Eco 2013 Exam Review 1 (ch 1,2,3)

Which scenario is asking you to apply marginal analysis?

Ø It costs $3 to go down the water slide. The first time you go down the slide, you are really excited, but your interest decreases each time you go down. How many times should you go down the water slide? Marginal analysis involves comparing marginal benefits and marginal costs to determine the optimal outcome.

Which of the following factors would not result in a change in the supply of automobiles?

Ø an increase in the price of gasoline Changes in the price of inputs used to make an automobile (steel, rubber, and glass) would change the supply of automobiles. While gasoline is needed to run an automobile, it is not a factor of production. This would affect the demand for automobiles.

In the graph below, demonstrate the impact of a cigarette tax on the supply of cigarettes by shifting the appropriate curve.

A tax on cigarettes increases production costs for cigarette producers. An increase in production cost decreases supply, or causes a leftward shift in the supply curve. A leftward shift in supply means that at every given price, the quantity supplied is lower.

An online celebrity was seen using a fidget spinner during a video, which caused a significant jump in popularity. In the graph below, show how demand for fidget spinners is impacted by this change by shifting the appropriate curve.

An increase in popularity results in an increase or rightward shift in demand for fidget spinners. A rightward shift in demand means that at any price, the quantity demanded will be higher than it was before

1. Beatrice buys potato chips and soda each week with a total budget of $25. Sometimes she buys more potato chips, sometimes she buys more soda. The cost of potato chips is $1 per bag and the cost of a soda is $1.25 per bottle. Graph Beatrice's budget constraint by moving the endpoints of the line segment in the graph.

Beatrice has a budget of $25. If Beatrice only purchases potato chips, then she can afford $25/$1=25 bags of potato chips. This corresponds to the point (25,0). If Beatrice only purchases soda, then she can afford $25/$1.25=20 bottles of soda. This corresponds to the point (0,20). Connecting these two points on the graph gives Beatrice's budget constraint, which shows every combination of potato chips and soda that she can afford with her budget.

A press release on a conflict in oil-producing nations creates concern that supplies of gasoline may be disrupted in the next three days. In the graph below, show how demand for gasoline is impacted by shifting the appropriate curve.

Demand can be impacted by expectations about future prices of a good. Disruption in supplies of gasoline caused by conflict in oil-producing countries would lead gasoline prices to increase in the near future. Consumers who anticipate this price increase will demand more gasoline now, and the current demand for gasoline increases, thus shifting the demand curve to the right. A rightward shift in demand means that at any price, the quantity demanded will be higher than it was before.

A rainy season improves the weather conditions for growing tomatoes in the Southeast. Demonstrate the impact on the supply of tomatoes on the graph below by shifting the supply curve in the appropriate direction.

Especially good weather for agricultural products shifts the supply curve for those products to the right. In this case, ideal weather conditions for growing tomatoes causes the supply curve to shift to the right. A rightward shift in supply means that at every given price, the quantity supplied is higher.

Given the supply and demand curves for cigarettes below, graph the change in the market if the government imposes a tax on the production of cigarettes.

Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. A tax placed on the production of cigarettes leads to a shift of the supply curve to the left. Equilibrium price of cigarettes rises, whereas equilibrium quantity falls.

What is the opportunity cost of increasing the production of butter from point F to point G?

Increasing the production of butter by one unit, moving from point F to point G, results in an opportunity cost of 6 guns.

________________ may analyze how a mother of three children spends her money each month. _________________ may analyze various influences on the unemployment rate.

Microeconomists; Macroeconomists Microeconomics focuses on individuals and firms. A microeconomist may analyze how an individual mother spends her money. Macroeconomics focuses on the economy as a whole. A macroeconomist may search for stimuli that impact the unemployment rate.

Demonstrate the effect a decrease in the price of tennis rackets will have on the equilibrium price and quantity of tennis balls. Drag the demand or supply curve to demonstrate this effect.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? A decrease in the price of tennis rackets will increase the demand for tennis balls because they are complementary goods. Step 3: The demand curve will shift to the right. Step 4: A rightward shift in the demand curve results in an upward movement along the supply curve. Equilibrium price and quantity of tennis balls will rise.

A main component used in the production of acoustic guitars has risen in price by 11%. Demonstrate the effect this has on the equilibrium price and quantity of acoustic guitars.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? The increase in price will decrease supply because of increased production costs. Step 3: The supply of acoustic guitars will decrease, shifting the supply curve to the left. Step 4: A leftward shift in supply causes a movement up the demand curve, increasing the equilibrium price and decreasing the equilibrium quantity.

The graph below represents the market for bicycles. Graph the change in the market if a hurricane floods a bicycle factory in Florida.

Supply can be impacted by natural conditions, such as weather. In this case, a flood destroys the bicycle plant, causing a decrease in the supply of bicycles. As a result, the supply curve shifts to the left leading to a higher equilibrium price and a lower equilibrium quantity of bicycles.

Suppose Julia has a budget of $40 that she spends on movies (Q1) and roller skating (Q2). The price of movie tickets recently increased from $7 per person to $10 per person and the price of roller skating decreased from $5 to $4 per person. What is Julia's new budget constraint?

