Microeconomics Exam 1 Study Guides

Give a statement that illustrates opportunity cost:

If I study, I must give up going to the football game.

What happens if a price floor is set above the equilibrium price?

a surplus will persist Example: the equilibrium wage rate for unskilled labor is $7/hr, but the price ceiling makes minimum wage $9/hr. At $9/hr, the supply of workers is greater than the demand for workers.

Ceteris paribus, the effects of an increase in the price of computers would best be represented by which of the following:

a movement up along the demand curve for computers

assume that Coca-Cola and Pepsi are substitutes. A rise in the price of Coca-Cola will have what effect on the market for Pepsi?

a rightward shift in the Pepsi demand curve. Remember that substitutes have a direct relationship.

What happens if a price ceiling is below the equilibrium price?

a shortage will persist Example: Equilibrium price for apartments is $1,200, however, the price ceiling is set at $800. At $800, the quantity demanded exceeds the quantity supplied.

market equilibrium

a situation in which quantity demanded equals quantity supplied. Represented graphically by the intersection of the supply and demand curves.

Initially the market shown is in equilibrium at E3. Changes in market conditions result in a new equilibrium at E2. This change is states as

decrease in demand and a decrease in quantity supplied

The market shown in exhibit 1 is initially in equilibrium at E4. Changes in market conditions result in a new equilibrium at E3. This change is stated as

decrease in supply and a decrease in quantity demanded

the demand curve is downward-sloping because of the law of ___________

diminishing marginal utility

This graph shows:

increasing values for x do not affect the value of y. This shows an independent relationship.

Microeconomics approaches the study of economics from the viewpoint of:

individual or specific markets

Give examples of market failure

lack of competition, externalities, public goods, and income inequality

Assume that brand X is an inferior good and name brand Y is a normal good. An increase in consumer income will cause:

leftward shift in the demand curve for brand X

consumer equilibrium is a condition in which total utility cannot increase by spending more of a given budget on one good and spending __________ on another good.

less

Any point on the production possibilities curve illustrates:

maximum production combinations

assume a consumer purchases a combination of goods X and Y such that MUxPx= 40 units of utility per dollar and MUyPy= 20 units of utility per dollar, to maximize utility, the consumers should buy:

more of X and less of Y

On a production possibilities curve, a change from economic inefficiency to economic efficiency is obtained by:

movement from a point inside the frontier to a point on the curve

What is the slope of an inverse straight line graph?

negative

"The government should provide health care for all citizens." This statement is an illustration of:

normative economic analysis

Non-price determinants of supply

number of sellers, technology, resource prices, taxes and subsidies, expectations of future price changes, prices of other goods and services

An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. The phrase "ceteris paribus" means that:

other relevant factors like consumer incomes must be held constant.

What is the slop of this graph?

positive. 50.

when supply increases what happens to price and quantity?

price goes down and quantity goes up. If supply decreases, price will go up and quantity will go down

consumer equilibrium exists when:

ratio of marginal utility to price for all goods and services is equal

Examples of capital include:

the robot used to help produce your car, the computer your professor uses to write exams, the inventory of unsold goods at your local hardware store.

when the price of a good rises, one effect of this change in price is that some consumers switch to more affordable substitutes, which helps is understand the law of demand. What is this effect called?

the substitution effect

the theory of supply states that:

there is a positive relationship between the price of a good and the quantity of it offered for sale by suppliers

what is true for the law of demand?

there is an inverse relationship between the price of a good and the quantity of the good demanded.

This straight line graph shows what?

there is an inverse relationship between x and y.

One of the assumptions underlying the production possibilities curve for any given economy is that:

there is full employment and no underemployment of resources when the economy is operating on the curve

True or false: on the PPC, a movement between points that yields a loss of one good in order to raise the output of another good will maintain efficient production

true

Macroeconomics studies economy-wide things. Give an example:

unemployment in the nation

total utility is measured by the mythical unit called the:

util

Give an example of an external benefit

vaccination shots. The sellers devote too few resources to produce this product. Two basic solutions to this type of market failure are laws to require consumption of shots and special subsidies.

