Macroeconomics Test 1: Chapter 2
How Fast to Drive? Suppose Duke is driving to a nearby town to attend a dance party, and must decide how fast to drive. The marginal benefit of speed is the extra dance time he will get by driving faster, and the marginal cost is the additional risk of a collision. The marginal-benefit curve is negatively sloped, and the marginal-cost curve is positively sloped. Suppose Duke's favorite dance partner, Daisy, is grounded for makeup violations. In the absence of Daisy, Duke's ??? from speeding ??? - marginal cost - marginal benefit - increases - decreases
marginal benefit, decreases
The ??? value of an amount of money is simply its face value. The ??? value of an amount of money is measured in terms of the quantity of goods the money can buy. Real or Nominal
nominal, real
Suppose you currently live and work in Cleveland, earning a salary of $80,000 per year and spending $10,000 for housing. You just heard that you will be transferred to a city in California where housing is 55 percent more expensive. In negotiating a new salary, your objective is to keep your real income constant. Your new target salary is ???
$85,500 $80,000 + 0.55(10,000) = $85,500
Your savings account pays 7 percent per year: Each $100 in the bank grows to $107 over a one-year period. If prices increase by 6 percent per year, by keeping $100 in the bank for a year you actually gain
$1
Consider a transaction in which a consumer buys a book for $20. The value of the book to the buyer is at least ??? and the cost of producing the book is no more than ???
$20, $20
Diminishing Returns and the Marginal Principle. Molly's Espresso Shop has become busy, and the more hours Ted works, the more espressos Molly can sell. The price of espressos is $2 and Ted's hourly wage is $11. Complete the following 3 hours for Ted and he has sold 172 espressos 4 hours for Ted and he has sold 184 Marginal Benefit for that hour? 5 hours for Ted and he has sold 190 ($12 marginal benefit) 6 hours for Ted and he has sold 194 ($6 marginal benefit) If Molly applies the marginal principle, how many hours should Ted work?
$24 184 - 172 = 12 x $2 = $24 5 hours
The Cost of a Flower Business. Jen left a job paying $80,000 per year to start her own florist shop in a building she owns. The market value of the building is $80,000. She pays $25,000 per year for flowers and other supplies, and has a bank account that pays 12 percent interest. What is the economic cost of Jen's business? (Enter your response rounded to the nearest dollar.)
$80,000 x 12% = $9,600 + $80,000 + $25,000 = $14,600 The economic cost, or total opportunity cost, of Jen's business includes all the costs of operating the business: These include forgone income (from the job she left), cost of supplies and inventory, and the forgone interest income (from the building).
How Many Pints of Blackberries? The pleasure you get from your first pint of freshly picked blackberries is $2.00. Your pleasure decreases by $0.20 for each additional pint ($1.80 for the second, $1.60 for the third, and so on). It takes you 12 minutes to pick the first pint, and each additional pint takes an additional 2 minutes (14 minutes for the second pint, 16 minutes for the third pint, and so on). The opportunity cost of your time is $0.10 per minute. Complete the following table by calculating the values of the marginal benefit and marginal cost associated with each additional pint of blackberries. Number of pints Marginal benefit Marginal cost 1 pint Marginal Benefit: $2.00 Marginal Cost: ??? 2 pints Marginal Benefit: ??? Marginal Cost: $1.40 3 pints Marginal Benefit: ??? Marginal Cost: ??? 4 pints Marginal Benefit: ??? Marginal Cost: ??? How many pints of blackberries should you pick?
1 pint Marginal Benefit: $2.00 Marginal Cost: $1.20 2 pints Marginal Benefit: $1.80 Marginal Cost: $1.40 3 pints Marginal Benefit: $1.60 Marginal Cost: $1.60 4 pints Marginal Benefit: $1.40 Marginal Cost: $1.80 3 pints
Between 1970 and 1988, the average monthly welfare payment to single mothers increased from $160 to $360. Over the same period, the cost of a standard basket of consumer goods (a standard bundle of food, housing, and other goods and services) increased from $39 to $118. Number of baskets per month per year? The real value of welfare payments ??? over this period.