The equation for any budget constraint is: Budget=$P1×Q1+$P2×Q2. In this case P1 is $10 for the price of a movie ticket. P2 is $4 for the price of roller skating. Note that in the question stem we are told movie tickets are represented by Q1 and roller skating is represented by Q2. Solving for the budget constraint, we get: Budget=$P1×Q1+$P2×Q2 Ø $40=$10×Q1+$4×Q2

Which of the following is the strongest definition of the term division of labor?

The production of a good or service is split up into separate tasks performed by different workers. Division of labor is the way in which the work required to produce a good or service is divided into tasks performed by different workers. For example, Mary is very detail oriented whereas Susan is very creative. When they work together on class assignments, Susan creates most material while Mary proofreads and makes sure they stay on task.

True or false?The U.S. economy is less affected by globalization than most other countries relative to its GDP.

True While the US has large levels of exports and imports in a nominal sense, they are often smaller than those of other countries when considered as proportion of GDP. The vast array of geographic conditions and natural resources available within the US allow it to be self-sufficient to a greater extent than many of the smaller countries of the world.

If the production of steel increases from point C to point D, what is the opportunity cost?

With an increase in steel from point C to point D (80 to 90 tons of steel), the production of wheat decreases from 45 to 25 tons of wheat, thus the opportunity cost is 20 tons of wheat (=45−25).

Specialization in a particular small job allows workers to focus on the parts of the production process where they have a(n) __________________.

advantage Specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. People have different skills, talents, and interests, so they will be better at some jobs than at others. In later chapters, we will develop this idea by discussing comparative advantage.

The purpose of a theory, in general, is to ________________________________.

take a complex, real-world issue and simplify it down to its essentials A theory is a simplified representation of how two or more variables interact with each other. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any problems around it.

What term is best described as the additional satisfaction gained from purchasing a good given the price of the product?

Ø Marginal utility per dollar is defined as the additional satisfaction gained from purchasing a good given the price of the product.

Bruce is allotted $22 per week to buy fishing equipment and ammunition. What is the opportunity cost if he spends all $22 on fishing equipment?

Ø the lost opportunity to buy ammunition Opportunity cost is the cost of what must be given up to obtain something that is desired. Since Bruce spends all of his money on fishing equipment, he is giving up the opportunity to purchase any ammunition.

A nation's comparative advantage in the production of an item is determined by __________________.

Ø the opportunity cost of producing the item relative to a trading partner's opportunity cost A country's comparative advantage is in the commodity for which its opportunity cost is lower than its trading partner.

All of the following are accurate descriptions of traditional economies except:

A person's income is based on his or her ability to convert resources (especially labor) into something society values, so there is significant economic progress and development. In a market economy a person's income is based on his or her ability to convert resources (especially labor) into something that society values. A traditional economy is the oldest economic system and is used in parts of Asia, Africa, and South America. Traditional economies organize their economic affairs the way they have always done (i.e., tradition). Occupations stay in the family. Most families are farmers who grow the crops using traditional methods. What you produce is what you consume. Because tradition drives the way of life, there is little economic progress or development.

The graph below represents the market for strawberries. A supply and a demand curve are shown with a price floor at $8.50. Equilibrium price is $5 and the equilibrium quantity is 135 baskets of strawberries. The quantity demanded at the price floor is 75 baskets of strawberries and the quantity supplied is 480 baskets of strawberries. Calculate the surplus caused by the price floor.

A price floor keeps the price for a good from falling below a set minimum. An effective price floor is set above equilibrium price. To calculate the surplus caused by the price floor, subtract the quantity demanded from the quantity supplied. In this case, the surplus is equal to 480−75, or 405 baskets of strawberries.

Of the following examples below, which is not an example of scarcity?

A puppy mill was shut down and all of the dogs went to an overcapacity humane society, leading to an increase in the supply of adoptable dogs. Because a puppy mill was shut down, the animal shelter has an influx of dogs for interested adopters. John's time is scarce - he cannot study and go to the concert. Only a limited number of people can receive the flu vaccine each year, thus it is a scarce resource. There is a shortage of teachers in Hawaii due to the high costs of living and low wages.

Carissa has $15 to spend on folders and notebooks. Folders cost $1.25 each. Notebooks cost $2.50 each. Graph Carissa's budget constraint by moving the endpoints of the line segment in the graph.

Carissa has a budget of $15. If Carissa only purchases folders, then she can afford $15/$1.25=12 folders. This corresponds to the point (12,0). If Carissa only purchases notebooks, then she can afford $15/$2.50=6 notebooks. This corresponds to the point (0,6). Connecting these two points on the graph gives Carissa's budget constraint, which shows every combination of folders and notebooks that she can afford with her budget.

True or false? A microeconomist would focus their studies on levels of exports and imports.

False Levels of exports and imports is a topic that falls under the study of macroeconomics, not microeconomics. Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses. Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports.

