Macroeconomics Test 2

Income is to wealth as: a. hours are to minutes b. inches are to feet c. demand is to quantity demand d. learning is to knowledge

learning is to knowledge

Which of the following goods is more likely to be a normal good: well-worn overalls from Leo's Old Clothes in Columbia or a Lexus automobile?

Lexus automobile. A normal good is when the income increases a person likely to buy the more expensive things

Define this term: flow variable. Explain which is a flow variable- the amount of income a person earns each week, or the amount in a savings account that a person has, as of the close business today

A flow variable is a measure of an ongoing process, such as income. The flow variable is the income earned each week because its ongoing and isn't a measure in an exact moment of time

If the income or/wealth of an individual increased, what would happen to his/her demand for a new car (to present to a relative on Christmas)? Is this good a normal good or an inferior good?

With an increase of an individuals income or/ wealth then their demand for a new car demand for the car would increase as well. The car would be an example of a normal good.

Which of the following statements about demand is correct? a. change in price of bicycles will not lead to a shift of the demand curve for bicycles b. a change in price of automobiles will lead not to a shift of the demand curve for motorcycles c. a change in demand is equivalent to a movement along a given demand curve d. when prices fall, so does the quantity demanded e. when the demand curve shifts to the right so will the demand curve

change in price of bicycles will not lead to a shift of the demand curve for bicycles

Which of the following might explain why the government would create a price ceiling for a certain good a. the equilibrium price that would result in the market would be considered too high b. the equilibrium price that would result in the market would be considered to low c. the equilibrium quantity that would result in the market would be considered too high d. the equilibrium quantity that would result in the market would be considered too low e. the government has never had a reason to create price floors or price ceilings

the equilibrium price that would result on the market would be considered too high

Is this pair of goods an example of two substitutes, two complements, or two unrelated goods? Explain your answer: Coke and Pepsi

Coke and pepsi is an example of two substitutes. They are both dark, caffeinated drinks that can be interchangeable with one another. For example, if coke isn't available at a restaurant then the customer will take pepsi instead.

Is this pair of goods an example of two substitutes, two complements, or two unrelated goods? Explain your answer: Computer hardware and computer software

Computer hardware and computer software are complimentary goods because they are used together. One cannot replace the other, rather they are used together in order to form a functioning computer.

Predict the change in equilibrium price and quantity for higher education services , as a result of the following event. Explain your answer in words, as carefully as you can. Be sure you indicate the change in equilibrium price and quantity in your answer. Population of high school graduates decreases

If the number of high school graduates decreases, the number of applicants seeking higher education will also decrease because there are less people. Therefore the equilibrium price and quantity would decrease because the demand would not be there.

Illustrate how this government program causes impact to prices and to the volume of agricultural output which is sold in the market. Price floors

A price floor is a government imposed minimum price in a market. One of the most common places to find price floors is in the agriculture market. Ultimately, setting the price floor above the equilibrium price creates a surplus, which would typically be eliminated by a fall in price. One way the government deals with the surplus they create in the agriculture market is buy-out programs where the government buys all the surplus goods. Another way the government may deal with surpluses is by paying farmers not to farm on their land to prevent the surplus.

If the income or/wealth of an individual increased, what would happen to his/her demand for an item on the dollar menu at a fast food restaurant for dinner? Is this good a normal good or an inferior good?

If the income/wealth increased the demand for the dollar menu item would decrease because it is an inferior good.

Determine whether this change will change demand or supply. Will this mean an increase or a decrease in the curve you have chosen? What will happen to equilibrium price as a result of the change? What will happen to equilibrium quantity? An increase in buyer taste for the good or service

An increase in buyer taste for the good or service If their is an increase in a buyers taste for a certain good or service then the demand for that good or service will also increase, causing a rightward shift in the demand curve on the graph. An increase in the taste will have no effect on the supply curve on the graph, therefore the supply curve will remain the exact same. With a shift in only the demand curve the equilibrium price will remain the same because there was no change in the price. The equilibrium quantity will increase due to the movement of the demand curve shifting rightward.

This season, major league baseball parks will be selling bottled water for about a price of $6 per unit, when that good sells for less than $1 per unit outside the ballpark. The stadiums will be enforcing policies of not allowing fans to bring beverages into the ballpark. What do baseball franchises know about supply and demand?

