ECON MIDTERM STUDY
The market system's answer to the fundamental question "What will be produced?" is essentially
"Goods and services that are profitable."
Let demand be given by Q^D=50-2P; let the supply be given Q^S=4P-10. SHOW WORK
50-2P=4P-10 -> 60-2P=4P -> 10=p 50-2(10)=4(10)-10 -> 30=30 -> Q=30
The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three cans of Pepsi is 38 units of utility. The marginal utility of the third Pepsi is
8 units of utility.
A schedule or curve that shows the various combinations of two products a consumer can purchase with a specific amount of money income is:
A budget line
For any particular good, the price elasticity of demand is likely to be highest for:
College students
From the economist's perspective, "market failures" basically arise when:
Demand and supply do not accurately reflect all the benefits and all the costs of production
If the surgeon general announces that oat bran will reduce colon cancer then we would expect, then all else equal
the demand for oat bran will shift right
Which best describes consumer surplus?
the difference between the price a consumer pays for a good and the price he/she is willing to pay for it
microeconomics is primarily
the study of how people choose among alternatives under the condition of scarcity
study economics
the study of how people use their limited resources to satisfy their unlimited wants
When the price of Nike soccer balls fell, Ronaldo purchased more Nike soccer balls and fewer adidas soccer balls. Which of the following best explains Ronaldo's decision to buy more Nike soccer balls?
the substitution effect
The opportunity cost of doing or getting something is defined as
the value of the best alternative that is given up in order to do or get something.
If the quantity supplied of a product is less than the quantity demanded, then:
there is a shortage of the product
Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle
under the demand curve and above the actual price.
A point inside a production possibilities curve best illustrates:
unemployment
negative externalities arise:
when firms "use" resources without being compelled to pay for their full costs.
the law of demand states that
when the price of a product falls, people will buy more of it
a product market is in equilibrium
where the demand and supply curves intersect
Which is an illustration of a microeconomic question?
will a new type of tv set increase the number of buyers
How can studying economics help us make better choices about how to use scarce resources.
Understanding economics allows you to make the best decision in regards to scarce. We weigh the costs and benefits.
The influential book written by Adam Smith was:
Wealth of Nations
Which is not one of the five fundamental questions
What goods and services should be produced by government?
For economists, the word "utility" means:
c. pleasure and satisfaction
Marginal utility is the:
change in total utility obtained by consuming one more unit of a good.
When the price of sleeping bags goes up by 10% and the quantity of tents purchased falls by 7%, we know that tents and sleeping bags are:
complementary goods
Assume the increase in the price of apples decreased the quantity demanded of vanilla ice cream. Identify if these two products are substitues or compliments.
compliments
Scarcity
condition that is created by people's seemingly unlimited wants and relatively limited resources.
A shift to the right in the demand curve for product A can be most reasonably explained by saying that
consumer preferences have changed in favor of A so they now want to buy more at each possible price.
The demand for a product is inelastic with respect to price if
consumers are largely unresponsive to a per unit price change.
Suppose the price elasticity of demand for beef is about 0.6. Other things equal, this means that a 20 percent increase in the price of beef will cause the quantity of beef demanded to
decrease by approximately 12 percent.
The competitive market system:
encouraged innovation because successful innovators are rewarded with economic profits.
A price ceiling means that
government is imposing a legal price that is typically below the equilibrium price.
A large increase in supply for a good leads to a drop in total revenue. The good most likely:
has an inelastic demand curve
A negative externality or spillover cost occurs when
he total cost of producing a good exceeds the costs borne by the producer.
a normative statement is one that:
is based on value judgments.
factors of production (page 12)
land, labor, capital, entrepreneurship
XYZ Corp was in trouble and so it decided to reduce the price of its famous, GeeWhiz. This only makes sense if GeeWhiz is a(n):
luxury good
The problems of aggregate inflation and unemployment are:
major topics of macroeconomics
Jane's marginal benefit per day from drinking smoothies is given in the table below. This shows that she values the first smoothie she drinks at $6, the second at $5, and so on. If the price of smoothie is $4.25, the optimal number of smoothies that Jane should drink is: Mar. Benefit ................ Cokes $6 ......................................1 $5 ......................................2 $4 .....................................3 $3 .....................................4
marginal benefit>marginal cost so, 2 smoothies
A consumer's demand curve for a product is downsloping because:
marginal utility diminishes as more of a product is consumed.