Every day, Josephine buys coffee and lottery tickets. She has a budget of $12. The coffee at the bodega she goes to costs $0.75 and lottery tickets are $1.50 each. Graph Josephine's budget constraint by moving the endpoints of the line segment in the graph.

Josephine has a budget of $12. If Josephine only purchases coffees, then she can afford $12/$0.75=16 coffees. This corresponds to the point (16,0). If Josephine only purchases lottery tickets, then she can afford $12/$1.50=8 lottery tickets. This corresponds to the point (0,8). Connecting these two points on the graph gives Josephine's budget constraint, which shows every combination of coffees and lottery tickets that she can afford with her budget.

Mike has a $10 budget that he can spend on either hot dogs or hamburgers. Hot dogs cost $1 each. Hamburgers cost $2 each. If Mike only has $10 to spend, reposition the endpoints of the line segment on the graph to demonstrate his budget constraint in terms of quantities of hamburgers and hotdogs. Note: Each endpoint has a pull handle.

Mike has a budget of $10. If Mike only purchases hot dogs, then he can afford $10/$1=10 hot dogs. This corresponds to the point (10,0). If Mike only purchases hamburgers, then he can afford $10/$2=5 hamburgers. This corresponds to the point (0,5). Connecting these two points on the graph gives Mike's budget constraint, which shows every combination of hot dogs and hamburgers that he can afford with his budget.

If a family spends its entire budget in a given time frame, the family can afford either 45 food items or 15 pieces of clothing. Assuming the family spends its entire budget on just these two goods, what is the opportunity cost of one piece of clothing in the time frame?

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 piece of clothing is 45 food items15 pieces of clothing=3 food items.

An excise tax is introduced on the sale of propane. At the same time, the use of propane grills is going up due to the summer season. Demonstrate the effects of the tax & increased use on the equilibrium price and quantity of propane. Note that the excise tax affects the supply curve.

Since this problem involves two disturbances, we need two four-step analyses. First we'll analyze the shift in supply of propane. Step 1: Begin with the initial supply and demand curves with the initial equilibrium price and quantity to illustrate what the market for propane looked like before this scenario starts. Step 2: Did the described change affect supply or demand? The excise tax will decrease supply of propane because profits will decrease. Step 3: Was the effect on supply positive or negative? The supply of propane will decrease, shifting the supply curve to the left. Step 4: Compare the new equilibrium price and quantity to the original equilibrium price. A leftward shift in supply causes a movement up the demand curve, increasing the equilibrium price and decreasing the equilibrium quantity. Second, we'll analyze the shift in demand for propane. Step 1: Begin with the initial supply and demand curves with the initial equilibrium price and quantity to illustrate what the market for propane looked like before this scenario starts. Step 2: Did the described change affect supply or demand? A change in tastes toward grilling with propane grills during the summer months will cause a change in demand for propane. Step 3: Was the effect on demand positive or negative? A [seasonal] change in tastes toward grilling causes higher quantity demanded at every given price, causing the demand curve for propane to shift to the right. Step 4: Compare the new equilibrium price and quantity to the original equilibrium price. The new equilibrium occurs at a higher quantity and a higher price than the original equilibrium. The final step in a scenario where both supply and demand shift is to combine the two individual analyses to determine what happens to the equilibrium quantity and price. These are superimposed on the provided graph. Following are the results: Effect on Quantity: The effect of the tax on propane is that it decreases the supply of propane and thus decreases the equilibrium quantity. The effect of a change in tastes toward propane grilling is that it increases the equilibrium quantity. Since the two effect are in opposite directions, unless we know the magnitudes of the two effects, the overall effect is unclear. Effect on Price: The effect of the tax on propane decreases supply and thus increases the equilibrium price. The effect of a seasonal change in tastes toward grilling also increases the equilibrium price. Since both shifts are to the right, the overall impact is an increase in the equilibrium price of propane.

As the economy hits an all time high, consumers begin to prefer name-brand groceries over generic groceries. Demonstrate the economy's effect on the equilibrium price and quantity of generic groceries.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? Generic brand groceries are inferior goods. As income increases, the demand for groceries will decrease. Step 3: The demand for generic groceries will decrease, shifting the demand curve to the left. Step 4: A leftward shift in demand causes a movement down the supply curve, decreases the equilibrium price and the equilibrium quantity.

Tax rates on the sales of cigarettes have been reduced. Demonstrate the effect of the tax on the equilibrium price and quantity of cigarettes.

Step 1: Draw the initial supply and demand curves with the initial equilibrium price and quantity. Step 2: Is the supply or demand affected? The reduction in taxes will increase the supply of cigarettes because profits will be increased. Step 3: The supply of cigarettes will increase, shifting the supply curve to the right. Step 4: A rightward shift in supply causes a movement down the demand curve, decreasing the equilibrium price and increasing the equilibrium quantity.

Jim and Norma go wine and oyster tasting. They set a budget of $100 for the day. Wine tastings (P1) are $10 per flight and oysters on the half shell (P2) are $2 each. According to their budget constraint, how many oysters are they able to purchase if they order 2 flights?

