Microeconomics Test 1
Which of the following is true regarding constant unitary elasticity?
A price change of one percent results in a quantity change of one percent. Constant unitary elasticity, in either a supply or demand curve, occurs when a price change of one percent results in a quantity change of one percent. Constant unitary elasticity, in either a supply or demand curve, occurs when a price change of one percent results in a quantity change of one percent.
The law of diminishing returns states that the marginal productivity of additional resources employed_________________.
can be high initially but will eventually decrease
Which of the following is not one of the three common types of elasticities?
Infinite elasticity
Which of the following situations is best described by a PPF.
A country is deciding how to allocate resources between infrastructure projects and national defense. A production possibilities frontier shows the combinations of products that society can produce with its limited resources and reflects diminishing marginal returns. In this case, since a whole society is determining how to allocate its limited resources between the production of two products, a production possibilities frontier would be the most appropriate representation of this situation.
Which scenario below is an example of scarcity?
A factory has a large need for highly skilled workers, however the majority of applicants do not have any work experience. Reason: Because the factory has a demand for highly skilled workers, but none exist in the area, there is a shortage of labor for these positions. Because we are able to create diamonds in a lab, they are no longer scarce. Similarly, fracking has increased the availability of natural gas which has lowered energy prices because it is not viewed as a scarce resource. There is no shortage of individuals interested in adopting kittens.
A student consumes only notebooks and folders. The student is maximizing utility and is consuming both notebooks and folders. If the price of notebooks increases, then which of the following actions will the student take to continue maximizing utility?
Decrease consumption of notebooks
If a 1% drop in price causes a 1% increase in quantity demanded, it is considered _______________________ demand.
unit elastic Constant unitary elasticity, in either a supply or demand curve, occurs when a price change of one percent results in a quantity change of one percent. The figure below shows a demand curve with constant unit elasticity. Constant unitary elasticity, in either a supply or demand curve, occurs when a price change of one percent results in a quantity change of one percent.
When a demand curve possess the characteristic of zero elasticity or perfect inelasticity, then the curve demand curve is
vertical Zero elasticity or perfect inelasticity refers to the extreme case in which a percentage change in price, no matter how large, results in zero change in quantity. A vertical demand curve show that there will be zero percentage change in quantity demanded or supplied, regardless of the price.
Which of the following cannot be determined by using a production possibilities curve?
what combination of outputs maximizes benefits for society The production possibilities curve shows all possible combinations that can be produced, but does not indicate which one maximizes society's benefits.
If there is a situation where the quantity demand of a product does not decrease or increase as a result of a percentage change in its price, we call this a situation of _______________.
zero elasticity Zero elasticity or perfect inelasticity refers to an extreme case when the demand or supply of a product is not influenced by a percentage change in its price.
The price of oil fell considerably over the last few months. Researches have plotted the data to evaluate the supply and demand schedules for oil and have found that the data illustrates a nearly vertical supply curve. This means that its elasticity of supply is almost equal to __________.
0 A vertical supply curve indicates there is no change in the quantity supplied when there is a change in prices. This is a typical example of a perfectly inelastic or zero elastic supply.
The price of each ride at the fair is $7. Your benefit associated with each ride decreases with each ride because you start to get dizzy. How many rides should you go on if your marginal benefit for each ride is as follows- first ride: $25, second ride: $18, third ride: $11, fourth ride: $4, fifth ride: $0?
3 rides According to the data given, your marginal benefit is greater than the marginal cost for the first three rides. After the third ride, the marginal cost exceeds your marginal benefit. Therefore, the best choice is to stop at three rides.
Which of the following is not an example of scarcity?
Amanda can play a song as many times as she likes with no additional cost to her. Reason: Scarcity means that human wants for goods, services and resources exceed what is available. Amanda being able to play a song as many times as she likes with no additional cost to her is not an example of scarcity.
Which scenario is not an example of marginal decision-making?
At the theme park, Julie goes on the roller coaster as many times as she can - even if she starts to feel sick - because she wants to get her money's worth for her day pass. Julie is not using marginal analysis because she is looking at the total cost of her ticket. Instead she should weigh the utility she receives from each ride to the cost of going on the ride (how long she waits in line, how sick she starts to feel, etc.). Then she would find her optimal number of times of riding the roller coaster.
