ECON Exam 1 (10/7/2021)
the benefit of something must be related to the price
FALSE
Damon's wage falls. The substitution effect would cause him to _____ his work hours, and the income effect would cause him to _____ his work hours.
decrease; increase
Why does an employer's labor demand curve slope downward?
diminishing marginal product
How do economists measure utility?
do not measure utility. It is a hypothetical measure used for modeling behavior
the labor demand curve has a BLANK slope
downward
higher prices lead to less total revenue if demand is
elastic
higher prices lead to less total revenue if the demand is
elastic
the CBP says before you make any decision, you should
evaluate the full set of costs/benefits associated with that choice
convert costs and benefits by
evaluating your willingness to pay
Economists assume that rational behavior is useful in explaining choices people make
even though people may not behave rationally all the time
inelastic supply
exists when a change in a good's price has little impact on the quantity supplied
Marginal utility is the
extra satisfaction received from consuming one more unit of a product
elasticity of labor demand
indicates how responsive the quantity of labor demanded is to changes in the wage
Over long periods, the price elasticity of demand for labor becomes
more elastic
changes in price causes BLANK along the demand curve, yielding a WHAT?
movement; change in the quantity supplied
in general, the slop of the demand curve is
negative
the cross price elasticity of a complement will be
negative
when demand is elastic, changes in price and revenue move in the BLANK direction
opposite
The marginal product of labor is how much an additional unit of labor affects
output
the law of supply states
producers are willing to offer more units for sale when the price at which they can sell their product increases
an inelastic graph will be
steep
your economic surplus is BLANK and it also BLANK
the difference between the benefits you enjoy and the costs you incur; measures how much your decision has improved your wellbeing.
Marginal Revenue Product
the extra revenue an extra worker generates
Marginal Revenue Product
the extra revenue created from one additional input (ie the extra money made from one extra worker)
what is the opportunity cost principle?
the true cost of something is the next best thing you must give up to get it
The value of the marginal product of labor is the marginal product of labor multiplied by
value of the marginal product equals the wage
a perfectly inelastic graph will be
vertical
employers should keep hiring workers until
wage equals the marginal revenue product
when the price elasticity is greater than 1, it is
elastic
Marginal Principle
Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost.
What do economists mean when they say behavior is "rational"?
Individuals making choices which help them reach their goals
How is the economic surplus generated by a decision calculated?
It is the total benefits minus total costs arising from the decision.
people respond to
incentives
When the price elasticity of demand is less than one it is
inelastic
higher prices lead to more total revenue if demand is
inelastic
The principle that your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future is known as the _____ principle.
interdependency principle
Carolyn Bates is a junior in college studying economics. She has created a new software application that applies the four principles of economic decision making to any potential decision that a user faces. She is considering leaving school after this academic year to pursue further development of her app. Carolyn should ignore all of the following costs when calculating the opportunity costs of leaving college EXCEPT the
skills she may gain from her final year of economics courses
producer surplus
the difference between the lowest a business is willing to accept for their quantity and the market price
Scarcity Principle
the economic problem of having limited resources to satisfy unlimited wants
The Rational Rule for Employers says to hire more workers if
the marginal revenue product is greater than or equal to the wage
principle 2 of the 4 core principles; the opportunity cost principle
before making a choice, we consider alternatives
what is the best definition of economics?
Economics studies how to make the best choice when coping with scarcity
Economists use the phrase "revealed preference" to mean
What you actually do when faced with a choice.
what is the elasticity of demand for labor?
a measure of how responsive a firms supply of labor is in response to a change in the wage rate
Kathleen Alvarado is binge-watching her favorite show on Netflix. She is trying to decide how many more episodes to watch. Kathleen should continue watching episodes unless the marginal
benefit of watching another episode is equal to the marginal cost
In a voluntary economic transaction between a buyer and a seller, _____ can earn economic surplus from the transaction
both
The slope of demand curve formula
change in price/ change in quantity (USE Y2-Y1)
What impacts the demand for labor?
changes in demand for output good, price of capital, productivity, non-wage benefits, taxes and subsidies
Which of the following will NOT shift a company's demand curve for labor?
changes in wages to paid workers
When faced with a quantity decision, the economic surplus stops increasing when
marginal benefits equal marginal costs
Carlo implemented some management changes that increased worker productivity in his company. This increased the _____ and led him to _____ workers.
marginal revenue product of labor; hire more
When an increase in demand for stand-up paddleboards rises, then the demand for skilled paddleboard shapers _____, and their marginal revenue product _____
rises, rises
diminishing marginal product leads to
rising marginal costs for a seller.
when demand is inelastic, changes in price and revenue move in the BLANK direction
same
opportunity cost is a reflection of
scarcity
Economic surplus is maximized when
the marginal benefit of consumption is equal to the marginal costs
in the labor market, wage is
the price of labor
True Opportunity Cost is
the value of the benefits of the next best alternative
Diamond-Water Paradox
the water has a higher total benefit but the diamond has a higher marginal cost
When people make rational choices, they
weight the costs and benefits of their options and act to satisfy their wants
the interdependence principle leads you to ask
what else?