The equation for any budget constraint is: Budget = $P1×Q1+$P2×Q2. In this case P1 is $10 per flight at a wine tasting. P2 is $2 for the price of oysters. If Jim and Norma purchase 2 flights, representing Q1, we will solve for Q2, the number of oysters, using the budget constraint formula. Budget = $P1×Q1+$P2×Q2 $100 = $10×2+$2×Q2 100=20+2Q2 2Q2=100−20 2Q2=80 Ø Q2= 40 oysters

True or false? The following scenario is an example of scarcity. Each lake has a limited number of fish living in it. As the number of fishermen who fish at the lake increases beyond a certain point, we see the fish population start to decline.

True When we have limited availability of a given resource, we say that the resource is in scarce supply. Here in the over fishing example, since fish are a scarce resource, the needs/wants of the fishermen are constrained by the limited number of fish available.

The table below represents the market for apartments. Suppose there is a price ceiling set at $600 per month. Calculate the shortage caused by the price ceiling.

· 275 apartments A price ceiling keeps the price for a good from rising above a set maximum. An effective price ceiling is set below equilibrium price. To calculate the shortage caused by the price ceiling, subtract the quantity supplied from the quantity demanded. In this case, the shortage is equal to 650−375, or 275 apartments.

You are in charge of predicting price changes in Product Q. Last quarter the industry produced a total of 700 units. This quarter, a higher price is expected so a new producer has entered the market adding 120 units to total production. What is the change in price?

Ø $0.40 higher The law of supply states that, all other things being equal, an increase in price results in an increase in quantity supplied. At a price of $18.40, the quantity produced is 700, and as the price increases to $18.80, the quantity supplied increases by 120 units. The price increases by $0.40.

Suppose your current budget amount can buy either 6 watches or 3 ties. What is the opportunity cost of purchasing a tie?

Ø $2watch(es) The opportunity cost is 2 watches because that is what you sacrifice for every tie purchased: 6 watches / 3 ties =2 watches per tie.

The table below represents the market for electric cars. Suppose there is a price floor set at $75,000 a car. Calculate the surplus caused by the price floor.

Ø 2,100 electric cars​ A price floor keeps the price for a good from falling below a set minimum. An effective price floor is set above equilibrium price. To calculate the surplus caused by the price floor, subtract the quantity demanded from the quantity supplied. In this case, the surplus is equal to 4,800−2,700, or 2,100 electric cars.

In order to encourage consumers to buy washing machines, the government places a price ceiling on them. Calculate the shortage caused by the price ceiling.

Ø 2800 washing machines ​ A price ceiling keeps the price for a good from rising above a set maximum. An effective price ceiling is set below equilibrium price. To calculate the shortage caused by the price ceiling, subtract the quantity supplied from the quantity demanded. In this case, the shortage is equal to 4,200−1,400, or 2,800 washing machines.

In order to increase support for the ruling party before the next general election, the government decrees that Product Z cannot be sold for more than $8.60. At a price of $8.60, what is the quantity supplied of Product Z?

Ø 800 If price is fixed at $8.60, then according to the supply curve, only 800 units of product Z will be brought to market by producers. Therefore 800 is the quantity supplied.

Which of the following situations is best described by a PPF.

Ø 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 points in the graph below demonstrate productive efficiency?

Ø A, B, C, D, and F, only Points demonstrate productive efficiency if they are located on, rather than within, the PPF. This includes the intercept points.

Which of the following describe benefits of international trade?

Ø All of the above. International trade and specialization increase worldwide production, improve the world economy, and improve standards of living all over the globe.

The table below shows Jennifer's demand schedule for bottles of barbecue sauce. Choose the most accurate statement below.

Ø As the price of barbecue sauce increases from $2 to $3, the quantity demanded of the sauce decreases from 12 units to 9 units. Law of demand says that as the price goes up, the quantity demanded goes down. We can examine the table and confirm that as the price of barbecue sauce increases from $2 to $3, the quantity demanded of the sauce decreases from 12 units to 9 units.

True or false? In underground economies, governments are heavily involved in making decisions on the goods sold and the prices set.

Ø False False. The government heavily regulates decisions of what to produce and prices to charge. Heavily-regulated economies often have underground economies (or black markets), which are markets where the buyers and sellers make transactions without the government's approval. In these black markets, the buyers and sellers choose the goods and prices in their transactions.

True or false? The law of diminishing returns states that as more variable inputs are added to production, the productivity of these inputs increases.

Ø 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? If a price is set at $210, there is a shortage and there is downward pressure on the price to reach equilibrium.

Ø False At a price of $210, there is a surplus. Downward pressure on the price would occur to reach a lower equilibrium price and quantity.

True or false? A surplus is the result of a price set above the equilibrium price. When producers face a surplus, they are willing to increase production even further. This combination of higher quantity and higher price increases industry profits, which are beneficial to producers.

Ø False By definition a surplus is an excess of supply--that is, quantity demanded cannot match quantity supplied. Firms cannot earn profits from unsold inventory, while production is costly. Since producers cannot find enough buyers at this price, producers in a competitive market will want to cut price and production levels.

