Ch 1-2 Macro Practice Questions

Which of these scenarios does NOT illustrate the law of demand? 1. When Kit-Kats are cheaper, Mary opts to buy more Kit-Kats. 2. Layla buys less tea when the price of tea rises. 3. Freya buys more doughnuts when the price of doughnuts rises. 4. Darren buys two pairs of jeans when they are $40 each but only one pair when it is $60.

Freya buys more doughnuts when the price of doughnuts rises.

International House of Pancakes (IHOP) is a U.S.-based multinational restaurant chain that specializes in breakfast food. Due to declining sales, an IHOP franchisee must consider closing up to three of her least profitable locations. She meets with two consultants to discuss potential plans. The first consultant offers two plans. Plan A will result in losing two locations with certainty. Plan B has a two-in-three chance of losing all locations but a one-in-three chance of losing no locations. The second consultant also offers two plans. Plan C keeps one location open with certainty. Plan D has a one-in-three chance of saving all three locations but a two-in-three chance of saving no locations. If the franchisee applies the cost-benefit principle, which combination of plans reflects a consistent decision?

plan c & a

What does the Production Possibilities Frontier show?

the trade-offs you confront when deciding how to allocate your scarce resources

What is opportunity cost?

the value of the next best alternative you must give up to get it

The cost of your favorite coffee is $5 per cup at the coffee shop. The marginal cost of each cup you drink is _____. The first cup of coffee you drink gives you a marginal benefit of $8. The marginal benefit from the second cup is $6, $4 from the third, $2 from the fourth, and $0 from the fifth. You should drink _____ cups of coffee.

$5; two

What is a complementary good? (related goods)

goods that go together (your demand for a good will decrease if the price of a complementary good rises) (ex. pb&j)

What is a sunk cost?

a cost that has been incurred and cannot be reversed (ignore sunk costs)

What is an inferior good?

a good where higher income causes an decrease in demand

What is a normal good?

a good where higher income causes an increase in demand

dependencies over time

as expectations about the future change, the terms of this trade-off change, and so your best choice might change

The cost-benefit principle evaluates _____ costs and benefits, and willingness-to-pay considerations quantify _____ costs and benefits.

both monetary and nonmonetary; only nonmonetary

When is there a movement in the demand curve?

change in price (holding all other factors constant

The tendency for quantity demanded to be higher when the price is lower is known as the law of:

demand

The _____ season tickets for the New York Rangers is the graphical representation of the number of season tickets people want to buy at any given price.

demand curve for

What is a market demand curve?

graph plotting the total quantity of an item demanded by all the buyers in the entire market, at each price

What is the individual demand curve?

graph that plots the quantity of an item that an individual plans to purchase at each price

law of demand

lower price = higher demand

Dental services are a ________ ________.

normal good

The relationship between price expectations and current demand is:

positive; when future prices are expected to rise, current demand rises

When you plot a demand curve:

quantity demanded is measured on the horizontal axis.

What is scarcity?

resources are limited, therefore any resources you spend pursing one activity leave fewer resources to pursue others

What happens to the demand graph when there is an decrease in demand?

shift left

dependencies between economics actors (other people)

the choices made by other economic actors (people, businesses, governments, or other groups) shape the choices available to you

Is the market demand curve upwards or downward sloping?

downward sloping

What is diminishing marginal benefit?

each additional item yields a smaller marginal benefit than the previous item (and willingness to pay also declines)

What are marginal benefit and marginal cost?

extra benefit from one extra unit or extra cost from one extra unit

A doctor has worked as a general practitioner for several years, earning an annual salary of $125,000. They are now deciding whether they want to open their own private practice or continue as a team member in the existing office. One-time start-up costs for the practice would be $100,000. If they open their own practice, they will receive $50,000 in salary from the business annually until the practice is well-established. They anticipate the practice will take one year to become fully established. They paid $200,000 for medical school. They should open their own practice if the future benefits exceed:

$175,000

Graph D

(Figure: Four sample demands) Fort Collins, CO is experiencing net immigration of people into the area. Which graph illustrates how the demand for rental housing might be affected?

300,000 recliners

(Figure: Recliners and Couches) American Signature is a furniture company based in Columbus, Ohio. The graph represents American Signature's production possibility frontier for manufacturing couches and recliners.