After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your choices indicate that the
marginal utility is positive for the fourth slice and negative for the fifth slice.
In a capitalist system, the decisions and actions of millions of consumers and firms are highly coordinated by
markets and prices
Households and businesses are:
sellers in the resource and product markets respectively.
Adam Smith, The Wealth of Nations argued that
society works best when people act in their own interest
consumer surplus arises in a market because:
some consumers are willing to pay more than the equilibrium price but do not need to do so
Assume the increase in the price of apples increased the quantity demanded of peaches from 20 to 30 tones. Calculate the cross price elasticity of demand.
substitutes
Economics is a social science concerned with:
The best use of scarce resources to achieve the maximum satisfaction of economic wants.
Externalitites+ definitions (page 16)
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Page 13 market graphs examples
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Theresa consumes both bagels and toy cars: 1.) What is her total utility from purchasing 3 toy cars: 2.) Theresa's weekly income is $11. The price of bagel is $2 and the price of a toy car is $1. What quantity of bagels and toy cars will maximize Theresa's utility if she spends her entire weekly income on bagels and toy cars? 3.) What is her total utility from the expenditure schedule derived in problem 2? (page 3)
1.) 10+8+6=24 2.) 5 Toy cars + 3 Bagels 3.) Marginal utility for all actually bought w/ $11 which is, 52
If you recieve $18 worth of pleasure from the first hole of golf played and your additional pleasure from succeeding holes drops $1 for each hole played, how many holes of gold would you play if you had to pay $5.50 per hole. (Page 3)
13
The price of season tickets to a performing arts theater decreases by 3 percent. As a result, the quantity demanded increases by 6 percent. The price elasticity of demand for season tickets is
2.
For which of the following would quantity supplied increase by the least amount in the short run market period in response to an increase in demand?
A singer performing concerts at Madison Square Gardens
Which of the following would likely result in an increase in the supply of leather (made from cows):
A substantial increase in the demand for beef
When the marginal benefit exceeds marginal cost, a market economy will:
Allocate too few resources to production of the product
When the production of a product creates external benefits greater than external costs, a market economy will:
Allocate too few resources to production of this product
When the marginal cost exceeds marginal benefit, a market economy will:
Allocate too many resources to production of the product.
When the production of a product creates external costs greater than external benefits, a market economy will:
Allocate too many resources to production of the product.
The price of pork may increase as a result of
An increase in the cost of producing beef
Angelica consumes a bundle that contains 4 pizzas and 7 soda pops. What is one thing we can NOT conclude?
Angelica likes soda pop better than pizza.
You have the option of flying down to flordia over spring break... (Page 13)
B(x)= 1, 4 =4,500 c(x)=2,3,5 =4,800
In the diagrams below, the subscript "1" refers to the initial position of the curve, while the subscript "2" refers to the final position after the curve shifts. Which diagram illustrates the effects on the peanut butter market, if severe flooding destroys a large portion of the peanut crop in the economy?
D
When Ramon was a kid, he didnt like lobster very much. Now as an adult, he likes it a lot more. Which of the following must be true?
His marginal utility per dollar increased for all quantities of lobster.
If the consumer's budget constaint is given by 5F+2S=100, where F is food and S is shelter, how much food can he buy if he purchases 20 units of shelter?
F=12
Rockets: #Times...Total Utility...Marginal Utility 1...30...30 2...50...20 3...66...16 4...74...8 5....78...4 6...80...2 (Page 4)
Find Marginal Utility
Roller Coasters: #Times...Total Utility...Marginal Utility 1...120...120 2...200...80 3...240...40 4...272...32 5...288...16 6...292...4 (Page 4)
Find Marginal Utility
which of the following statements could be considered a positive statement?