If income remains the same, but both the price of lottery tickets and train tickets increase, then what will happen to the budget constraint?
Both endpoints will shift in When both prices increase but the budget remains the same, we can now afford fewer of each good. This is represented by an inward shift of both endpoints. This is because we can now purchase at most fewer of both goods. That is, if we spend all of our income on either lottery tickets or train tickets we could purchase fewer of both than we could before.
Goods that are often consumed together are called
Complements example: hotel rooms & flights
True or false? When deciding on a new roof installation, it makes sense to examine the costs and benefits of each shingle that will be installed.
False In this case, the roof is the product, not each individual shingle. Here one would examine the costs and benefits of installing a roof, rather than individual shingles. Marginal analysis would apply if looking at replacing multiple roofs, where the costs and benefits of each one are examined.
True or false? If the price elasticity of demand for a commodity is always equal to one and obeys the law of demand, then a 3% increase in the commodity's price will lead to a 6% decrease in its demand.
False Price elasticity of demand measures percentage change in demand due to the percentage change in price. Thus, if the price elasticity of demand is one, then by definition, a three percent increase in price will lead to a three percent decrease in demand.
True or false? The law of diminishing returns states that as more variable inputs are added to production, the productivity of these inputs increases.
False The law of diminishing returns establishes a negative relationship between input resources and productivity. As more variable inputs are added to a fixed resource in production, the productivity of these variable inputs decreases
True or false? The law of diminishing returns states that as more variable inputs are added to production, the productivity of these inputs increases.
False The law of diminishing returns establishes a negative relationship between input resources and productivity. As more variable inputs are added to a fixed resource in production, the productivity of these variable inputs decreases
Which scenarios would be best represented by a budget constraint? There are two correct answers.
Finn has an allowance to spend on his dog. He must decide whether to spend the allowance on new doggy treats for $10 per bag or new water balls for $3 per ball. Sam has received a $500 scholarship that he can use for books and tuition.
All of the following likely have a highly elastic supply curve, except for __________.
MRI machines While a perfectly inelastic supply is an extreme example, goods with limited supply of inputs are likely to feature highly inelastic supply curves. Examples include diamond rings or housing in prime locations such as apartments facing Central Park in New York City. In this case MRI machines are most likely to have inelastic supply since the resources needed to produce MRI marchines are highly specliazed and difficult to obtain.
Midpoint Method Formula
Q2−Q1/ Q2+Q1/2 , P2-P1/P2+P2/2 then divide both numbers to get answer
If a family spends its entire education budget in August, the family can afford either 16 tutoring lessons or 12 school uniforms. Assuming the family spends its entire budget on just these two goods in August, calculate the opportunity cost of one extra uniform?
Opportunity cost can be calculated as the ratio of amounts of each good that could be consumed if the entire budget were spent only on that good. Therefore, the opportunity cost of an extra uniform is 16 tutoring lessons12 uniforms≈1.33 tutoring lessons.
Budget Constraint Equation
P1 X Q1 + P2 X Q2
refers to an extreme case of elasticity in which a percentage change in price, no matter how large or small, results in zero percent change in either quantity demanded or quantity supplied.
Perfect inelasticity/ Zero elasticity
Why does producer surplus exist?
Some producers are willing to produce at a price that is below the equilibrium price.
You are responsible for setting prices of finished clothing items at a major textile manufacturer. In the past year the price of cotton, a critical input, has increased by 20%. What is the likely result?
Supply of clothing will decrease. When a firm faces an increase in production costs, its profits will decline at the given selling price, causing the firm to reduce production and quantity supplied.
When the price of butter decreases from 4.05 to 3.75, which of the following is true regarding the cross-price elasticity of demand for margarine?
The cross-price elasticity of demand for margarine will be positive. Cross-price elasticity of demand of good A is the percentage change in quantity demanded of good A divided by the percentage change in price of good B. Since butter and margarine are substitutes, a decrease in the price of butter will mean users of margarine switch from margarine to butter. Therefore, the quantity demanded of margarine will decrease. Since price and quantity demanded have moved in the same direction (butter's price decreased and margarine's quantity decreased) the cross-price elasticity of demand will be positive.