The demand curve shows: (i) a buyer's willingness to pay for a product at each quantity. (ii) the marginal benefit a buyer gains from a product. (iii) the marginal cost of producing a product. (iv) the relationship between the price of a product and a buyer's willingness to pay for it at each price.

(i), (ii) and (iv) are correct.

What are the 6 factors that shift the demand curve?

1. Income 2. Preferences (trends etc.) 3. Prices of related goods 4. Expectations (high prices right now => wait to buy later) 5. Congestion and network effects (ex. increase in population => more customers) 6. The type and number of buyers (more baby boomers => higher demand for healthcare services)

Janelle loves sashimi. Her first piece of sashimi normally gives her a marginal benefit of $5. Each additional piece yields a marginal benefit that declines by $0.25 per piece. If her favorite sushi bar charges $2.75 per piece of sashimi, how many pieces should she eat?

9

International House of Pancakes (IHOP) is a U.S.-based multinational restaurant chain that specializes in breakfast food. Due to declining sales, an IHOP franchisee must consider closing up to three of her least profitable locations. She meets with two consultants to discuss potential plans. The first consultant offers two plans. Plan A keeps one location open with certainty. Plan B has a one-in-three chance of saving all three locations but a two-in-three chance of saving no locations. The second consultant also offers two plans. Plan C will result in losing two locations with certainty. Plan D has a two-in-three chance of losing all locations but a one-in-three chance of losing no locations. If the franchisee chooses Plan A, she should also choose Plan:

C

Many students have a car, but very few have two cars. Which BEST explains why?

Cars are expensive, but the marginal benefit of the first car is very high, whereas the marginal benefit of the second is practically zero.

What is the cost-benefit principle?

Costs and benefits are the incentives that shape decisions => only pursue a choice if the benefits are as great as the costs

Which is LEAST likely to shift a market demand curve to the left? 1. Engineers develop cheaper and more powerful batteries for electric vehicles, impacting the market for gasoline-powered cars. 2. A study finds that nutrients in pomegranates prevent various kinds of cancer. 3. H&M develops a new line of clothing that enables the customer to customize the color and pattern of a garment with an app. 4. Apple lowers the price of iPhones, but Samsung keeps its phone prices the same.

H&M develops a new line of clothing that enables the customer to customize the color and pattern of a garment with an app

Which is LEAST likely to shift a market demand curve to the left? 1. H&M develops a new line of clothing that enables the customer to customize the color and pattern of a garment with an app. 2. Apple lowers the price of iPhones, but Samsung keeps its phone prices the same. 3. Engineers develop cheaper and more powerful batteries for electric vehicles, impacting the market for gasoline-powered cars. 4. A study finds that nutrients in pomegranates prevent various kinds of cancer.

H&M develops a new line of clothing that enables the customer to customize the color and pattern of a garment with an app.

At a company meeting, someone suggests that Samsung would be better off if it uses its resources to manufacture 25 million phones and 1.75 million tablets. As one of Samsung's analysts, how do you explain the feasibility of the suggestion to the other team members in your company?

The combination is currently unattainable but could be possible with increased production capacity.

Which of these BEST explains the slope of an individual demand curve? 1. The marginal benefit of a good falls as quantity demanded rises. 2. As consumers purchase more of a typical good, their desire for more of the good rises. 3. As consumers purchase more of a typical good, their desire for more of the good rises. For a given individual demand curve, important factors other than price are held constant.

The marginal benefit of a good falls as quantity demanded rises.

Which of these illustrates a network effect? 1. Air conditioning and lower installation costs for backyard pools reduce attendance at community pools. 2. You go to the beach with your friends, but it is so crowded that you decide to leave. 3. TheQWERTYtypewriter keyboard is ubiquitous, even though it was designed to make typists slower.

TheQWERTYtypewriter keyboard is ubiquitous, even though it was designed to make typists slower.

An investor is franchising a new type of fitness studio that will be the first in the city and must determine how many locations to open. For each location, they will hire a manager for a salary of $4,000 per month and two part-time employees who will earn $1,500 per month each. Additional operating costs, including rent and utilities, will be $5,000 per month at each location. The investor projects that after the business gains traction, the first location will have 1,100 members. The second location will bring in 900 members. The third and fourth locations will bring in 400 and 200 members, respectively. The monthly membership fee will be $50 per member. However, looking at the most recent population data, the investor learns that the city's population growth rate is declining. This change in expectations about the future decreases their membership forecast by 200 members for each potential location. How does this change in expectations change the investor's franchising decision?