Food stamps allow low-income people to buy more food.
Which statement is correct?
Freedom of choice and enterprise are essential elements of the market system
third question in economics
From whom to produce
Which is a dimension or assumption of the marginal-utility theory of consumer behavior?
Goods and services carry a price tag.
GDP
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy
The more baseball cards Josephine collects, the more happiness she gets from each individual card, since she likes having the full set of cards for every team. This implies that:
Her demand curve for baseball slopes up (unusual).
second question in economics
How to produce?
If you are at an all-you-can-eat buffet (sunk cost) dinner and you are considering whether to eat another dessert, you as a rational consumer should decide to eat the dessert:
If it brings you any pleasure at all
The circular flow model:
Illustrates the interdependence of businesses and consumers
Assume instead that a 10% increase in income caused the quantity demanded of apples to decrease from 10 tons to 8 ton. Calculate the income elasticity of demand.
Income goes up 10% and Quantity of apples goes down 10 to 8. It is an inferior good
When the price of oil declines significantly, the price of gasoline also declines. The latter occurs because of a(n):
Increase in the supply of gasoline
When Bob's income goes up 30%, his consumption of apples rises 6%. This increase is due to:
Increasing the budget line.
The government would most likely raise the most tax revenue by taxing:
Insulin
Government set price floors and price ceilings:
Interfere with the rationing function of price in a free market
A consumer with a fixed income will maximize utility when each good is purchased in amounts such that the:
Marginal utlility per dollar spent is the same for all goods.
producer surplus arises in a market because:
Some producers are willing to accept less than the equilibrium price but does not need to do so.
For any particular good, the price elasticity of demand is likely to be lowest for:
NBA All-Stars
Assume the price of apples increase from $20 to $25 and the quantity demanded falls from 10 tones to 5 tons. 1.) Use the total revenue test to determine if the demand is relatively elastic or relative inelastic. 2.) Calculate the elastic of demand coefficient. 3.) calculate the elastic supply if the change in price caused the quantity supplied to increase from 10 to 25 tons. 4. Explain why the total revenue test cannot be used to determine the elasticity of demand. (Page 6)
P1=20 P2=25 Q1=10 Q2=5 1.) TR=P1*Q1=200 TR=P2*Q2=125 ELASTIC 2.) Q (-5/10)100= -50% loss P (5/25)100= +20% increase -50/25= |-2| or 2 price elasticity 3.) 25/10= 25% (15/10)*100=150% 150/25= 6 elastic of supply 4.) TR test has to due with demand
The total utility of a product is calculated by:
Summing the marginal utilities for each successive unit of the product that is consumed
XYZ Corp lowered the price of its product, GeeWhiz, and was rewarded with increased revenues. This must mean that, at the original price:
The GeeWhiz demand curve is relatively elastic
When the marginal benefit equals the marginal cost, a market economy will:
Produce a socially optimal allocation of resources
Product % Change in Income % Change in Quantity Demanded W −1 −1 X +6 +3 Y −1 +1 Z +4 +8 Refer to the above table. Which product would be an inferior good?
Product Y
A demand curve us given by P= 50-2Q. 1.) When the price is $10 what is the producer surplus? 2.) If the government gives away this food for free what is the consumer surplus?
Q=20 1.) PS=1/2(20-0)(50-10)=$400 2.) CS=1/2(25)(50)=$625
Pat just got off unemployment by landing a great job. Which of the following is Pat likely to buy less of?
Ramen Noodles (inferior good)
Jack took an unexpected 20% pay cut at his jobs. Jack's purchases will fall the most for:
Restraunt food
What sort of supplier would be likely to see an increase in revenue if the price of its product drops? A supplier of: (Page 5)
Restraunt meals
Sabrett reduced its price on hot dogs and, paradoxically, its revenue went up. How could this happen?
