Econ Exam 1 Prof Meer TAMU

The four principles of economic decision making

(1) people face tradeoffs; (2) the cost of something is what you give up to get it; (3) rational people think at the margin; (4) people respond to incentives.

when equilibrium quantity is ambiguous

If P and Q both increase the dominant force

cross‑price elasticity

measures how sensitive the demand of a product is over a shift of a corresponding product price

b. You are about to buy a laptop for $1,000 and the sales-person tells you that the model you want to buy is on sale for $995 at the store's other branch, which is a 20 minute drive away. You should make the trip to the other branch if:

your cost of making the trip is less than $5

examples of perfectly inelastic supply curves

quantity supplied does not respond to changes in price a shift in demand

Consider what impact the adoption of lean production techniques likely had on Dell's supply curve for PCs. Show the impact in the graph below by shifting the supply curve or moving the point along the curve.

supply curve moved to the right

opportunity cost principle

the value of the option not taken when a business makes a decision

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

$3

Diane is remodeling an apartment that she will rent out to a college student. The renovation is estimated to cost $7,940. If Diane decides to install decorative crown molding in the apartment, the renovation is estimated to cost $8,740. Assuming Diane chooses to install the crown molding, what is the marginal cost of this choice?

$800 (difference between the renovation cost)

You purchased a ticket to the musical Hamilton through a verified reseller for $457.00. When your ticket arrives, you see that the face value printed on it is $259.00. Which of the following is correct?

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

Relatively inelastic supply= Relatively elastic supply= PERFECTLY inelastic supply=

Es=.4, Es=.8 Es=1.6 Es=0

"Economists always put things into monetary terms; as a result, economics can most appropriately be called the study of money."

False, economists use monetary terms because they can be quantified and compared, but economics is better described as an approach to decision making.

When British regulators were forced to suspend the license of a flu vaccine plant in Liverpool operated by the Chiron Corporation due to concerns over bacterial contamination, the number of flu vaccines available in the United States market decreased by 48 million doses. This was nearly half of the total supply of vaccines in the market. a. Shift the appropriate curve or curves to show this dramatic change in the market for flu vaccines. b. As a result of the decline in available flu vaccines, the equilibrium price should ____, and the equilibrium quantity should ______

Demand stays the same and supply shifts significantly to the left rise significantly; fall significantly

Hydraulic fracturing is an advancement in production techniques that lowers the cost of producing natural gas. Use the graph to illustrate the impact this advancement has on the market for natural gas, holding all else constant. What impact does this advancement have on equilibrium price and quantity?

Equilibrium price decreases and equilibrium quantity increases. Supply shifts right

absolute value of the price elasticity of demand

If the absolute value of PED is greater than one, the price is elastic

"The market supply for natural gas is the sum of all prices that natural gas producers are willing and able to sell at for every quantity." What is the flaw in this statement?

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

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

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

Determine which statement about the absolute value of the price elasticity of demand is correct.

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

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

if the next best option was unemployment, many individuals may have preferred to enroll in higher education and gain new skills in hopes of increasing their future employment prospects.

You just took an Uber from home to campus for the first time and were willing to pay $13 for the trip. It was so much easier than driving yourself that you are willing to pay $21 for the same trip tomorrow. Determine if you have violated the law of demand based on your choices, and why or why not that is the case.

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

products become more ____ over time

elastic example: Customers will be less responsive to price increases over a shorter period of time but will become more responsive over the longer term

The price of lobster doubles, making Henri feel less wealthy. As a result, Henri buysfewer lobsters.

income effect

Stone and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of stone increases due to new regulations for the stone quarrying industry. Illustrate the impact this will have on the market for bricks. Equilibrium price: Equilibrium quantity:

increases increases demand shifts to the right

the Marginal Principal

individuals make decisions on purchases based on the additional utility they will receive from each unit

Delta signs a new labor contract that increases the wages Delta pays to its employees.

labor (costs) supply curve shifts to the left

examples of perfectly elastic supply curves

quantity supplied is hypersensitive to changes in price a shift in demand will elicit a large response in quantity supplied

Suppose that a rise in average income increases the demand for preventative dental visits. The increase in income leads to an increase in_______ This is because, as demand increases, _______________

quantity supplied; the equilibrium quantity moves up the supply curve to a higher price and more quantity supplied shift demand to the right

