Microeconomics Review Units 1 - 3

When a country chooses to produce more of one product, it must produce less of other products. Which economic concept explains that? A. Increasing opportunity cost B. Limited resources C. Diminishing marginal utility D. Diminishing marginal returns E. Substitution effect

B. Limited resources Reasoning: Choice 'B' is correct because the central economic problem which forces countries to make production choices is scarcity. Scarcity results from the existence of unlimited wants combined with limited resources. So when a country decides to increase its production of a good, it is using limited resources which are then no longer available for production of other goods.

What are the three economic systems?

1. Command Economy 2. Free Market Economy 3. Mixed Economy

What are the four factors of production?

1. Land 2. Labor 3. Capital 4. Entrepreneurship

What are the two types of capital? How do they differ?

1. Physical Capital: Any human-made resource that is used to create other goods and services (tools, tractors, machinery, buildings, factories, etc.)​ 2. Human Capital: Any skills or knowledge gained by a worker through education and experience (college degrees, vocational training, etc.)​

What are the five key economic assumptions?

1. Scarcity - Wants are unlimited, but resources are limited. 2. Trade-offs - Because of scarcity, people must make choices. With every choice, there is a cost. 3. Acting in self-interest. You must make choices to maximize satisfaction. 4. MC = MR. Act rationally by comparing marginal costs and marginal benefits. 5. Situations can be modeled and explained through graphs.

Which production possibility curve shows increasing opportunity cost?

A production possibility curve that is bowed out, or concave to the origin, reflects increasing opportunity costs while a straight-line production possibility curve reflects constant opportunity costs.

Which of the following DO NOT shift the PPC? A. Improvements in technology B. Loss of resources C. Increase in unemployment D. New sources of a resource are found E. Government ban on use of technology in production

C. Increase in unemployment Reasoning: Choice 'C' is correct because a production possibilities curve assumes that all resources are being fully employed so unemployment moves the point at which the economy is operating but does NOT shift the curve itself.

Positive vs Normative Economics

Positive economics is based on facts (what is). Normative economics is based on value judgements (what ought to be).

What is productive efficiency?

Products are being produced in the least costly way. This any point on the PPC.

What is Constant Opportunity Cost?

Resources are easily adaptable for producing either good. Results in a straight line PPC (Linear).

Describe scarcity in your own words.

Scarcity is the condition in which our wants are greater than the rate at which they are being produced.

What is Law of Increasing Opportunity Cost?

The more product produced, the greater the opportunity cost. Resources are not easily adaptable to producing both goods. Results in bowed out (Concave) PPC.

What is allocative efficiency?

The products being produced are the ones most desired by society.

Given the following assumptions, make a rational choice in your own self-interest: You want to visit your friend for the weekend​. You work every weekday earning $100 per day​. You have three flights to choose from:​ Thursday Night Flight = $300​ Friday Early Morning Flight = $345​ Friday Night Flight = $380 ​ What flight will you choose?

With these flights, I will end up losing something. The question is which flight will allow me to lose the least. The Thursday night flight costs $300. If I leave Thursday, I will not work Friday, so I lose an additional $100. $300 leaves my bank account, I lose out on $100. The Friday early morning flight costs $345. I still won't work Friday. I lose an additional $100. $345 leaves my bank account, I lose out on $100. The Friday night flight costs $380. I work Friday so I make $100. $380 leaves my bank account, I add $100 back. That leaves me with a cost of $280. I chose the FNF.

If the average physical product of labor curve of BetaCompany is sloping upward, then its marginal physical product of labor curve must also be sloping upward. (a) True (b) False

b) False

Which of the following could cause a shift inwards for a PPC? A. Increase in unemployment B. Increase in number of immigrants C. New sources of a resource are found D. Technological developments that cause increased labor productivity E. Government ban on use of technology in production

E. Government ban on use of technology in production Reasoning: Choice 'E' is correct because the production possibilities curve assumes fixed technology. A decrease in the use of technology would cause the curve to shift inward because of the decreased ability to produce.

