CMR 211
You are thinking about traveling to visit friends in Atlanta. You can fly or take the bus. A round-trip plane ticket costs $300, and it takes three hours to get from your house to your friend's house if you fly. A round-trip bus ticket costs $150 and it takes 10 hours to get door-to-door using the bus.What is the minimum value of your time necessary to induce you to buy the plane ticket instead of taking the bus?
$21.43 be sure to think about the trip in its entirety
Suppose the price of IBM computers falls from $2,500 to $2,000 and the quantity demanded increases from 10,000 to 20,000. Calculate the price elasticity of demand.
-3
After a recent study showed significant benefits to the use of public transportation, government officials have hired your consulting firm to increase the use of public transportation. In the initial meeting between the government officials and your consulting firm, some ideas for increasing demand were discussed. Three of those suggestions are listed below.Suggestion 1. Reduce the price of public transportationSuggestion 2. Increase the price of private transportation by increasing tollsSuggestion 3. Offer monthly and yearly passes that reduce the price paid per rideBased on your knowledge of the law of demand, which suggestions would you recommend?
2 If the price of public transportation is reduced, the number of riders will increase as suggested by the law of demand. This however does not generate an increase in demand as requested by government officials. Increasing the price of private transportation, a substitute good, will increase demand for public transportation
Sam has two options this weekend. He could work at his job and earn $9/hour for three hours, or he could go to a show at the theater for that three hours. A ticket to the theater costs $30. What is the opportunity cost of going to the theater? $______________
57 FEEDBACK: The opportunity cost includes both Sam's lost wages and the price of the ticket.
Suppose the government has imposed a binding price ceiling on the market price for a cell phone. Which of the following events could transform the price ceiling from one that is binding to one that is not binding?
A technological advance makes cell phone production faster.
Look at the provided figure. What area(s) represent consumer surplus before the tax imposed?
A+B+E Consumer surplus before the tax is equal to area A+B+E.
Which of the following will cause a rightward shift in the supply curve for tobacco?
An improvement in the technology used in the production of tobacco A rightward shift of the tobacco supply curve means there is an increase in the supply of tobacco. An improvement in technology allows a producer to increase output with the same resources or to produce a given level of output with fewer resources.
In the market for desk lamps, which of the following will increase demand? Select all the answer options that apply.
An increase in income if the good is a normal good If the price of floor lamps increases and floor lamps are a substitute good If the price of desks decreases and desks are a complementary good If income increases and lamps are a normal good, the price of floor lamps as a substitute good increases, and the price of desks as a complementary good decreases, the demand curve for desks lamps will shift to the right (increase).
Suppose that over the next year the equilibrium price of gasoline rises but the equilibrium quantity falls. These two simultaneous events could be explained by:
An increase in the cost of oil, which is an input in the production of gasoline.
As the owner of a hotel, you have decided to lower the price for all rooms in the month of October. What should you expect to happen?
As the price is lowered, the quantity demanded of rooms will increase As the price is lowered, the law of demand states that the quantity demanded will increase, all other things being equal. In this case, more rooms will be sold.
Look at the provided figure. What area(s) represent consumer surplus, producer surplus and tax revenue after the tax (select all that apply)?
CS = A; PS = D, Tax Revenue = B+C Consumer surplus after the tax is equal to area A. Producer surplus after the tax is equal to area D Tax revenue is equal to area B+C.
Suppose the cost of shipping fish drops. How will this affect the equilibrium price and equilibrium quantity of fish?
Equilibrium price decreases but equilibrium quantity increases. If the cost of transporting fish decreases, you would expect shipping firms to be able to transport more fish for the same price. Because the shipping firm can provide more fish for less money, fish markets will pay less for each pound of fish they supply. Supply increases because sellers in the market can offer more fish at any price they choose. An increase in supply will cause a lower equilibrium price and a higher equilibrium quantity.
Suppose that two things happen simultaneously in the market for fish. First, a new technology allows fishing boats to catch more fish while using the same number of crew-members. At the same time a new study shows that eating fish at least three times a week helps prevent heart attacks. How will the market for fish respond?
