Microeconomics Ch 1

6. Suppose you find $20. If you choose to use the $20 to go to the football game, your opportunity cost of going to the game is

$20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game.

You work as an assistant coach on the university basketball team and earn $14 per hour. One day, you decide to skip the hour-long practice and go to the local carnival instead, which has an admission fee of $9. The total cost (valued in dollars) of skipping practice and going to the carnival (including the opportunity cost of time) is _______.

$23 explanation: The opportunity cost of a choice includes both the monetary amount paid and the value of your time given up by making that choice over another. By skipping practice, you forgo earning your hourly wage of $14 per hour, so this is the opportunity cost of your time. You also choose to pay $9 to get into the local carnival. So your opportunity cost in dollars is $14+$9=$23$14+$9=$23.

18. Referring to question 17, your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than

$800

The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, you ___________ go ahead and do so. The most you should pay to complete development is __________ million. Explanation:

1. Should 2. $3.0 Because the $5 million your company invested in a new product has already been spent, it should not be considered in the decision of whether to finish development, according to the principle of thinking at the margin. In this case, the additional cost to finish development is $1 million, whereas the expected additional benefit of the new product is $3 million in profit (assuming that the company receives zero profit if the product remains unfinished). Therefore, your company should go ahead and finish the product. In fact, your company should be willing to pay up to $3 million to finish development, since that is the marginal benefit from doing so. See Section: Principle 3: Rational People Think at the Margin.

The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $1.5 million. If it would cost $2 million to finish development and make the product, you __________ go ahead and do so. The most you should pay to complete development is __________ million. Explanation:

1. Should not 2. $1.5 Because the $5 million your company invested in a new product has already been spent, it should not be considered in the decision of whether to finish development, according to the principle of thinking at the margin. In this case, the additional cost to finish development is $2 million, whereas the expected additional benefit of the new product is $1.5 million in profit (assuming that the company receives zero profit if the product remains unfinished). Therefore, your company should not go ahead and finish the product. In fact, your company should be willing to pay up to $1.5 million to finish development, since that is the marginal benefit from doing so. See Section: Principle 3: Rational People Think at the Margin.

The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $2 million. If it would cost $4 million to finish development and make the product, you ___________ go ahead and do so. The most you should pay to complete development is ________ million. Explanation

1. Should not 2. $2.0 Because the $5 million your company invested in a new product has already been spent, it should not be considered in the decision of whether to finish development, according to the principle of thinking at the margin. In this case, the additional cost to finish development is $4 million, whereas the expected additional benefit of the new product is $2 million in profit (assuming that the company receives zero profit if the product remains unfinished). Therefore, your company should not go ahead and finish the product. In fact, your company should be willing to pay up to $2 million to finish development, since that is the marginal benefit from doing so. See Section: Principle 3: Rational People Think at the Margin.

9. Which of the following activities is most likely to produce an externality?

A student has a party in her dorm room.

Which of the following are trade-offs faced by a family deciding whether to buy a new car? Check all that apply.

An increase in the family's car payment means the family will be unable to afford a vacation. A larger vehicle means saving time by not having to make multiple trips somewhere, but a smaller vehicle is cheaper. Fuel-efficient cars are more expensive, but regular cars require spending more on gas.

Which of the following government activities is motivated by a concern about efficiency? Check all that apply. The market failure associated with cable TV arises from the ________ the cable TV firm, which allows the firm to have a substantial influence on market prices.

Breaking up Standard Oil (which once owned 90% of all oil refineries) into several smaller companies Regulating cable TV prices Prohibiting smoking in public places Instituting laws against driving while intoxicated explanation: Efficiency means that society is getting the maximum benefits from its scarce resources. In this case, regulating cable TV prices and breaking up Standard Oil into several smaller companies are measures designed to address inefficiency associated with market power. Prohibiting smoking in public places and instituting laws against driving while intoxicated are measures designed to address inefficiencies associated with negative externalities. See Section: Principle 1: People Face Trade-offs. market power of explanation: Market failure arises in this case from the market power of the cable TV firm, which enables the firm to influence market prices unduly. See Section: Principle 7: Governments Can Sometimes Improve Market Outcomes.

e. In a and b above and c and d above, which is the opportunity cost of which—college for work or work for college? corn for beans or beans for corn?