Baseball franchises realize that people are going to buy the cheaper option of water, so if they restrict their ways of receiving the cheaper water, such as not allowing them to bring any outside drinks in the stadium. The baseball stadium knows that the demand for water is going to be high on a hot day, so being the only suppliers of water they can dominate the price market.

Is this pair of goods an example of two substitutes, two complements, or two unrelated goods? Explain your answer: Beef and chicken (in a Chinese restaurant buffet line)

Beef and chicken in a buffet line are examples of substitutes. They are examples of substitutes because if the buffet is out of orange chicken, odds are you would try orange beef since they are next to each other in the buffet line.

Suppose farmers can plant either corn or soybeans in their fields. What will be the impact of increased use of corn-based ethanol fuel on equilibrium price and quantity in the market for soybeans? Discuss this impact using supply and demand terminology. Predict the effect on equilibrium price and quantity resulting from this event.

Corn and soybeans are substitutes for each other. Due to this, a change in desire from soybeans to corn would result in higher equilibrium prices for corn and lower equilibrium prices for soybeans. Due to this, according to the law of supply, as the price of a good increases, the quantity supplied increases. Therefore, more farmers would desire to sell corn to increase their profits. However, if the supply of soybeans completely dropped off, eventually, the equilibrium price of soybeans would increase again because the demand (even if the demand was smaller than the demand for corn) would be more than the supply causing the price to rise.

If the income or/wealth of an individual increased, what would happen to his/her demand for a candy bar for lunch? Is this good a normal good or an inferior good?

I think this could depend on the reasoning behind the individual eating a candy bar for lunch. If the individual is eating a candy bar because that is the only thing they can afford out of the vending machine, it is an inferior good. If their income or wealth increases, they will now be able to afford a different lunch option. However, if the individual is eating a candy bar for lunch because that is what they wish to eat for lunch, it is a normal good because he will continue to eat a candy bar for lunch even if his income or wealth increases.

Is this pair of goods an example of two substitutes, two complements, or two unrelated goods? Explain your answer: Ice cream and frozen yogurt

Ice cream and frozen yogurt are examples of two substitutes. They are both frozen, dessert items, but frozen yogurt is the healthier version of ice cream. If you are on a diet you would substitute ice cream for frozen yogurt.

If the income or/wealth of an individual increased, what would happen to his/her demand for a flat screen high definition TV? Is this good a normal good or an inferior good? If the income or/wealth of an individual increased, what would happen to his/her demand for the "old-fashioned" kind of TV that fits on a TV stand? Is this good a normal good or an inferior good?

If an individuals income or wealth increased, their demand for an old box tv would most likely decreases, making it an inferior good. However, their demand for a flatscreen, LED tv would most likely increase, making it a normal good.

Equilibrium

Equilibrium is a very important concept in supply and demand. Equilibrium is when markets are at rest or in balance in motion. "Outside forces" disturb this rest or balance in motion and create disequilibrium. Economic change in markets is a progression from (a) an initial equilibrium (b) an "outside force" which hits the market and creates disequilibrium in markets (c) a settling down of the market into a new equilibrium.

What is equilibrium? What is disequilibrium? Explain why -- if there is no outside interference in a competitive market -- that prices will not remain either above or below equilibrium for long.

Equilibrium is when the market price and market quantity bought and sold stay constant until the demand or supply change in that market. On a graph equilibrium would be where the supply and demand curve intersect. Disequilibrium would then be when the markets supply or demand will be operating further in on either one of the curves caused from fluctuations in each of the curves based an outside interference. If there are no outside interference in a competitive market then prices will not remain above or below equilibrium for very long. This is because for demand and supply curves they are inverse functions, meaning they will intersect each other. If their is an excess demand the price will rise, if their is an excess supply then the price will fall, the longer the supply and demand curves stay the same. Due to no outside influences causing shifts in the curves, then it will center in on equilibrium where it will be most efficient for both the supplier and the consumer.

True or false? If the price of jelly (a compliment of peanut butter) decreases, both the demand and supply curves of peanut butter will shift rightward

False. If jelly decreases that doesn't mean that the demand and supply curves both shift rightward when the price of a compliment goes down the demand for the other will increase.

Divide GDP by population, and you have calculated real GDP per capita. This is the most famous measure of standard of living in economics. Calculate real GDP per capita for 1973 and 2000. Find the percentage change in GDP per capita in that time period. Show your work.