What best describes the income effect?
The idea that a higher price means the buying power of income has been reduced.
Suppose Susie can own 100 turkeys or 5 peacocks. What is the opportunity cost of owning one peacock?
The opportunity cost of owning one peacock is found by dividing the number of turkeys by the peacocks, i.e. 100/5=20 turkeys.
True or false? The production possibilities frontier (PPF) demonstrates how society's limited resources affect the quantities of goods and services produced.
True Because society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. The production possibilities frontier demonstrates this tradeoff.
Which of the following characteristics is a fundamental similarity that nearly all demand curves share?
They slope downward from left to right.
Economists use the ceteris paribus assumption to make it easier to analyze complex problems by looking at one factor at a time.
True
True or False: The metaphor of the invisible hand suggests the remarkable possibility that broader social good can emerge from selfish individual actions. Thus if an individual volunteers because he finds it personally rewarding, he may unintentionally also be contributing to the social good.
True
True or false? An economic theory is a representation of how two or more variables interact with each other.
True
True or false? Economies of scale occur when the production of goods increases and the average cost of production decreases.
True
Economists use the ceteris paribus assumption to make it easier to analyze complex problems by looking at one factor at a time.
True Ceteris paribus is a Latin phrase that means "all other things being equal." Economists try to test hypotheses by observing actual behavior and using real-world data. By keeping all other factors constant, economists are able to analyze one factor at a time.
True or false? A supply curve obeying the law of supply with constant unitary elasticity is a straight line because the curve slopes upward and both price and quantity are increasing proportionally.
True Constant unitary elasticity in either a supply or demand curve refers to a situation where a price change of one percent results in a quantity change of one percent. Unlike the demand curve with unitary elasticity, the supply curve with unitary elasticity is represented by a straight line, and that line goes through the origin.
Goods with a limited supply of inputs have nearly zero elastic supply curves.
True Goods with a limited supply of inputs have nearly zero elastic supply curves because the production of these goods is not able to increase easily. Examples include diamond rings or housing in prime locations such as apartments facing Central Park in New York City.
True or False The slope is the same at every point on a budget line and different at various points on a production possibilities frontier.
True The budget constraint is a straight line. This is because its slope is given by the relative prices of the two goods, which from the point of view of an individual consumer, are fixed. In contrast, the PPF has a curved shape because of the law of diminishing returns. Thus, the slope is different at various points on the PPF.
True or false? John says to his friend, "This concert is going to cost me $20 when I buy the ticket." His friend corrects him and says, "actually, this concert will cost you more than $20 since you have to miss work." His friend is referring to the opportunity cost.
True When making a decision, the cost of what you give up is known as the opportunity cost. Since John must miss work for the concert, the opportunity cost to attend is the wages he gives up.
True or false? The following situation describes a good that is likely to have perfectly, or nearly perfectly, elastic demand. Fifteen different companies sell a product called Econobread. While each company claims their product is the best, consumers know that the only difference among the products is the company label on the packaging.
True When products have many very close substitutes, demand for the product is very elastic. In this case, since each company sells the exact same product, demand for the product from any one company will be infinitely elastic because a price change will cause consumers to just buy it from somebody else.
True or false? If the elasticity of demand is equal to 1 between points A and B, and the price of a good is increased from point B to point A, total revenue will remain unchanged.
True When the elasticity of demand is equal to one, we call this unitary elasticity. At this point, a percentage rise in price is exactly cancelled out by a percentage fall in quantity. Therefore total revenue will remain unchanged when price changes.
True or false? The law of supply states that when there are many sellers of a good, an increase in price results in an increase in quantity supplied.
True All other factors being equal, when there are many sellers of a good, an increase in price results in an increase in quantity supplied, a relationship that is known as the law of supply.
Can it make sense for Julie to run every day at 5am in the morning, even if she has to pay extra for a babysitter at that hour?