1970: 4.1 and 1988: 3.1 decreases
Xena has a small copy shop with one copying machine. Xena hires a worker, who increases output by 400 pages (from 0 to 400). She adds a second worker, who increases output by only 300 pages (from 400 to 700). If she added a third worker, holding the number of copiers fixed, her output would increase by fewer than nothing pages.
300
What is the economic cost of a pair of warships purchased by Malaysia? A. Safe drinking water for 5 million people who lack it. B. The cost of materials and labor plus interest on loans from the IMF. C. 200 tanks. D. None of the above.
A. Safe drinking water for 5 million people who lack it.
In role-playing games, such as World of Warcraft and EverQuest, players use real-life auction sites, including eBay and Yahoo! Auctions, to buy products normally acquired in the game. A. True B. False
A. True
When to Use the Principle of Diminishing Returns? You are the manager of a firm that produces memory chips for mobile phones. a. In your decision about how much output to produce this week, would you use the principle of diminishing returns? A. Yes, because in the short run some inputs are fixed. B. No, because in the short run some inputs are variable. C. Only if I were free to vary all my inputs. D. No, because I'm flexible in choosing my inputs. b. In your decision about how much output to produce two years from now, would you use the principle of diminishing returns? A. No, because it is difficult to forecast 2 years into the future. B. No, because in the long run all inputs are variable. C. Yes, because it is difficult to forecast 2 years into the future. D. Yes, because in the long run some inputs are fixed.
A. Yes, because in the short run some inputs are fixed. B. No, because in the long run all inputs are variable.
Your student film society is looking for an auditorium to use for an all day Hitchcock film program and is willing to pay up to $200. Your college has a new auditorium that has a daily rent of $450, an amount that includes $300 to help pay for the cost of building the auditorium, $50 to help pay for insurance, and $100 to cover the extra costs of electricity and janitorial services for a one-day event. The college should rent the auditorium for A. any amount more than $100. B. no less than $200. C. no less than $150. D. any amount more than $50.
A. any amount more than $100.
Seat belts and other safety features in cars made bicycling more hazardous because A. people voluntarily wear seat belts. B. drivers drive faster. C. the cars are larger. D. there are fewer bike lanes.
B. drivers drive faster.
How Fast to Drive? Suppose Duke is driving to a nearby town to attend a dance party, and must decide how fast to drive. The marginal benefit of speed is the extra dance time he will get by driving faster, and the marginal cost is the additional risk of a collision. The marginal-benefit curve is negatively sloped, and the marginal-cost curve is positively sloped. Duke will drive at 40 mph if the intersection of the marginal benefit and the marginal cost curves occurs - at any point above - at any point below - at the point
At the point
A decrease in the market interest rate ??? the economic cost of holding a$500 collectible for a year. A. Increase B. Decrease
B. Decrease
Interest Rates and ATM Trips. Kevin, who lives in a country where interest rates are very high, goes to an ATM every day to get $10 of spending money. John, who lives in a country with relatively low interest rates, goes to the ATM once a month to get $300 of spending money. Why does Kevin use the ATM more frequently? (Assume they both have interest bearing checking accounts.) A. High interest rates imply low banking fees. B. Kevin's opportunity cost of holding cash is higher. C. Kevin doesn't like to carry a lot of cash. D. John's opportunity cost of holding cash is higher.
B. Kevin's opportunity cost of holding cash is higher.
The production possibilities curve illustrates the notion of opportunity cost because A. points outside the production possibilities curve are unattainable. B. as more of one good is produced, less of the other can be produced. C. points inside the production possibilities curve are inefficient. D. if there are more resources, the curve will shift.
B. as more of one good is produced, less of the other can be produced.
Conservationists have a new strategy for preserving rainforests: ??? loggers and other developers for the land, paying as little as ??? per hectare per year. A. excluding B. bidding against C. cooperating with
B. bidding against, $1
Suppose that over a one-year period, the nominal wage increases by 4 percent and consumer prices increase by 8 The real wage decreased by ??? % A. increased B. decreased
B. decreased, 4%
When using the principle of opportunity cost to explore the cost of military spending, the policy question is A. how much will the war cost, and who is likely to win. B. whether the benefits of the war exceed the opportunity cost of war. C. which side is likely to win the war and how will that affect foreign policy. D. will it require that a military draft be used.