As production of a good increases, opportunity costs rise because:

workers are not equally suited to all tasks

What is the slop of this line?

zero

Are dollars included in capital?

No, dollars are a different form of financial capital.

the condition of scarcity:

- cannot be eliminated - prevails in poor economies - prevails in rich economies

the following two alternatives exist for a student who has one evening in which to prepare for two exams on the following day: Possibility Score in Econ Score in Acct. A 95 80 B 80 90 The opportunity cost of receiving a 90 rather than an 80 on the accounting exam is represented by how many points on the economics exam?

15 points

Assume the total utilities corresponding to the first four units of a product consumed are 8, 12, 14, and 15, respectively. The marginal utility of the third unit consumed is:

2

Use the graph. This line is an example of what?

A direct relationship between distance and time.

If a textbook price rises and then students reduce the quantity demanded of textbooks, an economic model can show a cause-and-effect relationship only if which of the following occurs?

All other factors are held constant.

What can cause a PPC to shift outward?

An increase in resources or technological advancement

Initially the market shown is in equilibrium at E2. Changes in market conditions result in a new equilibrium at E4. This change is stated as

An increase in supply and an increase in demand

the law of diminishing marginal utility exists for the first four units of a good if they have marginal utilities of: a) 4,8,2,1 b)1,2,4,8 c) 8,4,2,1

C) 8, 4, 2, 1

In exhibit 1, which of the following would not cause a shift from S1 to S2. a) an increase in input prices b) a rise in the price of other goods c) an increase in consumer income

C) an increase in consumer income

Which of the following statements is true? A) total utility is the extra satisfaction from the consumption of a good or service B) marginal utility is the amount of satisfaction received from all the units of a good or service consumed C) the law of diminishing marginal utility states that as more of a good or service is consumed, total utility decreases D) consumer equilibrium is a combination of goods and services consumed which maximizes total utility from a given budget

D) consumer equilibrium is a combination of goods and services consumed which maximizes total utility from a given budget.

True or false, suppose A and B are substitute goods. Other things being equal, the demand curve for A will shift to the right when the price of B goes down

False

Give an example of a positive economic statement:

If taxes are raised, unemployment will drop.

What is true about renewable resources?

Land resources include forests, range lands, and marine fisheries that naturally regenerate

Can scarcity be eliminated?

NO

Would stock be considered capital?

NO

Non-price determinants of demand

Number of buyers, tastes and preferences, income (normal and inferior goods), expectations of future price and income changes, prices of related goods (substitutes and complements)

Give an example of an external cost

Pollution. Too many resources are used to produce the product responsible for the pollution. Two basic approaches to solve this market failure are regulation and pollution taxes.

when demand increases what happens to price and quantity?

Price increases and quantity increases. If demand decreases, both price and quantity will decrease.

Explain a public good and give an example

Public goods can benefit many individuals simultaneously and are provided by the government. Examples: National defense, air traffic control, lighthouses

If a point is outside a PPC, what does it show?

The point shows an unattainable economic condition

How do the income effect and the substitution effect explain the demand curve?

They attribute to its downward slope

Describe the slope of this graph.

This graph remains constant with changes in time.

What are the three fundamental economic questions

What to produce? How to produce? For whom to produce?

Assume congress passes a new tax of $2.00 per pack on cigarettes. The effect on the supply curve is:

a decrease in supply

Assume that crackers and soup are complementary goods. The effect on the soup market of an increase in the price of crackers would best be described as:

a decrease in the demand for soup. Remember that complementary goods have an inverse relationship.

In a graphic relationship, shifts in a curve are caused by a change in:

a factor not measured on the axises of a graph.

A supply curve slopes upward because

an increase in price gives producers incentive to supply a larger quantity

In exhibit 1, an increase in quantity supplied would cause a move from which equilibrium point to another, other things being equal? a) E1 to E2 b) E1 to E4 c) E3 to E4

b) E1 to E4

If water is essential for life, while diamonds are not, then why is water cheaper than diamonds?

because water is abundant, the marginal utility of water is low, and price reflects marginal utility, not total utility. Remember: marginal utility determines the price one is willing to pay.