True or false? If quantity supplied is 5 dozen apples and quantity demanded is 4 dozen apples, the market is in equilibrium.

Ø False Market equilibrium occurs where quantity demanded equals quantity supplied.

True or false? Point R and Q both demonstrate productive efficiency.

Ø False Only points on the PPF are considered to demonstrate productive efficiency. Because R is inside the PPF, it is not a point that shows productive efficiency, however Q is.

Which scenarios would be best represented by a budget constraint? There are two correct answers.

Ø 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. Ø Sam has received a $500 scholarship that he can use for books and tuition. A production possibilities frontier shows the combinations of products that society can produce with its limited resources and reflects diminishing marginal returns, whereas a budget constraint shows the combinations of two goods that an individual can afford to purchase given their budget and the prices of those goods. Finn can spend his 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. Both of these scenarios reflect a consumption decision for an individual based on a budget and fixed price of two goods, so budget constraints would best represent these situations. The other two situations represent production decisions for entire societies given limited resources; these would be best represented by production possibilities frontiers.

In a circular flow diagram, who pays wages?

Ø Firms Firms (also known as businesses) pay wages to households in a circular flow diagram.

Suppose that a firm invests $5 million in the development of a new product that generates only about $250,000 in revenue after a full year on the market. The firm only has a patent for one year and other firms are likely to start producing similar products. Which of the following is the most rational decision for the firm to make?

Ø Forget the new product, accept the loss of the investment and work on innovations that show signs of being more profitable. The lesson of sunk costs is to forget about the money and time that is irretrievably gone and instead to focus on the marginal costs and benefits of current and future options. This often means admitting an earlier error in judgment. Many firms, for example, find it hard to give up on a new product that is doing poorly because they spent so much money in creating and launching the product.

What is the opportunity cost of owning a business? I. The economic profits that the business earns II. The accounting profits that the business earns III. The profits that could be earned in another business using the same amount of resources

Ø III only Opportunity cost is the value of the best alternative forgone in making any choice. When owning a business, the profits that could be earned in another business using the same amount of resources are the opportunity cost.

Which of the following are accurate statements regarding globalization?

Ø International agreements and treaties between countries have contributed to globalization. Ø One way to measure globalization is examining the amount of imports and exports. Recent decades have seen a trend toward globalization, which is the expanding cultural, political, and economic connections between people around the world. One measure of this is the increased buying and selling of goods, services, and assets across national borders—in other words, international trade and financial capital flows. Another measure is that international agreements and treaties between countries have encouraged greater trade.

What is true of the product combination that satisfies allocative efficiency?

Ø It is the combination of products that society most desires. Ø It is one of many combinations of products that use all available resources. Allocative efficiency means that the particular combination of goods and services on the production possibilities frontier that a society produces represents the combination that society most desires. Only one of the productively efficient choices will be the allocatively efficient choice for society as a whole. For a combination to be on the production possibilities frontier, it must represent one of many combinations of products that use all available resources.

As adolescents become increasingly interested in electronics - as opposed to books - where would you find the greatest increase in demand?

Ø Kindle books for iPads and other tablets As the number of adolescents increases and consumer preferences move toward electronics, the demand for electronic books will also increase relative to the demand for traditional paper books.

In marginal analysis, when comparing costs and benefits, an optimal choice is found when ______.

Ø MB≥MC If possible, we want to choose an outcome or output where MB=MC. If an exact equality is not possible (because of, say, indivisible units of output), then we want to be as close to equality as possible, with MB slightly more than MC. In general, one should always choose to consume if the marginal benefit of doing so is greater than the marginal cost (MB>MC). This implies that the optimal level of consumption occurs where marginal benefit is equal to marginal cost (MB=MC).

Consider the budget constraint shown. If Megan's budget is $24, at what point is Megan consuming 2 bottles of water and 12 train tickets?

Ø Point B With a budget of $24 and given the current budget constraint, Point B shows that Megan can purchase 2 bottles of water and 12 train tickets while staying within her budget.

According to this production possibilities frontier, which of the following statements are true about point Q?

Ø Point Q is not considered to demonstrate productive efficiency. Points are only considered to have productive efficiency if they are located on the production possibilities frontier. Point Q is within the PPF, thus it does not demonstrate productive efficiency.

The opportunity cost of producing one bushel of wheat in Canada is equal to 1/2 computer. The opportunity cost of producing one bushel of wheat in the U.S. is 2 computers. If these two countries specialize according to comparative advantage and then trade with each other, which of the following is an expected outcome?

Ø The U.S. will import wheat and export computers. Because Canada can produce wheat at a lower opportunity cost than the U.S., it has a comparative advantage in producing wheat. Therefore, the U.S. will produce and export computers instead of wheat and import the wheat it needs from Canada.

What is the reason the following statement is incorrect? The price of tuition at a specific university increased from what it was the previous year, but enrollment at the university still increased. This implies that the law of demand has been violated.

Ø The ceteris paribus condition has been violated. The law of demand depends on ceteris paribus. Since other factors that might shift the demand curve for university education were not taken into account and were not held constant, we cannot say that the law of demand has been violated.