2 questions to ask when determining opportunity cost
what happens if I pursue my choice and what happens under my next best alternative
what is the counterfactural?
what would have happened in another scenario?
Elastic Supply
when a small change in price causes a major change in demand
elastic demand
when consumer demand is very sensitive to price
employers engaging in taste-based discrimination are ____ profits and employers engaging in statistical discrimination are ____ profits
willing to forego profits; trying to enhance
the cross price elasticity formula
(% change in quantity demand for good X) / (% change price Y)
Complements-in-production
allows a business to produce goods together.
A rise in the price of a substitute in production for a good leads to
a decrease in the supply of that good
specific brands tend to have MORE/LESS elasticity than categories
more
the cross price elasticity of a substitute will be
positive
individual human decisions are
the foundation of economic forces
when the substitution effect dominates, the labor supply curve slopes
upward
What is statistical discrimination?
using information about group averages to make conclusions about individuals
Alan Patel is a college student living alone in a campus apartment. He finished cooking dinner when his friends text him to join them at the dining hall on campus for dinner. He now has to decide whether to eat the dinner he prepared or walk to campus to meet his friends at the dining hall. Alan should consider all the following costs when making this decision EXCEPT the
money spent on the groceries he used to cook dinner
when the income effect dominates, leisure is
more attractive
Jonathan Mendez is deciding whether to study for his economics exam at a café or go to a concert with friends tonight. The cost of the concert ticket that he purchased yesterday is ____ in his opportunity cost and represents a _____ cost
not included; sunk
to always follow the cost benefit principle
only chose to trade if the benefits are at least as large as the cost
when labor supply decreases,
there will be higher wages and fewer hours of employment
when labor demand decreases,
there will be lower wages and less hours of employment
how do you calculate opportunity cost
cost of your choice MINUS the cost of the next best alternative
Your employer has asked you to start working overtime and has offered to pay $18 per hour for every hour you work beyond forty hours a week. The wage rate for each of the first forty hours will continue to be the usual $15 per hour. In terms of dollars, what is the marginal benefit of working each hour of overtime?
$18
economics is the study of
choices and decisions under scarcity
a perfectly elastic graph will be
horizontal
the labor supply curve has a BLANK slope
upward
The cost of your favorite coffee is $6.50 per cup at the coffee shop. The marginal cost of each cup you drink is _____. The first cup of coffee you drink gives you a marginal benefit of $8. The marginal benefit from the second cup is $6, $4 from the third, $2 from the fourth, and $0 from the fifth. You should drink _____ cups of coffee
$6.50; one
The price of coffee at a local coffee shop is $2.50. Cheryl is willing to pay $8 for her first cup of coffee each day. The marginal benefit to her of each additional cup of coffee falls by $2. How many cups of coffee should Cheryl purchase? Three
3
What is the difference between a change in quantity demanded and a change in demand?
A change in quantity demanded can be measured by moving along the demand curve while a change in quantity demanded can be represented by a shift in the demand curve.
If the price of jet fuel rises, the A)supply of jet fuel decreases. B)supply of airline flights decreases. C)supply of jet fuel increases. D)quantity supplied of jet fuel falls.
B
Which of the following is the best definition of the opportunity cost of a decision?
Benefits from the best foregone alternative.
Which of the statements is NOT a reason why economists still consider their models valid, in spite of the irrationality of people? A)People typically behave rationally in general B)Despite the flaws, the models are still fairly accurate at predicting behavior C)Models are made to simplify understanding, and irrational behavior is more difficult to generalize D)The existing models have been in place for so long, they are considered untouchable, the equivalent of an economic law.
D)The existing models have been in place for so long, they are considered untouchable, the equivalent of an economic law.
Decisions should reflect the _____ costs, rather than just the _____ costs
Decisions should reflect the _____ costs, rather than just the _____ costs
In economics, what is meant by "optimal decisions are made at the margin?"
The idea of the margin is related to making decisions while thinking about the benefits and costs of small changes in behavior.
Economists use money equivalents to compare costs and benefits because money is
a common measuring stick
what are sunk costs
a cost that has already been incurred and cannot be recovered
Instead of studying for an additional two hours for the economics final, Leann decides to watch a movie. Leann is making
a rational decision if her marginal benefit from the movie is greater than her marginal cost.
