Micro Exam #1
What is a marginal change?
small, incremental adjustment
What does trade allow for?
specialization
High school athletes who skip college to become professional athletes understand what?
that the opportunity cost of attending college is very high
Hamid spends an hour studying instead of watching TV with his friends. What is the opportunity cost to him of studying?
the enjoyment he would have received if he had watched TV with his friends
When computing the opportunity cost of attending a basketball game, what should you include?
the price you pay for the ticket and the value of your time
Matthew bakes apple pies that he sells at the local farmer's market. If the price of apples increases, what will happen?
the supply curve for Matthew's pies will decrease
Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also, assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, what will happen?
the two countries' combined output of both goods will be higher than it would be in the absence of trade; Greece will produce more fish than it would produce in the absence of trade; Germany will produce more cars than it would produce in the absence of trade
Ramona decides to spend two hours taking a nap rather than attending her classes. What is her opportunity cost of napping?
the value of knowledge she would have received had she attended classes
Economics is the study of how society manages what?
unlimited wants and limited resources
In economics, what does the cost of something refer to?
what is given up to get it
When is production efficient?
when the economy is producing at a point on the PPF
Can trade benefit all nations?
yes
Does trade allow countries to produce outside of their PPF?
yes
What can shift the demand curve?
1. Number of buyers 2. Income 3. Prices of related goods (substitutes move right, complements move left) 4. Tastes 5. Expectations
What shifts the supply curve?
1. Input prices (cost of production) 2. Technology (cost of production) 3. Number of sellers 4. Expectations
Where do land, labor, and capital flow from in the circular flow diagram?
from households to firms
Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 4 tables or 12 chairs, whereas Traci can make 8 tables or 20 chairs. Given this, what is the opportunity cost of 1 chair for each worker?
1/3 table for Ken and 2/5 table for Traci
Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate. Aruba needs 2 hours to make one cooler, and 5 hours to make one radio. Iceland needs 1 hour to make one cooler, and 4 hours to make one radio. Assume both countries have 80 labor hours available. If each country divides its time equally between the production of coolers and radios, what is total production for both goods?
60 coolers and 18 radios
Can someone have an absolute advantage and comparative advantage in a good?
No, they can only have absolute advantage
Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Jamaica can produce 12 coolers and 6 radios in one day. Norway can produce 24 coolers and 3 radios in one day. What does each country have a comparative advantage in?
Jamaica has comparative advantage in radios and Norway has comparative advantage in coolers
Assume that Jamaica and Norway can switch between producing coolers and producing radios at a constant rate. Jamaica can produce 12 coolers and 6 radios in one day. Norway can produce 24 coolers and 3 radios in one day. What should each country specialize in?
Jamaica: radios, Norway: coolers
What causes a movement along the supply curve?
a change in the price of the good or service that is being supplied
What is a PPF?
a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology
If consumers often purchase muffins to eat while they drink their lattés at local coffee shops, what would happen to the equilibrium price and quantity of lattés if the price of muffins rises?
both the equilibrium price and quantity would decrease
If consumers view cappuccinos and lattes as substitutes, what would happen to the equilibrium price and quantity of lattes if the price of cappuccinos rises?
both the equilibrium price and quantity would increase
What do supply and demand determine in a market economy?
both the quantity of each good produced and the price at which it is sold
Any point on a country'sPPF represents a combination of two goods that an economy...
can produce using all available resources and technology
A model that shows how dollars flow through markets among households and firms is called what?
circular flow diagram
What are specialization and trade closely linked to?
comparative advantage
What is the driving force of specialization?
comparative advantage
What might result in a lower price in the market for Snickers?
demand for Snickers decreases, and supply of Snickers increases
In the circular flow diagram, what flows from households to firms through the market for goods and services?
dollars spent on goods and services
How do you determine whether P or Q is ambiguous?
draw two graphs and show a larger change and smaller change; the one that consistently goes up/down is for sure and the other is ambiguous
Why does total output in the economy increase when each person specializes?
each person spends more time producing that product in which he or she has a comparative advantage
In the context of decision-making, the word marginal is most closely associated with what word?
edge
When the government redistributes income from the wealthy to the poor, what happens to equality and efficiency?
equality is improved, but efficiency is not
Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market?
equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous
Who are sellers in the markets for the factors of production in the circular flow diagram?
households
Who buys the goods and services that firms produce in the circular flow diagram?
households
Who owns the factors of production in the circular flow diagram?
households
On a bowed PPF, what happens to the opportunity cost of producing an additional unit of a good?
increase as more of the good is produced
When each person specializes in producing the good in which he or she has a comparative advantage, what will happen to total production in the economy?
it rises
Suppose there is a decrease in the price of corn. If corn is an input into the production of ethanol, what will happen to the supply curve?
it will increase/move to the right
A rational decision maker takes an action only if what?
marginal benefit is greater than the marginal cost
Dylan receives a salary for his work as a financial analyst for an investment firm. What part of the circular flow diagram does this take place in?
markets for factors of production
What are the gains from trade a result of?
more efficient resource allocation than would be observed in the absence of trade
What happens as you move down a bowed PPF?
more of one good must be given up to receive one unit of the other good, the available production technology does not change, and the opportunity cost increases
Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. Would the countries gain from trade?
neither would benefit from trade because neither has a comparative advantage
attempt to prescribe how the world should be; opinion usually
normative statement
What trade off does the PPF illustrate?
once an economy has reached the efficient points on its PPF, the only way of getting more of one good is to get less of the other
A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?
people respond to incentives
scientific facts to try and describe the world as it is
positive statements