If the supply of green tea rises, the equilibrium quantity will_________, and the equilibrium price will _____ This is because _____________

rise; fall; the equilibrium quantity moves down the demand curve to a lower price and a higher quantity demanded shift supply to the right

Rational Rule for Sellers in Competitive Markets

sell one more item if the price is greater than (or equal to) the marginal cost

Amy can study for an hour or spend that hour sleeping or going out for dinner. If she decides to study for the hour, the opportunity cost of the hour spent studying is

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

In the market for transportation, taking the train and taking a plane are

substitutes

The price of chicken falls by $0.75 a pound. Since chicken is now relatively less expensivethan ground beef, Mary buys more chicken and less beef.

substitution effect

when equilibrium price is ambiguous

supply and demand move in opposite

ALS medical research funds: The ALS ice bucket challenge goes viral, leading to greater awareness of the benefits of and need for ALS research. As a result, the _____ ALS research increase(s), causing the equilibrium price (or opportunity cost) of such research to _____ and the equilibrium quantity to _____

supply of and demand for; rise, fall, or remain unchanged; rise

Smartphones: Microchips used in smartphones become less costly to produce. As a result, the _____ smartphones increase(s), causing the equilibrium price to _____ and the equilibrium quantity to _____

supply of; fall; rise

Over the last decade, the price of hybrid electric vehicles decreased, while the number of hybrid vehicles sold increased. In this instance, _____ must have ______

supply; risen

New advances in recycling technology reduce the cost of producing paper made from recycled material Will the advancement in recycling technology result in a shortage or surplus of paper made from recycled material at the previous price? Will the price of paper made from recycled material rise or fall?

surplus, fall

You have been appointed head of marketing for Barry's Younique Yachts. Barry, the CEO, is interested in determining whether offering his yachts at a lower price would increase the firm's revenue. He asks you for advice. Using your knowledge of elasticity, you should tell Barry

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

voluntary economic transaction

the act of buyers and sellers freely and willingly engaging in market transactions.

income effect

the change in consumption resulting from a change in real income

Why might AbbVie develop drugs for rare diseases instead of investing all of its resources toward drugs for common diseases?

the marginal principle may be guiding AbbVie in determining if it is worth producing drugs for rare diseases. Since it is developing and producing treatments for rare diseases, the marginal benefits must exceed the costs.

Marginal benefit

the maximum amount a consumer will pay for one additional good or service *decreases as consumption increases

cross-price elasticity of demand

the percentage change in the quantity demanded of one good/ the percentage change in the price of the other good

When asked to write the definition of the "Law of Demand" on an exam, Chris wrote, "When the price of a good increases, consumers will decrease the amount that they purchase." Chris' professor deducted one point for this response. The professor most likely deducted one point because Chris forgot to include

the phrase "holding everything else constant."

Which graph shows what will happen to the supply of roses if the price of roses falls?

the point on the supply curve will move down along the supply curve to indicate a decrease in price

Coffee houses increase the price of coffee in order to pay their baristas more.

the price along the demand curve moves up (the curve itself does not move)

market-clearing price

the price of a good or service at which the quantity supplied equals the quantity demanded

marginal cost of each worker

the same price for every single worker for example: The current market rate for IT professionals is $58,000 per year. Each employee she hires will also require a computer and equipment that costs $6,000 per employee annually.This makes the marginal cost of each worker $64,000

Speculators in world steel markets push the price of steel up, leading domestic steel companies to expand production.

the supply curve does not change but the price moves up along the supply curve

An increase in the price of corn used in the production of ethanol reduces the amount of corn available for use as livestock feed.

the supply curve of corn available for livestock feed shifts left

What factors into the opportunity cost for a decision

time spent due to the decision benefits from the best foregone alternative actual financial cost of the decision

calculating the total revenue curve to the demand curve=

total revenue/ quantity (plot the answer at the original Q demanded)

perfectly inelastic demand curve: perfectly elastic demand curve:

vertical horizontal

substitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

framing effects

when people react differently to something depending on whether it is presented as positive or negative

a. You are about to buy a calculator for $10, and the sales-person tells you that the model you want to buy is on sale for $5 at the store's other branch, which is a 20 minute drive away. You should make the trip to the other branch if:

your cost of making the trip is less than $5

market supply =

adding together the individual supplies of all the firms in the economy

sunk costs

costs that are made in the past and cannot be recovered

Select each factor which helps determine the price elasticity of supply for a product.