Each is the opportunity cost of the other because each decision requires giving something up.

11. A goal for a society is to distribute resources more equally and fairly. How might you distribute resources if everyone were equally talented and worked equally hard? What if people had different talents and some people worked hard, while others did not?

Fairness might require that everyone get an equal share because they were equally talented and worked equally hard. Fairness might require that people not get an equal share because they were not equally talented and did not work equally hard.

12. An auto manufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional units exceeds the price received.

False: a manufacturer should produce as long as the marginal benefit exceeds the marginal cost.

11. In the short run, a reduction in inflation tends to cause a reduction in unemployment.

False: a reduction in inflation tends to raise unemployment

13. An individual farmer is likely to have market power in the market for wheat.

False: a single farmer is likely to have market power in the market for wheat.

5. The United States will benefit economically if we eliminate trade with Asian countries because we will be forced to produce more of our own cars and clothes.

False: all countries gain from voluntary trade.

7. A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more.

False: higher prices reduce the quantity demanded.

3. Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."

False: the "invisible hand" refers to how markets guide self-interested people to create desirable social outcomes.

1. When the government redistributes income with taxes and welfare, the economy becomes more efficient.

False: the economy becomes less efficient because it decreases the incentive to work hard.

15. Workers in the United States have a relatively high standard of living because the United States has a relatively high minimum wage.

False: workers in the United States have a high standard of living because they are productive.

d. Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant beans.

Farmer Jones gives up 10,000 bushels of corn.

c. Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant corn.

Farmer Jones gives up 4,000 bushels of beans.

Which of the following government activities is motivated by a concern about equality? Check all that apply. Smoking in public places creates ________ because secondhand smoke harms nonsmokers.

Imposing higher personal income tax rates on people with higher incomes Providing some poor people with vouchers that can be used to buy food an externality

d. The government declares marijuana and cocaine illegal. The price of illegal drugs increases, creating more gangs and gang warfare. Due to the high price of illegal drugs, fewer street drugs are consumed.

Intended: Fewer street drugs are consumed. Unintended: More gangs and gang warfare.

f. The government bans imports of sugar from South America. South American sugar beet growers can't repay their loans to U.S. banks and turn to more profitable crops such as coca leaves and marijuana. U.S. sugar beet growers avoid a financial crisis.

Intended: Improve the financial condition of U.S. sugar beet growers. Unintended: Cause South American growers to grow marijuana and coca leaves.

e. The government prohibits the killing of wolves. The wolf population increases. Sheep and cattle herds suffer losses.

Intended: Increase the wolf population. Unintended: Damage to sheep and cattle herds.

b. The government places rent controls on apartments restricting rent to $300 per month. Few landlords are willing to produce an apartment at this price causing more homelessness. Some low-income renters are able to rent an apartment more cheaply.

Intended: Low-income renters get a cheap apartment. Unintended: Some people find no apartment at all causing more homelessness.

1. People respond to incentives. Governments can alter incentives and, hence, behavior with public policy. However, sometimes public policy generates unintended consequences by producing results that were not anticipated. For each of the following public policies, determine which result was likely the intended result and which was the unintended consequence. a. The government raises the minimum wage to $15 per hour. Some workers find jobs at the higher wage making these workers better off. Some workers find no job at all because few firms want to hire low-productivity workers at this high wage.

Intended: Raise the wage of low-productivity workers. Unintended: Some workers are unemployed at the higher wage.

c. The government raises the tax on gasoline by $2 per gallon. The deficit is reduced, and people economize on their use of gasoline. There is a boom in bicycle sales.

Intended: Reduce the deficit and use less gasoline. Unintended: Bicycle sales increase.