GDP per capita for 1973= $4,342/212= 20.48 GDP per capita for 2000= $9,817/281= 34.94 Percentage change in GDP per capita= (20.48-34.94)/20.48*100= 70.6% increase

What economic forces have increased the tuition rate for colleges while also increasing enrollments? Give 3 reasonable explanations using supply and demand analysis

Government have increased tuition rate because the government gives students more money towards tuition, thus allowing for more students to go to college. 1. students get benefits of getting a degree 2. more students= more profit for teachers 3. higher paying jobs for students with teaching degrees

Predict the change in equilibrium price and quantity for higher education services , as a result of the following event. Explain your answer in words, as carefully as you can. Be sure you indicate the change in equilibrium price and quantity in your answer. Government increases the cost of interest on student loans

Government increases the cost of interest on student loans If the government increases the cost of interest on student loans it will effect the demand curve but it will not effect the supply curve. With an increase in interest on student loans, students will be expected to spend more money on a higher education. Therefore the expected price would increase to the students causing a rightward shift in the demand curve. Another way to look at it would be the loan as a substitute to college. With an increase of interest on the loans you will have to pay more money in interest than you would have before the increase causing for an increase in the price of the substitute. This also causes a rightward shift on a demand curve. With equilibrium price it will be more higher due to the shift in the graph, the intersect will be further up on the supply curve. Equilibrium quantity will also increase due to the whole demand curve shifting rightward.

How is it possible that Hurricane Katrina could raise gasoline prices in faraway Colorado, without affecting supply in that state? Use supply and demand terminology to explain your answer.

Hurricane Katrina wiped out a lot of their refineries and tools used for gasoline, which caused for gas prices to be higher. This affects Colorado without affecting the supply in the state because they were able to buy gas at higher prices because the gulf had to rebuild what they lost which cost them lots of money and there was a limited supply.

Is this pair of goods an example of two substitutes, two complements, or two unrelated goods? Explain your answer: Beef and chicken (at the grocery store)

I think beef and chicken could be seen as either substitutes or unrelated goods depending on your purpose for the meat. If the buyer's purpose is to add protein to their meal, both beef and chicken can provide that. Therefore, in that case they could be seen as substitutes. However, if the buyer's purpose is to make hamburger helper, chicken is probably seen as an unrelated good because it would not be able to be substituted into the hamburger helper effectively.

Define these terms: price floor and price ceiling. What difference does it make if the price floor is effective, or not effective? What difference does it make if the price ceiling is effective, or not effective

If the price floor is effective it is guarantying that people won't be losing money. For example, if a farmer has an effective price floor, they are guaranteed to sell their products at a reasonable price. If it isn't effective the farmer will be forced to sell their goods at such a good price that he will have to stop selling his crops because he can't afford to take care of them. If price ceiling is being effective they are making sure that the manufacture is not asking for too much money for their good. For example, if the price ceiling was inefficient on apartments landlords could charge a rent more than what their property is worth. This would result in not enough adequate housing.

How does the way the term "inferior good" is used in economics differ from the way that term is used in ordinary language?

In society, I think, most people would think of an inferior good as a good that was lower in quality. However, in economics, inferior goods are defined as goods that people demand less of as their income rises. For example, low quality meat could be seen as an inferior good because people will typically desire a high quality meat as their income rises.

How does the way the term "normal good" is used in economics differ from the way that term is used in ordinary language?

In society, most people see normal goods as goods that most people buy; "normal food" like bread and milk, for example. However, in economics, normal goods are goods that people demand more of as their income rises. Some examples are houses, cars, and gym memberships.

How does the way word "demand" is used in economics differ from the way that word is used in ordinary language?

In society, people usually see demand as how much of a good the population wants or needs. However, economics takes demand a step further. In economics, demand is the quantity of a good that all buyers in a market would choose to buy, given restraints. The economics definition of demand takes into account the fact that not every person can afford to buy everything they may want because of their restraints, such as money and the fact that as the price of the good changes, the quantity demanded of that good changes.

Explain this recent news dispatch from Hull, England. "The fish market here slumped today to what local commentators called 'a disastrous level'--all because of a shortage of potatoes. The potatoes are one of the main ingredients in a dish that figures on almost every cafe menu--fish and chips." Translate description of the problem from the language of ordinary people to the language of economics, regarding supply and demand. What is happening?

