of $90.
Optimization in levels, since she is comparing the net benefits between alternatives.
The goal of optimization for an individual is to maximize ______
Overall well-being
Which of the following statements, confirmed by empirical research, would you be most likely to trust?
Sales circulars with coupons generate increased sales
Suppose you have just been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. In your first presentation to management, how would you describe your planned methodology to perform the analysis?
Scientific method
Scott loves to go to baseball games, especially home games of the Cincinnatti Reds. All else equal, he likes to sit close to the field. He also likes to get to the stadium early to watch batting practice. The closer he parks to the stadium the more batting practice he is able to watch (the garages all open simultaneously). Find Scott's optimal seat type and parking garage using the information that follows.
Scott's optimal seat type is Club Seating. Scott's optimal parking is East river parking
(Using question 26) Suppose you have a two week spring break. Considering the time it takes for each activity, if your parents allow you to take one vacation with your friends, which of the following is a feasible and optimized bundle left for you to choose?
Taking up an economic crash course and volunteering at the old age home
All of the following statements about means and medians are true, except
The median is more skewed by extreme values
You have the option to play tennis or a round of golf (but not both). The tennis match requires you to take 2 hours off from work and the round of golf requires you to take 4 hours off from work. Playing tennis has value to you equal to $50, while golf has value to you equal to $105. Tennis courts are publicly available at no cost, but golf costs $40 per round. Suppose your wage from working is $6 per hour.
The net benefit from playing tennis is $38 and the net benefit from playing golf is $41. (Enter your responses as integers.) Therefore, you should play golf.
Give an example of a pair of variables that have negative correlation
The number of winter coats sold and the temperature outside
You are planning how to spend your spring break. You have four different choices, which will give you the following units of pleasure.
The opportunity cost of planning a vacation with friends is +45 units of pleasure and the opportunity cost of cleaning the room is planning a vacation with your friends
Let's say that you are trying to decide what to do on Friday at 11 a.m. You rank your possible options from the one you value the most to the one that you value the least in the following order: going to class, sleeping in late, going to work early, getting lunch, going to the gym to exercise, and watching television. If you decide to go to class, then what do we know about the opportunity cost of your decision?
The opportunity cost would be sleeping in late, since it was your next-best option
Which of the following statements regarding economic questions is not correct?
The questions must have implication on individuals' choices and their budget
Suppose you are ready to check out and see two lines: Line A has three people, while Line B has five people. Assume people choose lines at random and have not yet had a chance to switch lines.
The situation will move toward equilibrium if the last person from the longer line switches to the shorter line. Assume that all eight shoppers are optimizing (i.e., they had a chance to switch lines) and the situation is in equilibrium. Given this information, you could infer that the shorter line will move slower than the longer line. Assume that all eight shoppers are optimizing (i.e., they had a chance to switch lines) and the situation is in equilibrium. Given this information, you could infer that the behavior of the last person in the five-person line is most informative.
Suppose you have a part-time job and earn $400 a month. Suppose you decide to spend your income buying new shoes and jeans. The chart below shows the possible combinations that could be purchased in a month. Assume jeans cost $50 each and shoes cost $100 each.
The table above shows that for a given budget if you increase the amount of one type of good that you buy, you must decrease the amount of the other good that you buy. Therefore, a budget constraint implies that the consumer faces trade-offs
Which of the following is not true about economic models?
They are not useful, since they do not include all variables
In which of the following situations is optimization a good description of behavior
Tia is very fun loving person. She chooses to go on a vacation with friends instead of volunteering at NGO as vacation is more enjoyable.
The opportunity cost of an activity is a measure of ______ when you do that activity
What is given up
You are able to collect the following data on the impact of a one-cent increase in gasoline prices. Calculate the percentage change in demand for each service station. (Round your responses to two decimal places. If the change is negative, be sure to include a minus sign.)
What is the average percentage change in gasoline sold for all four service stations analyzed above? The average percentage change is −15.83 percent.
Suppose your firm has a marginal revenue given by the equation MR = 10 − Q, where Q is the quantity produced and sold. This means that the seventh unit of output brings in 10 − 7 = $3 of additional revenue. The marginal cost for your firm is given by the equation MC = 2 + Q. This means that the seventh unit of output increases the marginal cost by 2 + 7 = $9. If the firm produces the seventh unit of output, marginal cost will be greater than marginal revenue. In which of the following cases, will the profit of the firm be maximized?
When the marginal cost of producing an additional unit equals the marginal revenue from that unit. The profit-maximizing level of output is 4 units.
Does the principle of optimization imply that people always make the best choices?
Yes, it is a good approximation for the decisions people make
Suppose there are three activities in which you could participate: 1. The opportunity cost of the first activity is missing 3 hours of work. 2. The opportunity cost of the second activity is missing a concert that you have tickets to. 3. The opportunity cost of the third activity is missing the afternoon nap that you take every day. Given this information, for which of these activities would you be able to compare opportunity costs?