Yes, this can make sense if the benefits associated with running at 5am outweigh the extra costs of the babysitter. This can make sense if the benefits associated with running at 5am outweigh the costs of the babysitter. Benefits could include self-interested behavior like working out, better work environment later, etc. This could be considered self-interested behavior.
All of the following cause the supply curve to shift except _________.
a change in product price
When considering factors that shift demand curves, which of the following will decrease the market demand for a product? Select the two correct answers below.
a drop in the price of substitutes a rise in the price of complements A drop in the price of substitutes will decrease demand because people are likely to buy the more affordable product. A rise in the price of complements will decrease demand because people are likely to buy complements together.
When measuring income elasticity, what does a positive result tell us?
a good is normal
If a product's demand rises as income rises, ceteris paribus, the product is ________.
a normal good A product whose demand rises when income rises, and vice versa, is called a normal good. Normal goods are things we buy more of when our income rises, for example, restaurant meals, vacations, luxury items, etc.
Consumer surplus is the area found _____________ market price and _______________ the demand curve.
above; below Consumer surplus is defined as the gap between the price consumers are willing to pay, based on their preferences, and the market equilibrium price, which is shown on a supply and demand graph by the area above equilibrium price and below the demand curve.
Specialization in a particular small job allows workers to focus on the parts of the production process where they have a(n) __________________.
advantage
In the context of observing how changes in price affect quantity demanded, the ceteris paribus assumption means that
all variables other than price and quantity demanded are held constant
Elasticities that are equal to one everywhere along a supply or demand curve are referred to as __________.
constant unitary elasticity Elasticities that are equal to one everywhere along a demand or supply curve is defined as unitary elastic.
The production possibilities frontier has a __________ due to the law of diminishing returns.
curved shape
If the price of gasoline increases by 50%, we would expect demand for automobiles to _____________. This occurs because the two goods are close ______________.
decrease, complements Gasoline and automobiles are clearly complements, so the increase in price of one is expected to decrease demand for the other.
A production possibilities frontier ___________________
demonstrates the constraints that society faces in production.
A production possibilities frontier ___________________
demonstrates the constraints that society faces in production. A PPF demonstrates the constraints that society faces in production, while the budget constraint is best used when a specific budget and choices are presented.
Within economics, the theory of scarcity says that there are unlimited wants and a finite amount of resources. However, history has demonstrated the power of productivity to overcome the theory of scarcity. What is the economic practice responsible for overcoming scarcity?
division and specialization of labor, which is a theory of abundance Reason: The division and specialization of labor constitutes a theory of abundance, we people working in a production system by breaking production into parts, and then improving (specializing) activities, increase the output available from the same amount of resources.
If demand is constant unitary elastic, then total revenue __________.
does not change If demand is constant unitary elastic, it means that price and quantity demanded change by the same percentage. Since total revenue is defined as the price of the good or service multiplied by the quantity bought and sold, the total revenue does not change when demand is constant unitary elastic.
% change in quantity demanded divided by % change in price is greater than 1 considered to be
elastic
Identify the two groups that do not interact in a circular flow diagram for a two-sector economy.
exporters , importers
All of the following have highly elastic demand curves except _______.
gasoline and oil While perfectly inelastic demand is an extreme case, necessities with no close substitutes are likely to have highly inelastic demand curves. Gasoline and oil have nearly zero elastic demand curves because there are nearly no substitutes.
Which of the following is least likely to have a supply curve of zero elasticity?
goods with readily available inputs and whose production can easily expand (like pizza or pencils) Goods with readily available inputs and whose production can easily expand (like pizza or pencils) typically have perfectly (or infinitely) elastic demand curves, meaning that quantity supplied is extremely responsive to price changes. For goods like diamond rings, gold, and apartments in prime locations, a percentage change in price, no matter how large, results in zero (or very minimal) change in quantity. Because these goods have a limited supply of inputs, they are likely to feature highly inelastic supply curves.
The law of supply
higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied. Since the price of coal falls, the law of supply predicts that the quantity of coal supplied will also decrease.
When a demand curve is perfectly elastic or has infinite elasticity, the demand curve will be ___________________.
horizontal Infinite elasticity or perfect elasticity refers to the extreme case where either the quantity demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price at all. In both cases, the supply and the demand curve are horizontal.