In this example, fish and chips are complimentary goods. Because the supply of one good (potatoes - chips) decreased, the demand for fish decreased as well.

What is the law of supply? What Is the critical difference between supply and quantity supply?

Law of Supply- price and quantity are directly related Supply- when the curve shifts Quantity supply- when the points on the graph move

Illustrate how this government program causes impact to prices and to the volume of agricultural output which is sold in the market. Supply restrictions, such as acreage "set aside" programs

One way the government deals with surpluses is through set-aside programs. In this program, they pay farmers not to farm on their land in order to prevent a surplus, which would typically fix itself by a fall in price; however, a fall in price is not always possible, such as when price floors are in place. This program decreases the amount of agricultural output there is to hopefully supply around the quantity demanded at the set price floor.

In 1973, the U.S. population was 212 million. In 2000, the U.S. population was 281 million. What was the total percentage increase in U.S. population during that time period? Show your work.

Percentage change in US population= (212-281)/212*100= 32.55% increase

The owners of Toys Were Us decide to raise prices for Zonker brand toy trucks from $8.99 to $10.99, and the quantity demanded per day at Toys Were Us - as a result -- decreases from 24 per day to 16 per day. What is the percentage change in price? Show your work. What is the percentage change in quantity demanded which would result? Show your work. Bonus question: did the owners of the toy store make a good business decision or not? Show your work.

Percentage change in price= ($10.99-$8.99)/$8.99*100= 22.25% increase Percentage change in quantity demanded= ((24-16)/24*100= 33.3% decrease Bonus: $8.99*24= $215.76 $10.99*16= $175.84 Keep prices as they are. It is $39.92 more per day.

The owners of A-Local Hardware Store are consulting with you regarding the response of buyers to a change in the price of window well covers. After an exhaustive set of market research surveys, store owners have learned that if the price of the window well covers increases from $12 to $14, the quantity of well covers demanded in a given month will fall from 34 to 28 units. What is the percentage change in price being proposed to buyers? Show your work. What is the percentage change in quantity demanded which would result? Show your work. Bonus question: the owners of the hardware store ask you whether they should keep prices at their current level, or raise them by two dollars. What is your advice? Show your work.

Percentage change in price= (14-12)/12*100= 16.67% increase Percentage change in quantity= (28-34)/34*100= 17.65% decrease Bonus: $12*34= $408 per day $14*28= $392 per day Keep prices as they are. It is an extra $16 a day.

The officers of a student economics club are operating a coffee shop on campus. They ask you to make percentage calculations. Survey results show that the coffee shop they operate could raise prices for coffee from $2 to $3. If the students did that, the quantity demanded for coffee would fall from 220 people per day to 145 people per day. What percentage change in price is being proposed? What would be the percentage change in the quantity demanded? Show your work. Bonus question: the students ask you whether they should keep prices at their current level, or raise them by one dollar. What is your advice? Show your work.

Percentage change in price= 50%. (3-2)/2= .5*100%= 50% increase Percentage change in quantity demanded= (145-220)/220*100%= 34.09% decrease Bonus: 220*2= $440 revenue per day 145*3= $435 revenue per day I would recommend keeping prices as they are because it is $5 more a day in income.

In 1973, real GDP was $4,342 billion. In 2000, real GDP was $9,817 billion. What was the total percentage increase in real GDP from 1973 to 2000, for the United States? Show your work.

Percentage change in real GDP= ($4,342-$9,817)/$4,342*100= 126.09% increase

Cutthroat competition among video stores and also Internet/cable providers of movies causes much lower prices per month to view movies at home. What happens to the price and quantity for movie tickets at the theaters?

Since customers are able to receive movies at home for a lower cost both the price and quantity of the ticket will decrease. If the movie theater wants to make money, they will need to make tickets a lower price and make fewer tickets so that they can compete with the online movies.

Movies are a normal good and there is an increase in consumer income. What happens to the price and quantity for movie tickets?

Since movies are becoming a more frequent activity, the price and quantity will both increase. They will both increase because people are receiving a higher income, the demand for tickets will increase. Therefore they will increase the price of the ticket to increase their profit.

What is the law of demand? Answer carefully, in words. What is the critical difference between these two terms: "demand" and "quantity demanded?"