Suppose the price of adoption fees for shelter dogs decreases so that more dogs can be adopted. What would happen to the demand for dog food at the local pet store? Assume that the shelter does not buy its pet food from this pet store, rather it buys in bulk directly from a national supplier.

Ø The demand for dog food will go up because the number of dogs being adopted has increased. Shelter dogs and dog food are complementary goods. If the price of adoption fees for shelter dogs goes down and more dogs are adopted, then the demand for dog food at the local pet store will increase.

For generations, the Irish were among the poorest in the British Isles and relied almost exclusively on simple potatoes, which were inexpensive but not particularly tasty, for sustenance. Potatoes were an inferior food product favored by the poorer sections of the population. All else being equal, how would you expect the demand for potatoes per person to change after several decades of significant economic development?

Ø The demand for potatoes is likely to decline. Potatoes were an inferior food product favored by the poorer sections of the population. As demand for calories cannot increase ad infinitum, consumers are likely to start substituting potatoes for better quality foods as economic development increases. This is what in fact actually occurred in Ireland by the mid-20th century.

There is a general decrease in the price of airfare tickets. What do you expect to happen to the demand for cross-country train tickets, a substitute good?

Ø The demand for train tickets would decrease. Different modes of transportation can be viewed as substitutes, so if the price of one good decreases, the demand for the substitute good will also decrease.

The boundaries for a school district are redrawn to include more students from low income neighborhoods. What is the impact on the demand for the free or reduced lunch program in the district?

Ø The demand will increase. As more students who are classified as low income are moved into the school district, the demand for the free/reduced lunch program will increase in the district. This is because more students are eligible to apply for this benefit after the boundaries are redrawn.

The table below shows the supply schedule for pounds of pistachios. As the price increases from $4 per pound to $6 per pound, how does quantity supplied change?

Ø The quantity supplied increases from 12 to 18 pounds. The law of supply says that as the price increases, the quantity supplied will also increase. Thus as the price increases, the quantity supplied will increase from 12 to 18 pounds.

A drought in the Midwest impacts wheat crops grown in the area. Which of the following describes what will happen to the supply of bread in grocery stores?

Ø The supply of bread will decrease. A drought decreases the amount of wheat grown and raises its price. Wheat is an input for bread. The higher wheat price causes the production costs for bread to increase, so there is a decrease of bread supplied.

Workers at factories building machinery go on strike. Which of the following describes how the supply of machines will be affected?

Ø The supply of machines will decrease. When workers go on strike, there are not people available to produce the goods. Either the goods do not get produced, or the firm has to hire new workers, which raises the cost of production. This in turn decreases the supply of machines.

Assume equilibrium price for lemons is $1.50 for a dozen. If a government believes the price for lemons is too high, and sets a temporary price cap at $1.00 for a dozen, what will happen? Please select two correct answers below.

Ø There will be a shortage of lemons. Ø After the price cap is lifted, prices will return to the equilibrium price. A price below equilibrium leads to a shortage. If a price cap that was lower than the equilibrium price was lifted, the price of lemons would eventually rise to the equilibrium price.

Assuming all other variables that affect supply are held constant, which of the following outcomes happen in the market for DVD players if the price of DVD players increases?

Ø There will be an increase in the quantity supplied of DVD players. When price increases, we see a movement along the supply curve, not a shift in the curve. According to the law of supply, a rise in price almost always leads to an increase in the quantity supplied of the good or service in question. Remember, quantity supplied is not the same as supply. Supply refers to the curve and quantity supplied refers to the (specific) point on the curve. Changes in price cause movement along the supply curve, but do not cause the curve to shift.

In 2009, the worst recession in 80 years hit the United States, generally reducing household incomes. Despite this, profits and sales for certain enterprises such as McDonald's and Dollar General actually increased during this time. What is the most likely conclusion about the products sold by these stores?

Ø They are inferior goods. Inferior goods would undergo an increase in demand as income falls, which fits the scenario described in the question for these firms.

True or false? A budget constraint plots all possible combinations of goods that can be purchased when all of the budgeted amounts is spent.

Ø True The budget constraint represents all possible consumption combinations of two goods that someone can afford when the full budgeted amount is spent.

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.

Ø 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.

True or false? A recession is likely to hit a gambling and entertainment mecca like Las Vegas particularly hard compared with the average city.

Ø True Demand for most normal goods is certain to decline during a recession, but demand for luxuries like luxury vacations fall much faster. Las Vegas was in fact particularly hard hit by the 2009 recession for this reason.

True or false? In general, improvements in technology used in production will result in an increase in supply.

Ø True When a firm discovers a new technology that allows the firm to produce at a lower cost, the supply curve will shift to the right, increasing quantity produced at any given price.

All of the following cause the supply curve to shift except _________.

Ø a change in product price A change in the supply curve can set a new equilibrium quantity and price, but a price change cannot shift the supply curve. The reason price has changed is most likely because of a shift in the demand curve. When the demand curve shifts a new equilibrium price and quantity supplied is set along the supply curve.

Which of the following will impact the supply of a good?