If a consumer wishes to maximize satisfaction given limited income and MUx/Px < MUy/Py then the consumer should:

buy more of Y and less of X

what would happen if the government imposed a price floor (support price) of $4 per bushel in the wheat market shown in exhibit 2?

buyers would not purchase all of the wheat grown. Surplus of wheat.

A textbook is an example of:

capital

The software programs that make computer hardware useful in production and management tasks are:

capital

In economics, investment refers to the process of accumulating:

capital goods

consider a consumer who spends all income on only two goods: bread and wine. An extra loaf of bread would give the consumer 10 extra utils, while an extra bottle of wine would give the consumer 60 extra utils. Bread costs 50 cents per loaf and wine costs $6 per bottle. in this situation, the consumer:

could increase utility by buying more bread and less wine. MUb ------ = 20 utils Pb while MUw --------- = 10 utils Pw

A line that has a different slop at each point is a:

curve

suppose the government imposes rent control (a price ceiling) below the equilibrium price for rental housing. Which of the following will result? a) black markets b) the quality of existing rental housing deteriorates c) shortages d) all of the above

d) all of the above

The subject of economics is primarily the study of:

decision-making because of the problem of scarcity

There is news that the price of Tucker's Root Beer will increase significantly next week. If the demand for Tucker's Root Beer reacts only to this factor and shifts to the right, the position of this demand curve has reacted to a change in

expectations

True or false, suppose the market price of good X is below the equilibrium price. The result is a shortage, and sellers can be expected to decrease the quantity of good X supplied.

false

True or false: if some resources were used inefficiently, the economy would tend to operate outside its PPC

false

True or false: the most efficient point on the PPC is the midpoint on the curve.

false

what is the purpose of a graph?

graphs provide a means to clearly show economic relationships in a two-dimensional place

Another source of economic growth is:

greater entrepreneurship

When the price of a good increases, one effect of this price increase is that consumers of that good experience a decline in their purchasing power that is like a decline in income. For normal goods, this contributes to the law of demand. What is this effect called?

income effect

assume the price of good x increases. as a result, your real income decreases and you decrease the quantity of good x purchased each month. This is an example of the:

income effect

Yesterday seller A supplied 400 units of a good X at $10 per unit. Today Seller A supplies the same quantity of units at $5 per unit. Based on this evidence, seller A has experienced:

increase in supply.

the consumer equilibrium condition for two goods is achieved by equating the:

ratios of marginal utility to the price of both goods for the last dollar spent on each good. Mu of good A Mu of good B ----------------- = --------------------- Price of good A Price of good B

The slope of this line does what?

remains constant with changes in x.

A change in a third variable not on either axis of a graph is illustrated with a:

shift of a curve

Assume that a computer is a normal good. An increase in consumer income would:

shift the demand curve for computers to the right

The definition of a model is:

simplified description of reality to understand and predict an economic event

Measure between two points on a curve, the ratio of change in the variable on the vertical axis to the change in the variable on the horizontal axis is the:

slope

"An increase in the federal minimum wage will provide a living wage for the working poor" is a:

statement of normative economics

"The federal minimum wage causes higher unemployment among teenagers" is a:

statement of positive economics

Assume the price of Levi jeans increases. As a result, you decrease the quantity of Levi jeans purchased each month and purchase more Lee jeans. This is an example of the

substitution effect

An advance in technology results in:

suppliers offering a larger quantity than before at each given price, suppliers offering the same quantity as before at a lower price, a rightward shift of the supply curve/ increase in supply

What is important to remember about PPC ?

that labor is not equally productive or homogeneous.

What explains the determination of equilibrium price of a product

the interaction of supply and demand

the price of diamonds is higher than the price of water because:

the marginal utility for diamonds is greater than the marginal utility of water

Which can cause economic growth?

the production of more capital goods or a tech advancement

according to the income effect, when the price of automobiles rises people buy fewer automobiles because:

the purchasing power of their income is reduced.

the income effect refers to the change in:

the quantity demanded of a good because of a change in the buyer's real income (purchasing power)