The law of demand states that as the price of a good increases, the quantity demanded decreases, ceteris paribus. For example, all else remaining the same, if the price of an Apple laptop increases, the quantity demanded will decrease. Demand refers to the quantity of a good that is desired by buyers at various prices. The quantity demanded is the quantity of a good that is desired at a specific price at a specific point in time. If looking at a graphical depiction of this, you will see that a change in demand will shift the demand curve, whereas a change in quantity demanded will move the point along the demand curve.

What is the law of supply? Answer carefully, in words. What is the critical difference between these two terms: "supply" and "quantity supplied?"

The law of supply states that as the price of a good increases, the quantity supplied increases, ceteris paribus. For example, all else remaining the same, if the price of an Apple laptop increases, the quantity supplied will increase. Supply refers to the quantity of a good that sellers desire to sell, given different constraints (such as price). The quantity supplied is the specific amount of a good that all sellers in a market would choose to sell over some period of time, given constraints. If looking at a graphical depiction of this, you will see that a change in supply will shift the supply curve, whereas a change in quantity supplied will move the point along the supply curve.

Betsy graduates from college, where she earned $3,000 a year working part-time, and takes a job as a third grade teacher where now she earns $30,000 per year. About the same time she received her first paycheck =, her bike was stolen. With her old income she would have purchased a new bike, but with her new income she purchased a new car. Which of these two goods she uses, or has used, for transportation- the bike is an automobile- is the inferior good? Which is the normal good?

The normal good is the car because she is making money and can afford it. THe bike is now the inferior good because she can now buy something that is better. If her income went back to $3000 the bike would be the normal good

The number of smart phones sold in markets has quadrupled over a three-year period. The average price of a smart phone has also fallen. Use supply and demand analysis to give the simplest possible explanation about what is happening.

The number of smart phones sold has increased because the price has decreased - the demand has increased because the price has decreased (law of demand).

Explain the effect of an effective price ceiling on rented apartments, if the ceiling is set below the equilibrium rent price. In this case, is the price ceiling effective, or not? Explain your answer.

The price ceiling is not being affective because they are already below their legal maximum price. For example if the price ceiling was $1000 a month and they were asking for $800 they are already below their limit for the apartment.

Why are situations of excess demand or excess supply in markets only temporary - as long as there is no interference in the market? Bonus question: if markets constantly tend toward equilibrium, how do situations of excess demand or excess supply ever even occur?

When there is a case of excess demand or excess supply, the market will try to find the equilibrium price to balance out the excess - whether that be increasing or decreasing the price. Things are always changing in our world (including huge events, such as natural disasters), so the market is never 100% set at the equilibrium; however, the market always strives to be at the equilibrium.

Which proposal would tend to increase the equilibrium price paid for illegal drugs--increasing criminal penalties for those consuming drugs or increasing the efforts to interdict, or stop, the flow of drugs being imported into the United States? Explain your answer in words, using supply and demand analysis. Bonus question: which is a smarter approach for government regarding the market for illegal drugs?

There is no way to stop every person who is bringing in illegal drugs, but if they face a more severe punishment they may reconsider the illegal act. If there is a harsher punishment then less of a demand for drugs which would then cause the supply to go down as well which would solve the problem. The smarter approach for the government would be to stop the import of illegal drugs because they will receive funding, support, and are more likely to stop the import of drugs.

Is computer hardware and computer software an example of two substitutes, two compliments, or two unrelated goods?

They are two compliments. When one of the prices increases then the demand will decrease for the other

This season, major league baseball parks are selling bottled water for about $6 or even more, when that good sells for less than $1 per unit outside the baseball park. The stadiums will be enforcing policies of not allowing fans to bring beverages into the ballpark. What do baseball franchises know about supply and demand?

They know since drinks can't be brought in people will eventually want a drink and pay an outrageous amount of money for water. The supply and demand will both increase

How does the way the word "supply" is used in economics differ from the way that word is used in ordinary language?

Typically society sees supply as the amount of a good that is available or able to be made. However, according to economics supply is the amount of a good that all sellers in a market would choose to sell, given their constraints. In the economics definition, it shows the choice that sellers have to produce however much of a good that they choose. For example, they may be able to produce 10 million loaves of bread, but only choose to make 5 million.

If an exercise tax is imposed on shirts, a. the number of shirts produced will exceed the number demanded b. the number of shirts demanded will exceed the number supplied c. the equilibrium market price will vary d. the amount consumers pay for each shirt will decrease e. the net revenue producers receive from each shirt will decrease

the net revenue producers receive from each shirt will decrease