The cost-benefit principle will lead you to make unselfish decisions if you
account for unselfish motivations
what is the or what trick
adding OR in the middle, example "should i get my masters OR keep working
following the cost benefit principle will
allow your choices to increase your economic surplus
inelastic demand
an increase or decrease in price will not signficantly effect consumer demand
principle 4 of the 4 core principles; the interdependence principle
are we attuned to understanding how different decisions depend on each other
principle 3 of the 4 core principles; marginal principle
asking "a bit more or a bit less" of something would be an improvement
Why might the labor supply curve be backward-bending?
at low wages, the substitution effect dominates, but at high wages the income effect dominates
The key to using the cost-benefit principle is to think about _____ aspects of a decision
both financial/nonfinancial
what are some examples of economic discrimination?
boycotting a specific product or giving someone a different wage due to their gender, sexuality, race or ethnicity
Rational Rule for Buyers
buy more of an item if its marginal benefit is greater than (or equal to) the price
What causes the labor supply curve to shift?
changing wages in other occupations, changing number of potential workers, changing benefits of not working, and nonwage benefits, taxes and subsidies
principle 1 of the 4 core principles; the cost benefit principle
considering cost and benefits of a choice
what are two reasons college graduates earn more?
education acts as a signal to employers and increases worker productivity
opportunity costs include all possible alternatives T/F
false, only the next best alternative
Harry Watson is an engineering student taking an economics elective in his senior year. He has the option to work as a petroleum engineer or to design rollercoasters after college. He uses concepts learned from his economics course to help with this decision. When he considers the increasing popularity of electronic vehicles and a decrease in demand for petroleum in the future, he is acknowledging the dependencies that exist
over time
The interdependence principle states that your best choice today depends on all of the following EXCEPT
past decisions you have made
Because Farmer Mauricio will only sell his goats for one price, his supply is
perfectly elastic
the framing effect
small differences in how alternatives are described, ex a shirt on sale, an overpriced lobster
Dependencies between various people's choices reflect the fact that
society has limited resources
The marginal cost of an additional worker is
the additional cost of hiring one more worker.
Which graph shows the scenario where the income effect dominates labor supply decisions only at high wages?
the backward-bending curve
the CBP says to only pursue that choice if
the benefits are at least as large as the cost
An opportunity cost is
the benefits of the highest-valued alternative forgone
choosing to buy a friend a cup of coffee because you enjoy the way it makes you feel is an example of
the cost benefit principle
_____ is estimated by asking: "What is the _____ I am willing to pay to get this benefit (or avoid that cost)?"
willingness to pay; most
perfectly elastic supply means
you will supply any given amount at one price
Taking the absolute value of the cross-price elasticity of demand is incorrect because it would
remove the ability to tell whether the two products are substitutes or complements
If the price of Product E decreasing by 2%2% causes its quantity demanded to increase by 14%14% and the quantity demanded for Product F to increase by 17%17%, what is the cross-price elasticity of demand?
-8.5 making it a complement
Which of the following lists only factors that would cause an increase in the supply of an item
A decrease in input prices; a technological innovation; a fall in the price of a substitute-in-production
The cost-benefit principle states that the full set of _____ should be evaluated when making any choice
costs and benefits
getting married at 16 when there is a high chance you will meet a better match. therefore getting married at 16 has a BLANK opportunity cost
high
you're a great singer who has a chanced to be signed for 5 million. going to college now has a BLANK opportunity cost
higher
The law of demand states that
higher prices lead to smaller quantity demanded
the marginal principle is useful when deciding
how many
the income effect measures
how people's choices change when they have more income
when economists use the term "correlation" they are referring to
how to variables move together in a predictable way
following the marginal cost principle means
if the marginal benefits are greater than the marginal cost, do it
The current administration imposes an unannounced tariff on steel imports which causes the price of new cars to increase overnight. Will this shift the demand curve for new cars left, right, or just cause a movement?
it will move upwards along the curve. no shift
there is an economic succession and jobs are down and there is little to do. thus seeing a movie during this time has a BLANK opportunity cost
low
Economists assume that people's goals are to
make themselves as well off as possible
demand gets MORE/LESS elastic over time
more
scarcity results from the fact that
people's wants exceed the resources available to satisfy them.
Economic models do all of the following except
portray reality in all its minute details.
The opportunity costs of attending college include the
potential income that could be earned working
Taking the absolute value of the income elasticity of demand is incorrect because it would:
remove the ability to tell if a product is an inferior or normal good
The supply curve shows
the quantity a seller is willing to supply at each price and their marginal costs
Utility is the measure of
the satisfaction a good or service gives to the consumer
the opportunity cost principle reminds you to
think about alternative uses of your time/money
everything you do requires you to give up something
tradeoffs
the opportunity cost principle forces you to focus on
tradeoffs
both buyers and sellers benefit from voluntary exchange, T/F
true
when the price elasticity is exactly 1
unit elastic