- the ability to store product - flexibility of inputs or resources used to make a product - ease of firms to enter or exit the market

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

0

If a 25% price increase for product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for product B, what is the cross‑price elasticity of these goods?

0 These 2 goods are not related

1. Demand shifts so that the equilibrium quantity of the good decreases. This change is consistent with 2. Demand shifts so that the equilibrium price of the good increases. This change is consistent with 3. Supply shifts so that the equilibrium price of the good decreases. This change is consistent with 4. Supply shifts so that the equilibrium quantity of the good decreases. This change is consistent with

1. An increase in the price of a complement good. 2. Increased subsidies for buyers of the good. 3. Increased subsidies for buyers of the good. 4. An increase in production costs.

Suppose General Electric, one of the largest suppliers of light bulbs, decides to discontinue its production of light bulbs Which of the following will occur in the market for light bulbs? Will General Electric's exit from the light bulb market result in a shortage or surplus of light bulbs at the previous price? Will the price of light bulbs rise or fall?

1. supply will decrease 2. shortage, rise

If Good C increases in price by 50% a pound, and this causes the quantity demanded for Good D to increase by 60%, what is the cross-price elasticity of the two goods? Round your answer to one decimal place. What is the relationship between the goods?

1.2; substitutes

Madeline spends all of her spare money on widgets, which cost $2 each, and gizmos, which cost $4 each. What is her opportunity cost if Madeline buys 12 widgets?

6

Cost of an activity

= the highest cost of another activity, AKA the cost of one activity over another is always the price of the highest valued activity

You would enjoy hanging out with friends at a concert they want to see, but you are not a fan of the band. You enjoy doing well in school and usually enjoy your studies, and so would rather study than go to the concert. There is a movie coming out this weekend that you would prefer to see instead of studying. What are the benefits and opportunity costs of these activities? The benefit of going to the concert is _____ and the opportunity cost is______ The benefit of going to the movie is______ and the opportunity cost is______ The benefit of studying is______ and the opportunity cost is______

A. enjoying the activity, missing the movie B. enjoying the activity, getting better grades C. getting better grades, missing the movie

"An increase in the cost of oil will cause the price of a plane ticket to increase. This increase in price will cause a decrease in demand for airline travel and a leftward shift in the demand curve." What is the flaw of this reasoning?

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

Assume it is August of 2008. After much deliberation, TV (television) stations nationwide choose to stop broadcasting their programs in analog starting in June of 2009 and instead broadcast in pure digital television. Hence, there is less than one year left of analog broadcasting. This decision affects companies that produce TVs, but also affects people that own and wish to purchase TVs. Please shift the supply and demand curves appropriately as a result of this news in consideration of the long run (in this case, for example, the year 2010) for analog TV sets.

BOTH demand and supply shift to the left

In the diagrams below, shift one or both curves to show the effects of the following events. a. Fuel efficiency regulations reduce the use of steel in automobile production and increase the use of lighter materials such as aluminum. Also, increased import restrictions are imposed that limit the amount of steel that can be imported into the U.S. b. The developments described have an ______ effect on the equilibrium price of steel and a ______ effect on the equilibrium quantity.

BOTH demand and supply shift to the left indeterminate; negative

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

Both curves shift right The price will change ambiguously

which of the statements best describes the relationship between price movements and total revenue.

Demand is elastic. Changes in price and total revenue move in opposite directions.

marginal benefit equation

MB = change in total benefit / change in quantity

Lumber and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of lumber increases due to new regulations for the logging industry. Shift one or both curves in the graph to illustrate the impact this change will have on the market for bricks.

Supply doesn't move, demand shifts right

Incomes decline due to a recession. Also, Norwegian Airlines adds more U.S. cities to its list of international flight destinations. a. What happens to the market for international flights b. The developments described have an_____ effect on the equilibrium price of steel and a ______effect on the equilibrium quantity.