You can compare all the activities after you translate all the missed activities into dollar amounts
Suppose apartments are in four locations: Location A, Location B, Location C, and Location D. Location A is in the city, where your job is. Location B is 10 minutes farther from your job than Location A. Location C is 10 minutes farther from your job than Location B, and Location D is 10 minutes farther than Location C. In turn, similar apartments in Location B rent for $115 less per month than apartments in Location A, apartments in Location C rent for $115 less than in Location B, and apartments in Location D rent for $115 less than in Location C. Suppose the value of your time is $24 per hour and you work 21 days per month, with each day requiring a round-trip commute from your apartment to work. For simplicity, assume rent and the opportunity cost of your time commuting to work are the only factors influencing the location in which to rent an apartment.
You should rent an apartment in Location A. Suppose you currently rent an apartment in Location C. By moving to optimize, you change your net benefit by $106. (Enter your response as an integer.)
Suppose you have been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. You have assigned your staff member, Troy, to divide a group of survey participants into a treatment group and a control group. The intent is tell Group A that gas prices have increased, and group B will be told that gas prices have not changed. Participant members will then be surveyed about their purchasing habits. When you come back from lunch you notice how Troy has set up the groups:
You tell Troy that he has done a bad job because the groups are not randomly constructed
The Bureau of Labor Statistics defines the labor-force participation rate as the number of people in the labor force (those that either have jobs or are actively looking for jobs) as a percentage of the working-age population. The Organization for Economic Cooperation and Development defines the total fertility rate in a specific year as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years. Given the two definitions above, let's look at the relationship between the labor-force participation rate and the total fertility rate for highly educated women with high earning potential.
You would expect that the labor-force participation rate among highly educated women would be higher than average, since the opportunity cost of not working for highly educated women is higher than that of all women. You would expect that the total fertility rate among highly educated women would be lower than less educated women, since the opportunity cost of staying home to raise children is higher for highly educated women.
Suppose you put $300 into a bank account that has a 6 percent interest rate. In this example, the $300 reflects the principal and the 6 percent reflects the time value of money. If you leave your money in the bank for 1 year, then the future value of your money is $318. (Enter your response as an integer.) If you leave all your money in the bank for 5 years, then the future value of your money after those 5 years is $401.47 (Round your response to two decimal places.) The idea of leaving all the money in an account and earning interest not only on the original deposit but also on the past interest earned is called _____
compounding The graph on the right shows how much an initial deposit grows over time if all the money is left in your account and the interest rate is 5 percent. How would the future value of your deposit be different at a different interest rate? 1.) Using the 3-point drawing tool, illustrate the value of your deposit over time if the interest rate is 8 percent. Label your new curve appropriately.
When you deposit money into a bank, you are lending to the bank. This moves your spending from now to later. The interest rates on loans tend to be ____________ the interest rates on investments.
higher than
You have already purchased (non-refundable and unsellable) tickets to a concert on Friday night. A friend also invites you to her birthday party on Friday. While you like your friend, you politely decline because you really want to go to the concert. Suppose you learn that your friend is serving flank steak at her party; all-you-can eat and at no charge. Flank steak is your favorite food. Your opportunity cost of going to the concert is now _______ than you had previously thought. Suppose instead that you notice that the concert ticket cost you $10; previously, you had mistakenly believed the price was $100. Should learning this information affect your decision to go to the concert? _______
higher, No
Suppose your total benefits of renting x DVD's next month is: −x2+10x+20 The cost of renting a DVD is $2, and so the total cost of renting x DVD's is $2x. Calculate your net benefit from watching 1, 2...8 DVDs. Complete column (2). (Enter your responses as integers.)
our net benefit is maximized at 44 DVDs. Suppose further that your marginal benefit from watching x DVD's is −2x+10. If you follow the Principle of Optimization at the Margin, you will rent 44 DVDs. Optimization in levels and in differences always yield the same answer.
Mason and Jack are neighbors. Mason wants to buy a new outdoor grill so he can barbecue. Mason has two options, a charcoal grill or a gas grill. By using ______, he chooses to buy a gas grill. Mason knows that Jack would borrow his grill without asking; therefore, decides to use ______ in order to prevent his neighbor Jack from becoming a free-rider.
prescriptive economic analysis, equilibrium analysis
Suppose a total of 2,500 students are allowed in the engineering programs at all of the colleges in a particular city. From the previous three years' record, it shows that the number of students who enroll in the entrance exam for the engineering program increases if there is an increase in the number of IT recruiters the previous year. This year there is a total of 3,200 students who have enrolled to take the entrance exam of which only up to 2,500 of those who passed would get in. Based on either the students' perspective or the college perspective, what combination of economic key concepts does the situation follow?
Optimization, equilibrium, and empiricism