Equilibrium quantity will increase but the effect on the price is unknown without more information. Given the cost of catching fish has decreased due to an improvement in technology, the supply of fish will increase. Further, the news story on how eating fish helps prevent heart attacks should increase the demand for fish. Both of these changes increase the quantity of fish that will be consumed in equilibrium. However, because the increase in supply puts downward pressure on the price while the increase in demand puts upward pressure on the price, we do not know whether price will increase or decrease at this point. To determine whether price will increase or decrease, we need to know whether the shift in demand or the shift in supply was larger.
Examine the two figures below. Which illustrates a society that produces more capital goods?
Figure B FEEDBACK: Correct - The decision between whether to consume or to invest has a significant impact on economic growth in the future, or the long run. When society makes a choice to plan for the future by producing more capital goods than consumer goods, society invests in new capital and the long-run production possibilities frontier expands outward much more (Figure B) than it would have if it chose to produce more consumer goods than capital goods (Figure A).
How does an increase in the number of headphone suppliers affect the price of headphones, keeping other factor equal.
It is likely to lower the price of headphones down
How does a decrease in the price of smart phones affect the demand for headphones?
It will likely increase a demand for headphones.
Suppose an airline determines it can charge different prices to people traveling on business or because of an emergency and leisure travelers who travel for pleasure. The airline's goal is to increase total revenue. Based on the price elasticity of demand for each type of travel, how should it adjust its prices?
Lower the price for leisure travelers and raise the price for business travelers. Correct FEEDBACK: The correct answer is to lower the price for leisure travelers and raise the price for business travelers.. To increase total revenue, the firm wants to increase the price for business travelers but decrease the price for leisure travelers. Because the demand for business travelers is inelastic, an increase in price will raise total revenue. Leisure travelers' demand for airline tickets is elastic. When demand is elastic, decreasing the price will increase total revenue.
Refer to the following image. When a market is in equilibrium, which of the following is true?
Quantity supplied is equal to quantity demanded When a market is in equilibrium, supply and demand are balanced. This is represented graphically by the point at which the demand curve and supply curve intersect. According to the law of supply and demand, market prices adjust to bring the quantity supplied and the quantity demanded into balance, or equilibrium.
Which of the following is NOT characteristic of a market economy?
Significant government intervention A market economy allocates resources among households and firms with little or no government intervention.
Assume that all fast-food restaurants employ many minimum wage workers. Suppose 20,000 people in Pennsylvania work in fast-food restaurants for the federal minimum wage of $7.25/hour. If the state of Pennsylvania increases its minimum wage to $9.00/hour, who will be better off? Who will be worse off?
Some minimum wage workers will be better off, some minimum wage workers will be worse off, and all fast-food restaurant owners will be worse off Correct -The correct answer is C. Consider a simple demand and supply diagram with a binding minimum wage. When the minimum wage increases, all firms will be worse off because their costs are now higher. Some workers will be better off: those who keep their jobs will receive $9.00/hour instead of $7.25/hour. However, with higher wages in place, the quantity of workers hired will decrease. Those who lose their jobs will be worse off because of the rise in minimum wages.
In the market for breakfast cereal, the market is currently in equilibrium. Suddenly there is a storm that destroys the wheat that farmers had been growing for the cereal manufacturer. What will happen to the cereal market after the storm?
Supply will decrease. A storm that destroyed the wheat crops would cause the price of those grains to rise. Given that grains are an important input in the manufacture of cereal, the rise price of grain represents an increase in input prices for cereal. This is represented in the cereal market as a leftward shift of the supply curve and no change in the demand curve
There are a number goods that over time, for a variety of reasons, transition from being a normal good to an inferior good or from being an inferior good to a normal good. One such example of a good that experienced this transition is a CRT television, also known as a tube television. In the 1980s, more income for a household usually resulted in more CRT TVs being purchased. Today, more CRT TVs are purchased by households that have experienced a reduction in income.Why does this happen?
The CRT TV becomes an inferior good because the good becomes perceived as being of a lower quality than a flat-screen TV A good like a CRT TV can become an inferior good as it becomes perceived as a lower quality good.