2. What do you think would happen to the amount of time it would take to find a parking place?

It would take much longer to find a parking place.

High inflation imposes various costs on society. What can policymakers do to keep inflation at a low level?

Maintain a slow growth in the quantity of money.

12. Which of the following statements is true about a market economy?

Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.

11. Which of the following situations describes the greatest market power?

Microsoft's impact on the price of desktop operating systems

Which of the following are trade-offs faced by a member of Congress deciding how much to spend on national parks? Check all that apply.

Money spent on national parks benefits park visitors, but alternatively the money could be spent on highways to benefit drivers.

Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. 1. What do you think would happen to the number of students desiring to park their cars on campus?

More students would wish to park on campus.

3. Thinking in terms of opportunity cost, would the lower price of a parking permit necessarily lower the true cost of parking?

No, because we would have to factor in the value of our time spent looking for a parking place.

1. Is air scarce? Is clean air scarce?

No, you don't have to give up anything to get air. Yes, you can't have as much clean air as you want without giving up something to get it (pollution equipment on cars, etc.).

4. Would the opportunity cost of parking be the same for students with no outside employment and students with jobs earning $15 per hour?

No. Students who could be earning money working are giving up more while looking for a parking place. Therefore, their opportunity cost is higher.

Explanation:

Nothing in life is free. In order to get something, you usually have to give up something else. For example, when you spend $3 on a coffee on your way to class, you not only give up something else you could've bought for $3, but you also give up the time it takes to walk to the coffee shop, wait in line, and then drink your coffee. Therefore, making decisions requires trading off one goal against another, in terms of both the benefits and the costs. See Sections: Principle 1: People Face Trade-offs; and Principle 2: The Cost of Something Is What You Give Up to Get It.

10. If the government printed twice as much money, what do you think would happen to prices and output if the economy were already producing at maximum capacity?

Spending would double, but since the quantity of output would remain the same, prices would double.

b. Susan can work full time or go to college. She chooses work.

Susan gives up a college degree and the increase in income through life that it would have brought her (but doesn't have to pay tuition).

2. Opportunity cost is what you give up to get an item. Because there is no such thing as a free lunch, what would likely be given up to obtain each of the items listed below? a. Susan can work full time or go to college. She chooses college.

Susan gives up income from work (and must pay tuition).

Which of the following are trade-offs faced by a recent college graduate deciding whether to go to graduate school? Check all that apply.

Taking out more student loans means she may not able to purchase the new car she needs. Graduate school means fewer years of on-the-job experience. If she goes to graduate school, she won't be able to spend as much time with her family.

3. Why is there a trade-off between equality and efficiency?

Taxes and welfare make us more equal but reduce incentives for hard work, lowering total output.

You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. If you do not take the vacation, you would spend the same amount of money on a new computer. Which of the following is true if you decide to take the vacation? Explanation:

The benefits of going on the vacation exceed the benefits you would obtain from the new computer. It can be difficult to compare benefits to costs when costs are monetary but benefits are psychological. One way to achieve this is to determine the opportunity cost of going on vacation. The opportunity cost of an item is what you give up to get that item. In this case, you would have to give up buying a new computer if you decide to go on a vacation. If you decide to take the vacation, therefore, you must value the benefits of going on the vacation more than the benefits of a new computer. A second way to compare benefits to costs is to think about how hard you worked to earn the money to pay for the vacation. You can then decide whether the psychological benefits of the vacation are worth the cost of having to work for the money to pay for it. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.

Which of the following are trade-offs faced by a professor deciding how much time to spend preparing for class? Check all that apply.

The better the lecture, the better the professor's chances of tenure, but time spent preparing the lecture decreases the time the professor has available to work on research.

8. In the Wealth of Nations, Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." What do you think he meant?

The butcher, brewer, and baker produce the best food possible, not out of kindness, but because it is in their best interest to do so. Self-interest can maximize general economic well-being.

6. Why do you think air bags have reduced deaths from auto crashes less than we had hoped?

The cost of an accident was lowered. This changed incentives, so people drive faster and have more accidents.