B. whether the benefits of the war exceed the opportunity cost of war.
When using the marginal principle to analyze emissions standards, the government should make the emissions standard stricter as long as the A. the cost of additional equipment and extra fuel used exceeds savings in health-care costs and recovered work time. B. the air is cleaner and people with respiratory ailments make fewer visits to doctors and hospitals. C. savings in health-care costs and recovered work time exceeds the cost of additional equipment and extra fuel used. D. consumers of cars want this feature.
C. savings in health-care costs and recovered work time exceeds the cost of additional equipment and extra fuel used.
According to the principle of voluntary exchange, A. exchange allows us to take advantage of differences in people's talents and skills. B. if participation in a market is voluntary and people are well informed, both people in a transaction will be better off. C. it is more sensible to specialize, doing what we do best and then buying products from other people, who in turn are doing what they do best. D. All of the above.
D. All of the above.
Solving a Tree Cutting Problem. Consider a hilly neighborhood where large trees provide shade but also block views. When a resident announces plans to cut down several trees to improve her view, her neighbors object and announce plans to block the tree cutting. One week later, the trees are gone, but everyone is happy. Use the principle of voluntary exchange to explain what could have happened. A. The resident paid her neighbors to let her cut down the trees. B. The resident paid for a block party for her neighbors. C. The resident bought her neighbors seedlings to plant in their yards. D. All of the above.
D. All of the above.
The Opportunity Cost of a Mission to Mars. The United States has plans to spend billions of dollars on a mission to Mars. Various resources will be used to execute the mission, and sacrifices will be made to use those resources. Which of the following are possible opportunity costs of the mission? A. Setting up a missile defense system. B. Colonizing the moon. C. Hiring 1.8 million additional teachers for one year. D. All of the above.
D. All of the above.
The opportunity cost of a college degree includes the A. the cost of college, the foregone income while in college, and the inability to go to another college. B. goods that a student cannot purchase because of spending on books, tuition, food, and housing and the foregone income that could have been earned while in college. C. the costs of food, housing, books, tuition that a student could have purchased. D. goods that a student cannot purchase because of spending on books and tuition and the foregone income that could have been earned while in college.
D. goods that a student cannot purchase because of spending on books and tuition and the foregone income that could have been earned while in college.
Diminishing marginal returns is applicable when a firm is ??? in choosing inputs, but does not apply when a firm is ??? in choosing its inputs. A. Flexible or B. Inflexible
Inflexible, flexible
When they design public programs, government officials use the real-nominal principle. When the change in wages is presented in terms of its buying power, it is describing the ??? wage. Social security payments are adjusted each year to keep the ??? payments constant. - Real - Nominal
Real, real
Repaying a Car Loan. Suppose you borrow money to buy a car and must repay $20,000 in interest and principal in 5 years. Your current monthly salary is $4,000. a. Complete the following table. (Enter your responses as integers.) Change in prices and wages Stable: $4,000 Months to Repay Loan: 5 Inflation 25%: ??? Months to Repay Loan: ??? Deflation 50%: ??? Months to Repay Loan: ??? b. Which environment has the lowest real cost of repaying the loan?
Stable: $4,000 Months to Repay Loan: 5 Inflation 25%: $5,000 Months to Repay Loan: 4 Deflation 50%: $2,000 Months to Repay Loan: 10 Inflation
How Many Police Officers? In your city, each police officer has a budgetary cost of $40,000 per year. The property loss from each burglary is $4,000. The first officer hired will reduce crime by 40 burglaries, and each additional officer will reduce crime by half as much as the previous one. The first officer will reduce property loss ??? The second officer will reduce property loss by ??? The third officer will reduce property loss by ??? Finally, the fourth officer will reduce property loss by ??? In this example, the marginal ??? is the reduction in property loss caused by the hiring of an additional officer. Which of the following describes the marginal cost curve? Hint: The number of police officers is shown on the horizontal axis and marginal cost on the vertical axis. A. The marginal cost curve is upward sloping with a slope equal to 40. B. The marginal cost curve is downward sloping with a slope equal to −40. C. The marginal cost curve is vertical with a horizontal intercept of $40,000. D. The marginal cost curve is horizontal with a vertical intercept of $40,000. How many officers should the city hire?