Suppose that in a time of crisis everyone pitches in and works works more than full-time. How is this represented by a production possibilities frontier?
The entire PPF shifts out. FEEDBACK: Correct - If, in a time of crisis, people pitch in and work much harder than usual, then the production possibilities frontier shifts out. The economy is able to produce more of everything because everyone is working much harder. Note, however, that this shift may not be sustainable over time.
You are a producer of calculators. In the market for calculators, two events happened simultaneously last month. There was a fire at your calculator factory that eliminated half of your firm's production capability. At the same time, your compensation costs increased by 5% because of an annual pay raise you give your employees.With these events happening simultaneously, which of the following is a consequence?
The fire causes the supply curve to shift a large amount but the increase in wages causes the supply curve to shift to the left by an even smaller amount A fire and wage increase both shift the supply curve for calculators to the left with the fire shifting the curve more than the wage increase.
Which of the following is an example of normative analysis?
The multimillion dollar B-1 bombers are a waste of tax money. FEEDBACK: Correct - A normative statement cannot be tested or validated; it is a matter of opinion. The only normative statement from the above answer choices is "The multimillion dollar B-1 bombers are a waste of tax money." The other statements can be tested and validated.
Which of the following statements refers to a macroeconomic issue?
The national unemployment rate is currently 7.7%. FEEDBACK: Correct- The national unemployment rate is a statistic based on the number of unemployed workers in the US. and the total number of people in the U.S. labor force. This is a broad measure of employment, which is one of the major concerns of macroeconomics.
What would be a possible event that could eliminate or reduce the disequilibrium in the market for shoes?
There is an increase in income and "spring shoes" are a normal good When there are too many "spring shoes" available, what is revealed is a surplus where quantity supplied is greater than quantity demanded. On a graph, a surplus is illustrated with a horizontal line above the equilibrium point.The surplus can be removed as quantity demanded increases or when quantity supplied falls. In this case, this can be removed as the demand for the normal good increases as a result of an increase in income.
Suppose that many people who earn a living catching fish decide they can make more money selling t-shirts and switch occupations. How will this affect the number of fish supplied by producers?
There will be a decrease in supply. If fewer people catch fish, we can assume fewer fish will be caught. This decrease in fish will carry through throughout the supply chain. We would expect fewer fish caught and supplied for any given price. This is a decrease in supply.
Where would you plot full employment on a production possibilities frontier?
a point on the PPF FEEDBACK: Correct - Full employment would be a point on the production possibilities frontier. At full employment, and assuming there are no technical advances or additional resources, it would be impossible to gain more of one good without giving up another good.
Refer to the following image. At a price of $5, this market is experiencing________
a shortage, and price must rise for a shortage to be eliminated.
Suppose that the equilibrium price of a mountain bike is $250. The government decides that people have a right to affordable mountain biking. To protect this new right, government passes a law setting a maximum price of $150 for a bike. As a result of the legislation, there will be______
a smaller number of mountain bikes sold than before the legislation Correct - With the maximum price set at $150 for a mountain bike, suppliers are not willing to supply as many bikes as they were when the price was $250. Remember the law of supply: all other things being equal, when the price of a good falls, the quantity supplied will decrease. Therefore, the number of bikes bought and sold will be less after the legislation.
Which of these is an exogenous factor?
a yearly rainfall
You have to decide between going on a cruise with friends or going on a service trip with Alternative Spring Break; both of which cost the same amount. You could also work over the break and earn some extra money, but this would be less valuable to you than either experience. If you choose the cruise, what is your opportunity cost?
alternative spring break FEEDBACK: CORRECT - By choosing to go on the cruise, you give up your next best option, which is going on a service trip with Alternative Spring Break.
Suppose that a politician tells you about a plan to create two expensive but necessary programs to build more production facilities for solar power and wind power. At the same time, the politician is unwilling to cut any other programs. Assuming the resources are already being efficiently used in other programs, where would the point the politician is trying to reach be on the production possibilities frontier?
an impossible point FEEDBACK: Correct - Assuming that resources are already being efficiently used in other programs (i.e., there is nowhere to take money from other programs without affecting the program's success), and assuming that the politician cannot raise the funds from another source, then it will be impossible to build additional facilities for the solar and wind power programs. You are already at the frontier of the PPF and utilizing all of your resources efficiently. You can move along the frontier and create either more wind power or more solar power but not both. In order to create more of both, you would have to be at a point outside of the PPF, which is infeasible.