Now suppose you had been planning to spend the day reading your new favorite novel. What is the cost of going kayaking in this case? Check all that apply. Explanation:

The fee for accessing the river in a national park The rental of any kayak equipment you need The value of your time spent reading In this case, the opportunity cost of going kayaking when your plan was to read a novel again includes the fee for accessing the river in a national park and the rental of any kayak equipment you need. However, because you are giving up reading time, your opportunity cost also includes the value of your time spent reading. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.

You were planning to spend Sunday working at your part-time job, but a friend asks you to go kayaking. Which of the following are included in the true cost of going kayaking? Check all that apply. Explanation:

The fee for accessing the river in a national park The rental of any kayak equipment you need The wages you forgo by going kayaking The opportunity cost of an item is what you give up to get that item. The opportunity cost of going kayaking when your plan was to go to work includes the fee for accessing the river in a national park, the wages you forgo by going kayaking, and the rental of any kayak equipment you need. Your endurance splash pants are not included in the cost of going kayaking since you don't have to give up anything to use the pants you already own. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.

Which of the following are trade-offs faced by a company president deciding whether to open a new factory? Check all that apply.

The firm can either open a new factory or expand its current factory.

2. What is the opportunity cost of saving some of your paycheck?

The items you could have enjoyed had you spent that portion of your paycheck (current consumption).

4. Water is necessary for life. Diamonds are not. Is the marginal benefit of an additional glass of water greater or lesser than an additional one-carat diamond? Why?

The marginal benefit of another glass of water is generally lower because we have so much water that one more glass is of little value. The opposite is true for diamonds.

You win $200 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 3% interest. Which of the following is the opportunity cost of putting the $200 in a bank account for one year? Explanation:

The value you could obtain by spending the money now The opportunity cost of an item is what you give up to get that item. In this case, by putting the $200 in a bank account for a year, you give up spending the money now. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It

You have $20 in your wallet. You have a choice between using this amount to enter a baseball pool, which will give you the opportunity to win $80, and spending the money on buying something else. Which of the following is the opportunity cost of entering a baseball pool with $20? Explanation:

The value you could obtain by spending the money on buying something else The opportunity cost of an item is what you give up to get that item. In this case, by entering a baseball pool, you give up spending the money on buying something else. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.

Which of the following is the reason behind the slow growth in U.S. incomes during the 1970s and 1980s? What can the government do to boost living standards? Check all that apply.

There was a slowdown in productivity growth. Improve education and expand literacy among its citizens to ensure workers are well educated Encourage research and development to ensure workers have access to the best available technology

7. Suppose one country is better at producing agricultural products (because they have land that is more fertile), while another country is better at producing manufactured goods (because they have a better educational system and more engineers). If each country produced their specialty and traded, would there be more or less total output than if each country produced all of their agricultural and manufacturing needs? Why?

There would be more total output if the two countries specialize and trade because each is doing what it does most efficiently.

12. Who is more self-interested, the buyer or the seller?

They are equally self-interested. The seller will sell to the highest bidder, and the buyer will buy from the lowest offer.

10. High and persistent inflation is caused by excessive growth in the quantity of money in the economy.

True

14. To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.

True

2. When economists say, "There ain't no such thing as a free lunch," they mean that all economic decisions involve trade-offs.

True

4. Rational people act only when the marginal benefit of the action exceeds the marginal cost.

True

8. An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.

True

9. Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly.

True

9. If we save more and use it to build more physical capital, productivity will rise and we will have rising standards of living in the future. What is the opportunity cost of future growth?

We must give up consumption today.

A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only two years of benefits. Which arrangement would provide the unemployed with greater incentives to look for jobs? Under which arrangement would the distribution of income be more equal?