The first officer will reduce property loss by $160000 The second officer will reduce property loss by $80000 The third officer will reduce property loss by $40000 Finally, the fourth officer will reduce property loss by $20000 marginal benefit D. The marginal cost curve is horizontal with a vertical intercept of $40,000. 3 officers since benefit equals cost
A taxi company currently has nine cabs in its fleet, and its total daily cost is $4,800. If a taxi company adds a tenth cab, the company's total daily cost will increase to $5,000 and its total revenue will increase by $250 per day. Should the company add the tenth cab?
Yes
Between 1974 and 2011, the federal minimum wage increased from $2.00 to $7.25. Was the typical minimum-wage worker worse off in 2011?
Yes
Continental Airlines Goes Marginal. In the 1960s, Continental Airlines puzzled observers of the airline industry and dismayed its stockholders by running flights with up to half the seats empty. The average cost of running a flight was $4,000, a figure that includes fixed costs such as airport fees and the cost of running the reservation system. A half-full aircraft generated only $3,100 of revenue. a. Continental ran half-empty flights because A. the marginal cost of adding more flights was increasing. B. the marginal benefit was greater than the marginal cost. C. the average cost would be higher with full flights. D. they own the reservation system so they pay themselves for that. b. It will be sensible to run a half-empty flight if the marginal ??? of the flight is ??? than ???
a. B. the marginal benefit was greater than the marginal cost. b. cost, less, $3,100
Should a Heart Surgeon Do Her Own Plumbing? A heart surgeon is skillful at unplugging arteries and rerouting the flow of blood, and these skills also make her a very skillful plumber. She can clear a clogged drain in 6 minutes, about 10 times faster than the most skillful plumber in town. Suppose the surgeon earns $30 per minute in heart surgery and the best plumber in town charges $50 per hour. a. Should the surgeon clear her own clogged drains? A. Yes, her opportunity cost is too high. B. No, her opportunity cost is too low. C. No, her opportunity cost is too high. D. Yes, her opportunity cost is too low. b. How much does the surgeon gain by hiring the plumber to clear a clogged drain?
a. C. No, her opportunity cost is too high. - In the time it will take her to clear the drain, she can earn more doing surgery than it will cost to have a plumber clear it. Hence, the surgeon should not clear her own drains because her opportunity cost is too high. b. $130 - 30(6) --> 180 - 50 = 130
When using the marginal principle to explore the decision of how many movie sequels to produce, the marginal benefit of movies in a series ??? while the marginal cost ??? Sequels should be made so long as the marginal benefit of the sequel ??? the marginal cost of the sequel.
decreases, increases, exceeds
How Fast to Drive? Suppose Duke is driving to a nearby town to attend a dance party, and must decide how fast to drive. The marginal benefit of speed is the extra dance time he will get by driving faster, and the marginal cost is the additional risk of a collision. The marginal-benefit curve is negatively sloped, and the marginal-cost curve is positively sloped. Suppose the normal country band is replaced by Adam Smith and the Invisible Hands, Duke's favorite punk band. Duke's utility from slam dancing is twice his utility from the two-step. The band replacement will ??? the ??? to Duke from speeding. - increase - decrease - marginal benefit - marginal cost
increase, marginal benefit
The current speed limit is set at 40 mph. Suppose the legal speed limit is changed to 35 mph, and there is still a 50 percent chance that Duke will be caught if he speeds. The change in the legal speed limit will ??? Duke's ??? of speeding. - increase - decrease - marginal benefit - marginal cost
increase, marginal cost
As a farmer adds more and more fertilizer to the soil, the crop yield ??? but at a ??? rate. A. increases/increasing B. decreases/decreasing
increases, decreasing
The typical minimum-wage worker was ??? off in 2015 than in 1974 because the weekly income increased than the cost of the standard basket of goods. A. Worse B. Better A. more B. less
worse, less