Which of the following will cause an increase in market equilibrium quantity and an increase in equilibrium price?
an increase in demand
Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity?
an increase in the supply
If income increases by 10% and the demand for tuna decreases by 20%, then tuna is a(n)
an inferior good FEEDBACK: Correct - Inferior goods are those that people will choose not to purchase when their income goes up. Spending on necessities will increase at a slower rate than the increase in income. Rising income allows consumers to enjoy more luxury goods. Income elasticity does not measure consumer response to changes in the price of substitute goods.
In an imperfect market, individual firms
are able to influence the price of their product. When sellers produce goods and services that are different from their competitors, they gain some control over the price that they charge.
Which of the following are club goods (select all that apply)?
attendance at an NHL hockey game between the Pittsburgh Penguins and the Minnesota Wilds (and another answer)
Which of the following increases the quantity supplied of automobiles but does not increase the supply of automobiles
b. An increase in the number of consumers in the automobile market
In order for a price ceiling to be binding, it must be set_____________
below the equilibrium price Correct - Take a look at this figure. Price ceilings are a maximum price imposed on the market to keep prices from reaching the equilibrium price. Therefore, a price ceiling to make any difference to prices, it must be set below the equilibrium price. When a price ceiling is set above the equilibrium price, prices are free to fall to the equilibrium price, and the ceiling has no effect on the market. http://media.wwnorton.com/college/econ/principles-of-microeconomics/conceptcheck/FIG05.02_PRINECOMI_CH05_revised.jpg
What would we have to assume before constructing a society's production possibilities frontier?
both are true (that the quantity of resources remains constant, that the technology available to for use in production remains constant.
Incentives can be classified as
both of these are true (positive or negative, direct or indirect) FEEDBACK: Correct - Incentives can be classified as either positive or negative and as either direct or indirect. All incentives encourage action. Positive incentives are rewards for taking desired actions, while negative incentives punish undesired actions. Direct incentives are easy to see, while indirect incentives are harder to recognize and often create unintended consequences.
Suppose that Coca Cola and Pepsi are substitutes in consumption. If the price of Coca Cola decreases, then
both the equilibrium price and the quantity of Pepsi demanded will decrease. Substitutes are two goods that used in place of one another. Since Coca Cola and Pepsi are substitutes in consumption, a fall in the price of Coca Cola will result in a leftward shift, or decrease, of the demand for Pepsi, which leads to a fall in demand for Pepsi and a lower price.
Which product's demand is more inelastic: Coffee or Movie Tickets?
coffee Correct FEEDBACK: The correct answer is coffee. The price elasticity of demand for coffee is -.25. The price elasticity of demand for movie tickets is -.9. A price elasticity of demand closer to 0 indicates a product or service that is relatively inelastic. Because -2.5 (coffee) is closer to zero than -0.9 (movie tickets), the demand for coffee is more inelastic than the demand for movie tickets. This means that consumers will be less responsive when the price of coffee changes than when the price of movie tickets changes.
A physician who hires a plumber is an example of
comparative advantage FEEDBACK: CORRECT - Comparative advantage refers to a situation in which an individual, business, or country can produce at a lower opportunity cost than a competitor.
The difference between the willingness to pay for a good and the price that is paid to get it is________________
consumer surplus Correct - A consumer's willingness to pay is the maximum price a consumer will pay for a good. Consumer surplus is the difference between the willingness to pay for a good and the price that is paid to get it
Suppose that a local pizzeria produces pizzas with a demand elasticity of -1.6. If it raises the price of pizzas, total revenue would _________
decrease First determine whether the price elasticity of demand for the restaurant's pizzas is relatively elastic or relatively inelastic. Then refer to Figure 4.4 in your textbook. What happens to total revenue when demand for a good is elastic and the price decreases?