Welfare benefits last for only two years. Welfare benefits last forever. Explanation: If welfare benefits lasted forever, there would be little incentive to find work once one became unemployed. If benefits last only two years, on the other hand, there is a greater incentive for people to find work before the two years are up and they stop receiving financial support from the government. This change in the government's antipoverty program reduces equality in the distribution of income, since those who cannot find a job will get no income at all; however, the economy is more efficient, given the increased incentive for the unemployed to find work and contribute to the nation's output. See Section: Principle 4: People Respond to Incentives.

17. You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.)

Yes

5. Your car needs to be repaired. You have already paid $500 to have the transmission fixed, but it still doesn't work properly. You can sell your car "as is" for $2,000. If your car were fixed, you could sell it for $2,500. Your car can be fixed with a guarantee for another $300. Should you repair your car? Why?

Yes, because the marginal benefit of fixing the car is $2,500 - $2,000 = $500, and the marginal cost is $300. The original repair payment is not relevant.

15. In the short run,

a decrease in inflation temporarily increases unemployment.

1. Which of the following involve a trade-off?

a. buying a car b. going to college c. watching a football game on Saturday afternoon d. taking a nap e. all of the above involve trade-offs.

7. Foreign trade

allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home.

20. Productivity can be increased by

improving the education of workers.

Guaranteeing everyone in society the best healthcare would likely _______ efficiency because people would __________ healthcare. Paying laid-off workers unemployment benefits until they find a new job will likely _______ equality and _________ efficiency.

decrease overconsume increase decrease

Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, this leads to ________ growth in productivity because workers will have _________ equipment with which to work. Workers will _________ from the change in productivity growth because they will produce and earn ________. True or False: Society can receive a "free lunch" when it builds new factories.

faster more benefit more false

10. Which of the following products would be least capable of producing an externality?

food

14. High and persistent inflation is caused by

governments increasing the quantity of money too much

5. Raising taxes and increasing welfare payments

improves equality at the expense of efficiency

16. An increase in the price of beef provides

information that tells producers to produce more beef.

Suppose Americans decide to save less of their incomes, reducing the ability of banks to lend to businesses. With less funds available to businesses, workers will have _______ capital equipment with which to work. This leads to ______ growth in productivity. Factory owners will ______ from the change in productivity growth because they will receive a ________ return on their investments. True or False: Society can receive a "free lunch" when it builds new factories.

less slower lose lower false

A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only two years of benefits. This change gives people the incentives to find a job _______ quickly than if welfare benefits lasted forever. The loss of benefits after two years will result in the distribution of income becoming ________ equal.

more less explanation: If welfare benefits lasted forever, there would be little incentive to find work once one became unemployed. If benefits last only two years, on the other hand, there is a greater incentive for people to find work before the two years are up and they stop receiving financial support from the government. This change in the government's antipoverty program reduces equality in the distribution of income, since those who cannot find a job will get no income at all; however, the economy is more efficient, given the increased incentive for the unemployed to find work and contribute to the nation's output. See Section: Principle 4: People Respond to Incentives.

A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only two years of benefits. This change gives people the incentives to find a job ________ quickly than if welfare benefits lasted forever. As a result of the change in working incentives led by the 1996 bill reform, the economy will be ___________ efficient.

more more explanation: If welfare benefits lasted forever, there would be little incentive to find work once one became unemployed. If benefits last only two years, on the other hand, there is a greater incentive for people to find work before the two years are up and they stop receiving financial support from the government. This change in the government's antipoverty program reduces equality in the distribution of income, since those who cannot find a job will get no income at all; however, the economy is more efficient, given the increased incentive for the unemployed to find work and contribute to the nation's output. See Section: Principle 4: People Respond to Incentives.

2. Trade-offs are required because wants are unlimited and resources are

scarce

3. Economics is the study of how

society manages its scarce resources

8. Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent,

students will shift majors from education to accounting.

4. A rational person does not act unless

the action produces marginal benefits that exceed marginal costs

19. Which of the following is not part of the opportunity cost of going on vacation?

the money you spent on food

6. When a jet flies overhead, the noise it generates is an externality.

true

13. Workers in the United States enjoy a high standard of living because

workers in the United States are highly productive.