Ø a government subsidy to the producers of the good Price of related goods, consumer taste. and consumer income all impact demand, not supply. When the government subsidizes the production of a good, supply of that good will increase because the subsidy lowers production costs.

When considering factors that shift demand curves, all of the following will decrease demand except _______________.

Ø a rise in income (for a normal good) A rise in income (for a normal good) will increase demand because people will have more money to spend. For normal goods, higher income causes greater demand at every price.

Which of the following would be consequences of more rental properties in the United States being subject to binding price ceilings? Select the two correct answers below.

Ø a shortage of apartments Ø the quantity demanded of apartments will exceed the quantity supplied When a binding rent ceiling is instituted, this causes the price in the market for apartments to be below equilibrium. As a result, there will be more people looking for apartments than there will be landlords looking to rent out apartments. A shortage of apartments will result.

Comparative advantage is a measure of _____.

Ø advantage due to specialization A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country. Therefore, comparative advantage is a measure of the advantages due to specialization in production.

Economic theories and models can give us ideas about which of the following?

Ø all of the above Although economic models and theories are not always exact, they provide us with a tool to better understand responsiveness, incentives, the effects of constantly changing government policies, and human behavior. Models and theories help us solve new issues and deal with economic challenges in the future.

Which of the following factors would shift the demand curve?

Ø all of the above Income, changing tastes or preferences, and expectations about the future price (or expectations about tastes and preferences, income, and so on) can all affect demand.

In the context of observing how changes in price affect quantity demanded, the ceteris paribus assumption means that __________.

Ø all variables other than price and quantity demanded are held constant When the relationship between two variables is being examined under the ceteris paribus assumption, you assume that all other variables are kept constant. A demand curve shows the relationship between price and quantity demanded. Any given demand curve is based on the ceteris paribus assumption that all else is held equal. A demand curve is a relationship between two, and only two, variables when all other variables are kept constant. If all else is not held equal, then the law of demand will not necessarily hold.

Which of the following cannot be an example of a pair of substitute goods?

Ø computers and computer mouses A substitute good is one that can be used in place of another good or service. The substitution of a good has an effect on the demand curve for the original good. When rents increase, individuals turn to home purchases as a substitute. When the price of coal increases, energy producers will turn to less expensive substitutes such as natural gas. For some people tea and coffee are substitutes and so are tablets and laptop computers. Computers and computer mouses are complementary goods - they are purchased together.

The production possibilities frontier has a __________ due to the law of diminishing returns.

Ø curved shape The PPF has a curved shape because of the law of the diminishing returns, thus, the slope is different at various points on the PPF.

A price floor will usually tend to create ___________ when the price floor is set above the market price.

Ø excess supply A price floor will tend to create conditions of excess supply as a result of the misalignment in the market forces of more supply produced than demanded at this higher price. If price is set above equilibrium, quantity demand decreases while quantity supplied increases, causing a shortage to exist in the market.

Which of the following, when placed in the empty box shown below best completes the circular flow diagram?

Ø households Firms produce goods and services, which households pay to purchase. Households provide labor services to firms, for which they are paid wages, salaries, and benefits.

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?

Ø how much butter she buys at each price point The demand curve shows how much a person chooses to buy at different prices. In order to graph the curve, we need to know how much butter Jenna buys when it costs $3, $4, and $6.

Which of the following best completes the statement below? If the price of coffee falls by 90%, we would expect demand for coffee stirrers to _____________. This occurs because the two goods are close ______________.

Ø increase; complements Coffee stirrers and coffee are clearly close complements, that is, the more coffee people consume, the more stirrers they require.

Suppose that the demand and supply curves have similar steepness. If demand for the good increases slightly and at the same time supply of that good significantly decreases, the equilibrium price of the good will ________ and the equilibrium quantity of the good will ________.

Ø increase; decrease An increase in demand will cause the equilibrium price to rise and the equilibrium quantity to rise. A decrease in supply will cause the equilibrium price to rise and the equilibrium quantity to fall. In this situation, both shifts have the same effect on price, so overall the equilibrium price will rise. However, the changes in supply and demand have opposite impacts on the equilibrium quantity. The only way to know the overall effect on the equilibrium quantity is to know the magnitudes of the shifts in supply and demand. In this case, since the magnitude of the shift in supply was greater than the magnitude of the shift in demand, the supply shift will have a greater effect on the equilibrium quantity than the demand shift, and therefore overall the equilibrium quantity will fall.

Consider the market for new higher-end televisions. When income increases, the demand for new televisions ________. Therefore new televisions are ________ goods.

Ø increases; normal If an increase in income leads to an increase in demand, the good is a normal good.

When John first starts his job, he rides the bus wherever he goes. However, after one year, John receives a promotion and a pay raise, leading to an increase in his annual income. As a result of his pay raise, John decides to drive wherever he goes instead of riding the bus. This behavior would indicate that to John, a bus ride is a(n) _________ good.

Ø inferior If an increase in income leads to a decrease in demand, the good is an inferior good. In this case, when John's income increased, he rode the bus less. This makes riding the bus an inferior good to John.