According to the law of supply, what is the relationship between price and quantity supplied?
direct The law of supply states that, all other things being equal, quantity supplied rises when prices rise, and quantity falls when prices fall.
Jewell attends a wedding reception where dinner is served. For her entrée, she has the option of steak, chicken, or pasta. If she chooses the pasta, then her opportunity cost is
either the chicken or the steak--whichever would have been her second choice to the pasta FEEDBACK: Correct - Opportunity cost is the highest-valued alternative that must be sacrificed in order to get something else. We can't say which one will be her opportunity cost since we don't know which Jewell prefers over the other.
A local paintball business receives total revenue of $10,000 per month when it charges $12 per person, and $15,000 in total revenue when it charges $8 per person. Over that range of prices, the business faces
elastic demand Because the paintball business was able to increase revenue by lowering its price, the percent change in the quantity demanded of paintballing was greater (in absolute value) than the percent change in price. This evidence implies that the paintball business faced elastic demand; that is, elasticity of demand of less than -1
If the government wants to minimize the deadweight loss of taxation, which of the following items are good candidates for an excise tax?
emergency plumber services, and insulin Deadweight loss is minimized when the item being taxed has an inelastic demand. Coca-Cola is a specific brand of a product; therefore, there are plenty of other companies that make similar items. There are also many substitutes for food at restaurants. Other options include cooking at home, buying ready-to-eat meals from the grocery store, or ordering takeout. There are not many good substitutes available for emergency plumber services or insulin, especially in the short run. This means that consumers will not be able to reduce the amount that they consume by very much when the effective price they pay rises due to a tax.
Suppose pasta salad is a normal good. If the price of pasta (a major ingredient in pasta salad) increases and income also increases, the
equilibrium quantity of pasta salad may either increase or decrease and the equilibrium price of pasta salad will increase. The two events cause a shift in both the supply curve and the demand curve. The first event, an increase in the price of pasta—which is used to make pasta salad—increases. This causes a leftward shift of the supply curve. The second event, an income increase, causes a rightward shift of the demand curve because pasta salad is a normal good. The result is that the equilibrium price increases but the effect on equilibrium quantity is unknown.
Two brands of water, Natural Spring Water and Mountain Spring Water, are close substitutes. If the price of Mountain Spring Water decreases, the demand for Natural Spring Water will shift rightward.
false These two brands are substitutes. When the price of Mountain Spring Water decreases, the quantity demanded for Mountain Spring water will increase, and that results in a decrease in quantity demanded for Natural Spring Water at any given price. The demand for Natural Spring Water,hence, will shift leftward.
Suppose the government decides the Big Mac is an American tradition. To recognize the value of the Big Mac, government passes legislation making it illegal sell a Big Mac for less than $8. The equilibrium price of a Big Mac is $4. As a result of the government legislation, there will be
fewer Big Macs bought and sold than before Correct - The law of supply tells us that when the price of Big Macs is set at a minimum of $8, suppliers are willing to supply more Big Macs than they were at the equilibrium price of $4. But the law of demand tells us that consumers are not willing to buy as many Big Macs as they were at a price of $4. Therefore, the number of Big Macs bought and sold will be less after the legislation.
A common solution to the free-rider problem is_________
for government to provide the good and then pay for its production through taxation Correct - A free-rider problem exists when someone receives a benefit without having to pay for it. Public goods that a society deems essential are normally provided by the government and funded by tax revenues. Since most people pay taxes, this almost eliminates the free-rider problem.
Judy spent eight hours studying for an exam. Normally, she would have spent that time watching TV instead of studying. She figures she could have made a "B" after only studying four hours, but she really wanted an "A." What is Judy's marginal cost in terms of TV viewing to improve her grade from a "B" to an "A"?
four hours FEEDBACK: Correct - Marginal cost is the additional cost of consuming one more unit. In this case, "one more unit" refers to increasing a grade by one letter. If Judy feels that four hours of study would allow her to receive a "B," and she studies eight hours to get an "A," then the marginal cost of the "A" is (eight hours - four hours) or four hours of additional study time.
Which of the following describes Jonathan having a comparative advantage in producing apples?
giving up less production of other goods when producing an apple FEEDBACK: You might not see the definition for opportunity cost in the answer choices, but apply the concept of opportunity cost to this scenario.