Jenna changes the amount of butter she purchases depending on whether it costs $3, $4, or $6 a pound. In order to derive her demand curve for butter, what other information do we need?
how much butter she buys at each price point
If the price of indoor cycling classes increase by $10, we would expect the demand for fitness classes to _______________. This is because indoor cycling classes and fitness classes are ______________.
increase; substitutes Indoor cycling classes and fitness classes are substitutes, so if the price of one rises, the demand for the other will also rise.
When a price is increased at a point where demand is inelastic, revenue ___________.
increases When demand is inelastic and price increases, quantity will decrease by a smaller percentage. As a result, total revenue will increase when price increases.
% change in quantity demanded divided by % change in price is less than 1 is considered to be
inelastic
As additional increments of marginal resources are added to either healthcare or education, the marginal benefit from those additional increments will decline. What do economists call this pattern?
law of diminishing returns
The percent change in the quantity demanded of a good in relation to the percent change in the price of that good is called its ____________.
price elasticity of demand Price elasticity of demand measures how responsive quantity demanded is to a given change in price. Mathematically, it can be defined as the percent change in the quantity demanded of a good or service divided by the percent change in the price.
The responsiveness of quantity supplied of a good in relation to a change in its price is called ____________.
price elasticity of supply
All of these scenarios cause the Demand Curve for a product to shift (left or right), except for one. Identify that one scenario that does not shift the Demand Curve.
price of the good changes
Quantity demanded is different from demand because _________________________.
quantity demanded is the number of units consumers demand at a specific price, while demand is a schedule comprised of quantity demanded at different prices
Consider the following scenario: David eats lunch outside every day because he enjoys the daily walk to the park, the fresh air, and the time away from his computer desk. While the time it takes him is a little longer, the utility he receives outweighs the costs associated with the additional time. This is an example of ______________.
rational decision-making self-interested behavior Because David's utility outweighs his costs of eating lunch outside, he is maximizing his utility through his self-interested behavior and making a rational decision. Through his behavior, he might be a better employee and more productive, which would support efficiency in the market economy.
The amount that a seller is paid for a good minus the _____________ is called producer surplus.
seller's actual cost By definition, the amount that a seller is paid for a good minus the seller's actual cost is called producer surplus.
The demand curve for a normal good is ______________.
sloped downwards The demand curves for both an inferior and normal good are sloped downwards as the slope is determined by the law of demand (which is a negative relationship between price and quantity demanded).
The purpose of a theory, in general, is to ________________________________.
take a complex, real-world issue and simplify it down to its essentials
What is the best definition of producer surplus?
the difference in the amount the producer is paid and the cost of production
Assume Brandon can buy either 1 DVD for $20 or 3 CDs for $25. What is the opportunity cost if he decides to buy 3 CDs?
the lost opportunity to buy 1 DVD. Opportunity cost is the cost of what must be given up to obtain something that is desired. Since Brandon spends all of his money on CDs, he is giving up the opportunity to purchase a DVD.
Income elasticity of demand is __________.
the percentage change in quantity demanded divided by the percentage change in income Income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the income of the people demanding the good. More specifically, it is calculated as the percentage change in quantity demanded divided by the percentage change in income.
When plotting a demand curve for the price of canned tomatoes, what is assumed to be constant according to ceteris paribus? Select the two correct answers below.
the price of a can of string beans income Ceteris paribus is a Latin phrase meaning "everything else being equal." When plotting price and quantity of canned tomatoes on a demand curve, the factors being held constant include income and other canned goods.
If we use "ceteris paribus" when plotting a demand curve for the price of sneakers, what is assumed to be constant? (Select all that apply.)
the price of shoelaces consumers income "Ceteris paribus" is a Latin phrase meaning "everything else being equal." When plotting price and quantity of sneakers on a demand curve, the factors being held constant include consumer income and other sneaker accessories (like socks and shoelaces). We can vary both price and quantity of sneakers as these are the variables whose relationship we are plotting with the demand curve.
According to the law of demand, if all else remains equal, as the price of a good becomes lower, then _________________________.
the quantity demanded of the good will increase