A price floor will affect both the price charged for a good and the quantity supplied if ________________.

Ø it is set above the equilibrium price When a price floor is set above the equilibrium price, the quantity supplied will rise and the quantity demanded will fall, causing a surplus. When a price floor is set below the equilibrium price, there is nothing preventing the price from rising to its equilibrium level. Only when the price floor is above the market equilibrium will in influence the market quantity and price.

The law of diminishing marginal utility describes the general pattern that continuous consumption of a commodity leads to an eventual decline in _________ from the consumption of that commodity.

Ø marginal utility The law of diminishing marginal utility is the general pattern that consumption of the first few units of any good or service tends to bring a higher level of utility than consumption of later units.

Sunk costs should have ______________.

Ø no effect on output decisions Sunk costs are actually costs that should be ignored when making a decision. A rational economic actor making a decision should be forward-looking and consider prospective costs and not consider costs that have been incurred and cannot be recovered.

View the graph below that includes a supply and demand curve. What is the equilibrium price and quantity?

Ø p=$7 q=5 The equilibrium quantity and price is found where the demand and supply curves cross or where quantity demanded equals quantity supplied. In this case, p=$7 and q=5.

China is currently on the tail end of a "demographic bulge" that will see unprecedented numbers of retirees and senior citizens over the next decade. You are the strategy coordinator of a major sporting goods company. The main products in your catalog are hiking equipment, diving gear, physical therapy equipment, and basketball equipment. Where would you expect the greatest increase in demand as the elderly and retiree population increases?

Ø physical therapy equipment Senior citizens and retirees are likely to have much greater demand for physical therapy than the rest of the population. As their population grows, your company would be wise to expand in products that help older individuals since demand for them will increase.

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.

Ø price of the good changes When the price of a good changes, it is a movement along the demand curve, not a shift in the demand curve. The new equilibrium point along the demand curve will indicate both the new quantity demanded and the new price.

Use the graph below to answer the following questions. What is the equilibrium quantity and price at the intersection of D0 and S0?

Ø q=250 thousand fish p=$3.25 per pound Equilibrium occurs where D0 and S0 cross, at point E0. In this case, the curves cross at q=250 thousand fish and p=$3.25 per pound.

Use the table below to find the correct equilibrium price and quantity.

Ø q=4 p=$7 Equilibrium occurs when the quantity supplied equals the amount demanded. The price at which this occurs is the equilibrium price. The supply and demand schedule shows that quantity supplied equals quantity demanded when q = 4 and price = $7.

Given the schedule below, what is the equilibrium quantity and price?

Ø q=600 p=$16 Equilibrium occurs when the quantity supplied equals the amount demanded. The price at which this occurs is the equilibrium price. The supply and demand schedule shows that quantity supplied equals quantity demanded when q = 600 and price = $16

What term describes the total number of units of a good or service consumers are willing to purchase at a given price?

Ø quantity demanded Quantity demanded is the total number of units of a good or service consumers are willing to purchase at a given price.

Price ceilings typically affect which of the following?

Ø rent A price ceiling is a legal maximum price that one pays for some good or service. A government imposes price ceilings in order to keep the price of some necessary good or service affordable. Rent is likely to have a price ceiling in an effort to keep prices low for those needing them. This is a necessity that could disproportionately affect the poor. An unintended consequence is that shortage occurs and some people are unable to get the goods. Additionally, product quality may suffer. Milk, cars and CEO salaries are not generally affected by price ceilings.

What term is best described as the situation where the quantity demanded exceeds the quantity supplied?

Ø shortage A shortage is the situation where the quantity demanded exceeds the quantity supplied. It occurs when the price is set below equilibrium price, therefore, more units of the good are desired for purchase than are available for sale.

Use the chart below to fill in the blanks. At a price of $120 a ___________ exists. There will be a(n) _____________ pressure on the price to reach equilibrium.

Ø shortage; upward When quantity demanded is greater than quantity supplied, a shortage exists. When there is a shortage, there is an upward pressure on the price until it reaches equilibrium.

Using the graph below, if a price is set at $10, a ____________ will result, with eventual downward pressure on the price to reach equilibrium.

Ø surplus A price of $10 is above the equilibrium price in the graph, where quantity supplied equals quantity demanded. This results in a surplus, with eventual downward pressure on the price.

The table below shows the market's demand and supply for cheddar cheese. If the price is set at $3.80, the market will experience a ______________ with resulting ____________________ pressure on the price.

Ø surplus, downward The equilibrium price is where quantity supplied equals quantity demanded, which is where price = $3.40. At a higher price, a surplus occurs leading to downward pressure on the price until equilibrium is reached.

Market equilibrium is defined as ___________________.

Ø the point where the supply curve and demand curve cross Market equilibrium is defined as the point where supply and demand cross or when quantity supplied equals quantity demanded.

According to the law of demand, if all else remains equal, as the price of a good becomes lower, then _________________________.

Ø the quantity demanded of the good will increase The law of demand states that as the price of a product increases, quantity demanded will fall. As the price of a product decreases, quantity demanded will increase.