In the case of negative externalities, social costs are ____________ internal costs.
greater than FEEDBACK: Correct - Social costs are the sum of the internal costs and the external costs of an activity. If there is a negative externality from an activity, it means, by definition that external costs exist. Adding these external costs to the internal costs of the activity results in social costs that are greater than the internal costs alone.
Suppose that the equilibrium wage for teachers in Minnesota is $15/hour. Also suppose that the state of Minnesota raises their minimum wage to $10/hour. Since the equilibrium wage for teachers is ____________ the new minimum wage, we would expect the number of teachers employed to _____________________ and the equilibrium wage for teachers to ______________________.
higher than; stay the same; stay the same Correct -As you can tell from the infographic, Minnesota currently uses the federal minimum wage of $7.25/hour. The new law will push it to $10/hour. Since the equilibrium wage for teachers is higher than the new minimum wage, the new minimum wage is nonbinding. We would expect the number of teachers employed to stay the same and the equilibrium wage for teachers to stay the same.
The graph below portrays a market for a good whose consumption causes a positive externality. The curve marked Dinternal shows the market demand when consumers pay attention to only their internal benefits; the curve marked Dsocial shows demand when consumers observe social benefits. The socially optimal price is ______ than the market equilibrium price, and the socially optimal output level is _____ than the market equilibrium output level.
higher; higher Correct - To account for the social benefits from the positive externality, the demand curve must shift to the right. The social optimum occurs where the new demand curve crosses the supply curve. The social optimum compared to the market equilibrium yields a higher price and a higher output level.
The graph linked below portrays a market for a good whose production causes a negative externality. The curve marked internal shows the market supply when producers pay only their internal costs; the curve marked social shows supply when producers pay social costs. The socially optimal price is ______ than the market equilibrium price, and the socially optimal output level is _____ than the market equilibrium output level.
higher; lower Correct - To account for the social costs from a negative externality, the supply curve shifts left. The new social optimum occurs where the new supply curve crosses the demand curve. The price at the social optimum is higher than the market equilibrium, and the output at the new social optimum is lower.
Opportunity cost is the ______________ alternative that must be sacrificed in order to get something else.
highest-valued FEEDBACK: Correct - No matter what choice you make, there is an opportunity cost, or next-best alternative, that must be sacrificed. Every time we make a choice, we experience an opportunity cost. The key to making the best possible decision is to minimize your opportunity cost by selecting the option that gives you the largest benefit.
Suppose that government officials want to increase the population, so they offer a $1,000 payment for to the parents of each child born. Which of the five foundations of economics best describes the thinking of these government officials?
incentives FEEDBACK: Correct-- The correct answer is Incentives. These government officials understand that by offering a payment for having a child, parents have an additional incentive to have children.
You order a $20 Seattle Mariners sweatshirt online for a Father's Day gift. There's a standard shipping charge of $10, but you see that orders $25 or more ship for free. You could also order a $5 Mariners sticker, but you're not sure your father would like it. You decide to order the sticker. This is an example of
incentives Hint - Does the web site's offer for free shipping over $25 cause you to change your behavior in any way? If so, which foundation does this effect reflect? FEEDBACK: You decide to buy a $20 item from a web site only to discover that spending another $5 gets you free shipping. If shipping on the $20 item is greater than $5, you may find something else to buy for $5, even if it is something you may not want. This is an example of incentives. The website has offered you an incentive to spend more in order to save on shipping costs.
According to the law of demand, what is the relationship between price and quantity demanded?
inverse The law of demand states that, all other things being equal, quantity demanded falls when prices rise, and quantity demanded rises when prices fall.
When a supplier has a limited ability to make quick adjustments to quantity supplied, the elasticity of supply is
less than 1 When the responsiveness of the quantity supplied is small relative to the change in price, we say that supply is inelastic. Look at the formula for the price elasticity of supply. When supply is inelastic, the numerator is smaller than the denominator, meaning that the value of the coefficient is less than 1.