The demand for hot dogs is relatively elastic
Fitch and Fynn increased its price on legal services and its revenue went up. How could this happen? (Page 5)
The demand for legal services is relatively inelastic
Which of the following is a limitation of the simple circular flow model?
The determination of product and resource prices is not explained
Suppose that Steve heads to the local hamburger shop with $3, expecting to spend $2 for his favorite burger and $1 for french fries. When he gets there, he discoveres that his favorite burger is on sale for $1, so he buys two burgers and one order of french fries. Steve's consumption behavior is best explained by:
The income effect
The idea that firms and resource suppliers in seeking to further their own self-interests in a competitive market economy also simultaneously promotes the public or social interest is a description of:
The invisible hand
Susan keeps buying additional units of lollipops, and her total utility goes up by 4 each time. Which of the following must be true?
The marginal utility of every additional lollipops is identical.
Angelica consumes a bundle that contains 4 pizzas and 8 soda pops. What is one thing we can conclude?
The marginal utility per dollar of pizza equals marginal utility per dollar of soda pop.
Which statements best describes a command economy?
The production and allocation of goods and services is determined primarily through government
The process of developing hypothesis, testing them against facts, and using the results to construct theories is called:
The scientific method
Which of the following is a positive statement?
The temperature is 92 degrees today.
The price of movie tickets went up so you "Netflix and Chill" more. Which of the following can you conclude?
Theatre movies and Netflix movies are substitutes
First question in economics
What to produce?
Positive externalities arise:
When the demand curve for a product is located too far to the left.
Which of the following is a real capital
a construction crane
Which would cause a decrease in the quantity of computers supplied?
a decrease in the demand for computers
If the market price is above the equilibrium price:
a surplus will occur, and the producers will produce less and lower prices
The figure above depicts the annual fairbanks market for boat motors where prices are in thousands of dollars per motor and the qualities are in hundreds of motors. a) At a price of $5,000 per motor how many motors are demanded in fairbanks? b) If the government were set the price at $2,000 per motor, how many motors would be demanded? c) If the government were set the price at $2,000 per motor, how many motors would be sold? d) If the government were set the price at $2,000 per motor, do we have (i) a free market equilibrium, (ii) a shortage, (iii) a surplus? (Page 13)
a) 500 b) 800 c) 200 (only what we have) d) shortage of 600 motors
a competitive market will:
achieve an equilibrium price
Which of the following is the best synonym for "marginal" in economics?
additional
A budget line shows the
alternative combinations of two goods that a consumer can purchase with a given money income.
want
an item that we desire but that is not essential to survival
Owners of defective used cars have more information about the condition of their vehicles than potential buyers of those used cars. This is an example of
asymmetric information.
need
basic requirement for survival, including food, clothing, and shelter
A person should consume more of something when its marginal:
benefit exceeds its marginal cost
If X is a normal good, a rise in money income will shift the
demand curve for X to the right.
On a production possibilities curve, the single optimal or best combination of output for any society:
depends upon the preferences of society
In a competitive economy, prices:
do all of these
The law of demand is illustrated by a demand curve that is
downward sloping
In the circular flow diagram, households get their ability to pay for their consumption expenditures from the
incomes they earn for their resources.
a headline reads "storms destroy half of the lettuce crop." this situation would lead to a(n):
increase in the price of lettuce and decrease in quantity purchased
Purposeful behavior suggests that:
individuals may make different choices because of different desired outcomes.
In the insurance business, the moral hazard problem arises when
people who have car-insurance coverage drive less carefully.
We would expect the cross elasticity of demand between Pepsi and Coke to be
positive, indicating substitute goods.
Marginal utilitiy can be:
positive, negative, or zero
In terms of the circular flow diagram, businesses obtain revenue through the _____ market and make expenditures in the _____ market.
product; resource
A product has utility if it:
satisfies consumer wants.
A schedule which shows the various amounts of a product producers are willing and able to produce at each price in a series of possible prices during a specified period of time is called:
quantity supplied