Microeconomics 1011 Test 1

Why do demand curves slope downward?

because demand reflects the entire market; 1) lower prices bring more buyers into the market 2) Lower prices cause existing buyers to buy more 3)At higher prices fewer consumers will pass the cost benefit test and fewer will buy

incentive principle

ceteris paribus

Complete price elasticity formula

((Q2-Q1)/(avg(Q2+Q1)))/((P2-P1)/(avg(P2+P1)))

3 important decision pitfalls

1) Measuring cost and benefit using proportional dollar amounts rather than absolute, 2) Ignoring opportunity costs, 3) failure to think at the margin

13. You had to pay $600 (non-refundable) for your meal plan for Fall semester which gives you up to 150 meals. If you eat only 100 meals, your average cost for a meal is A. $6. B. $5. C. $4. D. $0.25.

A

14. Jody has purchased a non-refundable $25 ticket to attend a Savage Garden concert on Friday evening. Subsequently, she is asked to go to dinner and dancing at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going on the date, she should A. include only the entertainment value of the concert in the opportunity cost of going on the date. B. include the cost of the ticket plus the entertainment value of the concert in the opportunity cost of going on the date. C. include only the cost of concert ticket in the opportunity cost of going on the date. D. include neither the cost of the ticket nor the entertainment value of the concert in the opportunity cost of going on the date.

A

Economics "percentage change"

Absolute value of final-initial/(average of two), multiplied by 100

Principle of Rationality

All individuals are rational, where a rational person is someone with well defined goals trying to fulfill said goals

Giffen Good**

As price increases, quantity demanded increases (by income effect)

5. Relative to a person who earns minimum wage, a person who earns $30 per hour has A. a lower opportunity cost of working longer hours. B. a higher opportunity cost of taking a day off. C. a lower opportunity cost of driving farther to work. D. the same opportunity cost of spending time on leisure activities.

B

You paid $35 for a ticket (which is non-refundable) to see JAM, a local rock band, in concert on Saturday. (Assume that you would not have been willing to pay any more than $35 for this concert.) Your boss called and she is looking for someone to cover a shift on Saturday at the same time as your concert. You will have to work 4 hours and she will pay you time and a half, which is $9/hr. 10. What is your economic surplus if you go to work on Saturday? A. $0 B. $1 C. $9 D. $35

B

You paid $35 for a ticket (which is non-refundable) to see JAM, a local rock band, in concert on Saturday. (Assume that you would not have been willing to pay any more than $35 for this concert.) Your boss called and she is looking for someone to cover a shift on Saturday at the same time as your concert. You will have to work 4 hours and she will pay you time and a half, which is $9/hr. 8. Should you go to the concert instead of working Saturday? A. Yes, your benefit is more than your cost B. No, your benefit is less than your cost C. Yes, your benefit is equal to your cost D. No, because there are no benefits in the concert

B

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. 4. Larry maximizes his surplus by attending A. Elite U, because $60,000 is greater than the benefit at the other schools. B. State College, because the difference between the benefit and cost is greatest there. C. NoName U, because Larry has a full scholarship there. D. Elite U, because the opportunity costs of attending Elite U are the lowest.

B State college

15. Mike, a whitewater rafting instructor, pays a non-refundable $100 to ACE Adventure to reserve a raft for a group whitewater rafting trip in the New River. The raft has room for 5 people. Mike usually sells 4 rafting tickets at $25 each and goes on the trip for free. But this time, he could only sell 3 tickets at $25 each for a total of $75. These amounts will have to be refunded by Mike if he cancels the trip. Should Mike cancel this trip? A. Yes, because he will lose his $100. B. Yes if Mike values going on the trip at less than $25. C. No, because losing $25 is better than losing $100 D. Yes, because he will lose an additional $25 if he goes on the trip.

C

6. Amy is thinking about going to the movies tonight. A ticket costs $7 and she will have to cancel her dog-sitting job that pays $30. The total cost (money cost plus opportunity cost) of seeing the movie is A. $7. B. $30. C. $37. D. $37 minus the benefit of seeing the movie.

C

7. Suppose the most you would be willing to pay for a plane ticket home is $250, but you buy one online for $175. The economic surplus from buying the ticket online is: A. $175. B. $250. C. $75. D. $0.

C

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. 3. The opportunity cost of attending State College is A. $30,000 B. $20,000 C. $15,000 D. $10,000

C. 15,000

Income effect

Change in quantity demanded of a good because a change in the price of a good changes the buyers purchasing power

Substitution effect

Change in quantity demanded of a good due to price of said good changing

12. You had to pay $600 (non-refundable) for your meal plan for Fall semester which gives you up to150 meals. If you eat only 100 meals, your marginal cost for the 100th meal is A. $6 B. $4 C. $0.25 D. $0

D

You paid $35 for a ticket (which is non-refundable) to see JAM, a local rock band, in concert on Saturday. (Assume that you would not have been willing to pay any more than $35 for this concert.) Your boss called and she is looking for someone to cover a shift on Saturday at the same time as your concert. You will have to work 4 hours and she will pay you time and a half, which is $9/hr. 9. What is the opportunity cost of going to the concert? A. $1 B. $9 C. $35 D. $36

D

(Perfect competition) What is a supplier's reservation price

Marginal cost

Price elasticity

Percentage change in quantity demanded/percentage change in price multiplied by 100

Reservation price vs market price

Reservation price is the highest price a consumer is willing to pay for something, market price is the current price for all on the market

Total Net Benefit equals

total benefit-total cost