Scarcity refers to the __________ nature of society's resources.
limited FEEDBACK: Correct - Even the most abundant resources, like the water we drink and the air we breathe, are not always abundant enough everywhere to meet the needs of every person. Scarcity refers to the limited nature of society's resources.
The concept of scarcity in economics refers to
limited resources and unlimited wants FEEDBACK: CORRECT - Even the most abundant resources, like the water we drink and the air we breathe, are not always abundant enough everywhere to meet the needs of every person. Scarcity refers to the limited nature of society's resources, given society's unlimited wants and needs.
Economics is the study of how people allocate their ________ resources to satisfy their nearly _________ wants.
limited; unlimited FEEDBACK: Correct - The basic question economists seek to answer is how individuals and societies make decisions about scarce resources. Economics is the study of how people allocate their limited resources to satisfy their nearly unlimited wants.
Think about a country where most economic production comes from factories that create air pollution. What could be a possible trade-off of lower levels of pollution?
lower incomes FEEDBACK: Correct - To decrease pollution, the factories could cut production or install equipment to reduce pollution. Either way, the country's economic production will decrease, and there will be a trade-off of lower incomes.
The concept of _________________ refers to weighing the costs and benefits of an action.
marginal thinking FEEDBACK: CORRECT - Marginal thinking requires a decision-maker to weigh the benefits and costs of an action. For example, suppose you've already studied for three hours for an exam and are thinking about studying for another hour. Using marginal thinking, you weigh the benefit of the extra hour of study (how much better will your grade be?) against its cost (what could you do with that time instead?)
Suppose that Marie is buying bananas. She decides that she would like to purchase three bananas at the price of $0.25/banana but not a fourth. Which of the five foundations of economics best describes Marie's thinking?
marginal thinking FEEDBACK: Correct - The correct answer is D, marginal thinking. Marie is thinking about the extra benefit and cost of purchasing each additional banana. This is what economists would describe as "thinking on the margin," or marginal thinking.
Flour is a factor of production of cupcakes. How will an increase in the price of flour affect the market for cupcakes?
overall supply will decrease Changes in the cost of inputs is one determinant of supply that will cause supply to shift. If the prices of inputs increase, a firm's profit margins fall. Lower profit margins make the firm less willing to supply the good; therefore, supply will decrease.
Which demand for the following goods is perfectly elastic?
photocopies that cost 11 cents per copy at one copy shop, when all of the shop's competitors charge 10 ents per copy. If these photocopies are perfect substitutes, one shop raising its prices means it will lose all of its business. Demand for these copies would likely be perfectly elastic.
What must happen to the market price in order for a shortage to be eliminated?
price must rise Whenever the quantity supplied is less than the quantity demanded, the market price experiences upward pressure. As the price rises, suppliers continue to increase the quantity that they supply and buyers demand an increasingly smaller quantity until the market clears and quantity supplied is equal to quantity demanded.
Refer to the following graph. The demand curve slopes downward because
prices and quantity demanded move in opposite directions. The demand curve is a graph of the relationship between the prices on the demand schedule and the quantity demanded at those prices. Because prices and quantity demanded move in opposite directions, the demand curve slopes downward.
Suppose that brand X is an inferior good. This means that if people's income fall, the equilibrium price of brand X should ________and the equilibrium quantity should_____ .
rise; rise
Which of the following is NOT an example of a private good?
satellite television Correct - Private goods have two characteristics: they are excludable and rival in consumption. Satellite television is an excludable good, because consumers cannot use it without paying the provider for a subscription. But it is a nonrival good, since many people can enjoy it at the same time.
In a competitive market, the price of the product is
set by market supply and demand. In a competitive market, the goods and services sold are similar and there are many buyers and sellers. Where there are many buyers and sellers of a similar good or service, the price and quantity sold are determined by the market rather than any one person or business.
Externalities are_________
sometimes negative and sometimes positive Correct - Externalities are the costs or benefits of a market activity that affect a third party. Externalities can be positive or negative.
For which of the following goods would you expect demand to be the most responsive to a rise in price?
spaghetti FEEDBACK: Correct - Consumers are very responsive to a change in the price of spaghetti. Since there are many substitutes available for spaghetti, consumers will switch to something else in response to a small rise in price.