Supply shifts right (goes up) and demand shifts to the left (making the price go down but keeping quantity the same) negative ; indeterminate

intermediate effect

When supply and demand move in the same direction

interdependence principle

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

Mateo works eight hours per day. Today he has to decide whether to work overtime and stay one more hour in the office, or go back home and spend that hour studying for his economics exam. His company pays him $70 per day if he works eight hours, and $100 per day if he works nine hours. If Mateo studies one more hour, his exam score increases from 75 to 80, what is Mateo 's rational decision?

a five point increase on his exam score less than $30.

unit elastic

a given change in price causes a proportional change in quantity demanded

inferior good

a good that consumers demand less of when their incomes increase

Trinh quits his $80,000-a-year job to become a full-time volunteer at a museum. What is the opportunity cost of his decision?

at least $80,000

Kathleen is binge-watching her favorite show on Netflix. She is trying to decide how many more episodes to watch. Kathleen should continue watching episodes until the marginal:

benefit of watching another episode is equal to the marginal cost.

4 types of interdependency's:

between people or businesses within the same market between markets between each of your individual choices through time (anything involving a timeline)

marginal benefit per worker

calculated by the difference of the amount of clients that each worker takes on X the amount that they get paid per client

In the market for gasoline and sport utility vehicles (SUVs), the two goods are

complements

law of demand

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

Ilsia is driving home from work. She needs to buy gas and notices an Exxon-Mobil station on one side of the street and a Shell station on the other side of the street. Although run by different companies, the two stations sell gasoline at the same price. a. The most likely reason that the price is the same is that

consumers view gasoline from different gas stations as perfect substitutes.

Sugarcane is vulnerable to the cane beetle, which can substantially reduce crop yields. Suppose that a new beetle‑resistant species of sugarcane is developed and productivity increases as a result. Use the terms to identify the effect on each of the related factors. As productivity increases, the price of sugar will The quantity demanded for sugar will then Given the change in the price of sugar, the price of cookies will The price of honey, also used as a sweetener, will Responding to changes in the sugar market, the price of textiles will

decrease increase decrease decrease not change

The figure shows the supply and demand for online music. Suppose that an economic downturn decreases household wealth and erodes consumer confidence. Move the supply and/or demand curves to reflect the primary effect this would have on the market for online music. You can assume that online music is a normal good. Also select the end result of equilibrium price and quantity. Equilibrium price: Equilibrium quantity:

decreases decreases demand curve shifts to the left

From January through April in the United States, personal certified public accountants (CPAs) see a dramatic increase in their number of billable hours, but the average hourly rate of a CPA remains the same. In this instance, _____ must have______

demand and supply; risen

Apple increases the price of the newest iPhone by 10%.

demand curve for Samsung phones shifts to the right

The batteries in Samsung smartphones begin to spontaneously combust.

demand curve shifts left

The government requires all coffee houses to post warnings to consumers about the cancer-causing components of coffee.

demand for coffee goes down and it shifts to the left

A. If the price of gasoline rises, what response do you expect in the market for SUVs? B. If the price of airfare rises, what response do you expect in the market for train travel?

demand for suv's shifts leftward demand for train travel increases

Illustrate graphically how each of the following events will impact the demand for cups of coffee. a. Average hourly wages increase.

demand increases and shifts to the right

Determine whether each good is a normal good or an inferior good for the average consumer. a. For most consumers, the newest iPhone is a _____ good. b. For most consumers, a 10-year-old used car is an _____ good. c. For most consumers, dental services are a _____ good.

normal; inferior; normal

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

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

Jonathan is deciding whether to study for his economics exam at a café or go to a concert with friends tonight. The cost of the concert ticket that he purchased yesterday is _____ in his opportunity cost and represents a _____ cost.

not included; sunk

Which of the following is the best argument against your friend's claim that longer movies provide more benefit than shorter movies?

opportunity cost principle, the length of the movie does not matter as long as watching a movie is the best way to spend your time compared to other alternatives.

Captain Eddy takes his 25-seat party boat out for a harbor cruise every night, rain or shine. Whether he gets $70 per seat or $0 per seat, he always fills every seat. Show the supply curve of cruise seats per night on the graph.

perfectly inelastic curve (vertical)