They will franchise two locations instead of three.

You just got a new puppy, and you need to determine the best way to have him cared for while you are at work. You could enroll your puppy in a doggy daycare in your neighborhood for $22 per day. Alternatively, your friend, who works from home, could care for your puppy for only $10 per day. However, your friend lives a few miles away, so it would cost you $6 per day in gas and $10 per day in time to drop your puppy off and pick him up. If you choose to take your puppy to daycare, are you correctly applying the cost-benefit principle?

Yes, because you are maximizing your economic surplus by enrolling him in daycare.

dependencies between markets

changes in prices and opportunities in one market affect the choices you might make in other markets

What is willingness to pay?

converting nonfinancial costs or benefits into their monetary equivalent (ex. What is the most I am willing to pay to get this benefit?)

What are the four core principles?

cost-benefit principle, opportunity cost principle, marginal principle, interdependence principle

A trade-off involves weighing:

costs and benefits

You are analyzing a trade-off when you compare the _____ and _____ of doing something.

costs; benefits

What is a substitute good? (related goods)

goods that replace each other (ex. coca-cola vs pepsi)

Following the Rational Rule, the maximum economic surplus occurs when:

mb=mc

As consumers consume more units of an item, the marginal benefit of each additional unit decreases at an increasing rate. This can be seen through demand curves that are:

steeper at lower quantities and flatter at higher quantities

What is NOT a demand shifter?

the price of a good

When the marginal benefit of an activity is equivalent, in the rational buyer's mind, to the price of the activity, the rational buyer should do _____ of the activity.

the same amount

An investor is franchising a new type of fitness studio that will be the first in the city and must determine how many locations to open. Each location will have a manager with a salary of $4,000 per month and two part-time employees with salaries of $2,000 each per month. Additional operating costs, including rent and utilities, will be $6,000 per month at each location. The investor projects that after the business gains traction, the first location will have 1,100 members. The second location will bring in 950 members. The third and fourth locations will bring in 350 and 200 members, respectively. The monthly membership fee will be $45 per member. How many locations should the investor franchise?

three

Blake has successfully launched a massage therapy business, but he now receives more requests for bookings than his availability. He must determine how many new therapists to hire. Blake currently provides 15 total weekly massages. Hiring the first therapist would bring the total to 40 massages per week. Adding a second therapist will result in 60 total massages per week. The third and fourth therapists will result in 75 and 80 total weekly massages. A client pays $120 for a massage, and Blake pays therapists $1,000 per week. How many therapists should Blake add to his team?

three

What is economic surplus?

total benefits minus the total costs flowing from a decision (measures how much a decision has improved your well being)

When is economic surplus maximized?

when mb=mc

You usually buy one large jar of peanut butter when you do your weekly grocery shopping. You notice that the price of peanut butter has risen and so decide to go without it this week. This decision reveals something about:

your individual demand curve

What is the interdependence principle (and the factors that affect it)?

your other choices, the choices others make, developments in other markets and expectations about the future

Vincent makes handcrafted dining tables, and he is trying to decide how many tables to produce. He can sell each dining table for $2,000. The cost of the first table is $750, and for the second it's $1,000. For each additional table he produces, the marginal cost of each table increases by $250. How many dining tables should Vincent produce, and what is the total cost of his production?

He will produce six tables at a cost of $8,250.

Which of these lists only factors that would cause a decrease in the demand for a good? 1. a decrease in popularity of a good; a rise in income (if the good is an inferior good); a fall in the price of a substitute good 2. an increase in congestion effects; a decrease in the number of consumers in the market; increase in popularity of a product 3. a decrease in the number of consumers in the market; a rise in the price of a substitute good; a fall in the price of a complementary good 4. an increase in network effects; a rise in income (if the good is a normal good); a rise in the price of a substitute good

a decrease in popularity of a good; a rise in income (if the good is an inferior good); a fall in the price of a substitute good

What is the same as the demand curve?

marginal benefit

What happens to the demand graph when there is an increase in demand?

shift right

dependencies between personal choices

since you have limited resources, every choice you make affects the resources available for every other decision

What is the framing effect?

when a decision is affected by how a choice is described or framed (ex price tag showing og price and sale price)