If the cross-price elasticity of demand for two goods is positive, the two goods are_______________
substitutes If the coefficient of the cross-price elasticity of demand between two goods is positive, this tells us there is a direct relationship between them and they are substitutes. If the price of one goes up, the quantity demanded of the other will go up as well.
A change in which of the following will cause a change in the quantity demanded of coffee?
the price of coffee The law of demand states that, all other things being equal, the quantity demanded falls when price rises, and the quantity demanded rises when the price falls. Therefore, a change in the price of coffee will cause a change in the quantity demanded of coffee. A change in any of the determinants of demand—for example a change in consumer income, the number of people consuming coffee, or a change in the price of a substitute—will cause a shift of the demand curve.
A change in which of the following will cause a change in the quantity supplied of coffee?
the price of coffee The law of supply states that, all other things being equal, the quantity supplied increases when the price rises, and the quantity supplied falls when the price falls. Therefore, the price of coffee will cause a change in the quantity supplied of coffee.
The difference between the study of microeconomics and the study of macroeconomics is a difference between
the study of individual economic units and the study of aspects of the economy as a whole FEEDBACK: CORRECT - Microeconomics is the study of the individual units that make up the economy, where macroeconomics is the study of the overall aspects and workings of an economy.
You are an owner of a restaurant. In an attempt to increase sales, you have lowered prices by 10%. Which of the following is NOT a consequence of this price change?
the supply of restaurant meals will increase The reduced price of a restaurant meal will cause no change in the demand for a restaurant meal. Demand for meals at home will decrease because of meals at home are a substitute good, and the quantity supplied of restaurant meals will decrease.
If equilibrium exists:
there will be no remaining opportunities for individuals to make themselves better off.
What is the term for the voluntary exchange of goods and services between two or more parties?
trade FEEDBACK: CORRECT - Trade is the voluntary exchange of goods and services between two or more parties.
Suppose your friend can obtain concert tickets for $100 but you can't get them for less than $300. Your friend sells the tickets to you for $200. Which of the five foundations of economics best describes this activity?
trade creates value FEEDBACK: Correct The correct answer is trade creates value. Your friend receives $200 when the cost to him is $100, he gains $100 in value. You would have paid $300, but you obtain the ticket for $200, so you also gain $100. This is a great example of how trade creates value.
Refer to the graph below. The supply curve is _______________ driven by the law of supply.
upward sloping The supply curve is a graph of the relationship between the prices on the supply schedule and the quantity supplied at those prices. Since we know prices and quantity supplied move in the same direction, the supply curve slopes upward.
Austin, Jensen, Matthew, and Walker can all produce matches, brushes, cans, and shirts. The table below identifies how many of each good they can make in a day if they devote themselves to producing only that good. Who has the absolute advantage in brushes?
walker FEEDBACK: Correct - The person with the absolute advantage is the one who can produce the most output. In this case, Walker can produce more brushes than anyone else, so he has the comparative advantage.
The opportunity cost of attending college is likely to be highest for a high school graduate
who is capable of playing a well-paid professional sport FEEDBACK: Correct - Opportunity cost is the highest-valued alternative that must be sacrificed in order to get something else. The opportunity cost of going to college is highest for the person who can make the most money without a college education.
Two of the bizarre taxes mentioned in this chapter's Snapshot were the "Flush Tax" and the "Window Tax." Which tax likely caused a bigger deadweight loss?
window tax The correct answer is the "Window Tax." There will be a greater deadweight loss for the product that has a more elastic demand. For the "flush tax" an extra $2.50 per month was assessed to all sewer bills, regardless of the amount of water used. Unless somebody canceled their water, which is doubtful for such a small tax, demand is almost perfectly inelastic for this price increase. While demand for the window tax is relatively inelastic, we are told in the infographic that some houses actually bricked over their windows. Furthermore, when new homes were built, homeowners may have decided to have fewer windows because of this tax. Hence, demand for windows is more elastic than the demand for sewer services. Given the ways people avoided the window tax by changing purchasing behavior, the window tax led to a greater deadweight loss.