Which economic concepts are reflected in the production possibilities graph?

Economic Efficiency, Scarcity and Opportunity costs are reflected in the production possibilities curve.

If the marginal physical product of labor is increasing as a firm adds more units of labor, then we know (a) the total output is increasing at an increasing rate (b) the average physical product of labor is increasing (c) Both (a) and (b). (d) Neither (a) nor(b).

(b) the average physical product of labor is increasing

At the amount of labor where the average physical product of labor is maximized (a) the marginal physical product (MPP) of labor is maximized. (b) the total output is maximized. (c) the marginal physical product of labor is equal to the average physical product of labor.

(c) the marginal physical product of labor is equal to the average physical product of labor.

When the total output of the Delta Inc.is maximized, we know (a) the marginal physical product of labor is maximized. (b) the average physical product of labor is maximized. (c) the marginal physical product of labor is zero. (d) Both (a) and (b).

(c) the marginal physical product of labor is zero.

The average physical product (APP) of 10 workers is 200 units of output per day. The marginal physical product (MPP) of the 11th worker is 220 units of output per day. If the firm adds the 11th worker, APP will (a) increase (b) decrease (c) not change

(a) increase

When the Alpha Co.hires a fifth worker, its total output increases. The marginal physical product of the fifth worker (a) is positive (b) is zero (c) is negative (d) cannot be described.

(a) is positive

If a firm which is experiencing diminishing marginal productivity from labor decides to add an extra unit of labor, which of the following must decrease? (a) marginal physical product (b) average physical product (c) total product (d) Both (a) and (b)

(a) marginal physical product

If the total product curve of Beta Company is sloping upward, then its average physical product of labor curve must also be sloping upward. (a) True (b) False

(b) False

If the total product curve of Beta Company is sloping upward, then its marginal physical product of labor curve must also be sloping upward. (a) True (b) False

(b) False

Based on the graph above, when the price moves from $15 to $25 A. The demand for girl scout cookies is elastic B. The supply for girl scout cookies is inelastic C. The demand for girl scout cookies is inelastic D. The demand for girl scout cookies is unit elastic E. The supply for girl scout cookies is unit elastic

C. The demand for girl scout cookies is inelastic Reasoning: Choice 'C' is correct because as the price increases from $15 to $25, the total revenue (calculated by multiplying price times quantity) increases as follows $15 x 160 = $2400 $25 x 120 = $3000 When total revenue increases as price increases, it means that the percentage change in price is greater than percentage change in quantity which is true when demand is inelastic.

Which of the following would allow a country to consume a combination of goods that is beyond its current production possibilities curve? A. Decrease in unemployment B. Decrease in rate inflation C. Trade based comparative advantage D. Increased efficiency in use of resources E. Producing at allocatively efficient point

C. Trade based comparative advantage Reasoning: Choice 'C' is correct because when countries trade based on comparative advantage, each country produces the goods for which it has the lowest opportunity costs. Because of scarcity, production of goods requires the sacrifice of other goods that could have been with those same limited resources. If a country trades for goods produced by another country at lower opportunity costs, it benefits from those lower costs, and the combination of goods available for it to consume increases.

The law of demand says that consumers will generally purchase smaller quantities of a product for which the price increases. This can be explained by A. The income effect B. The substitution effect C. Increasing marginal utility D. Both A and B E. Both A and C

D. Both A and B Reasoning: Choice 'D' is the correct answer because both the income effect and the substitution effect are explanations for the law of demand. Increases in price decrease the amount of a product that can be purchased with a consumer's income, and substitutes will become relatively cheaper, causing some consumers to purchase them instead.

Based on the graph, if the area represented by 0P1BQ1 is a larger area than 0P2AQ2, which of the following is true? A. This a normal good B. This is an inferior good C. Demand for the product is inelastic when price increases from P1 to P2 D. Demand for the product is elastic when price increases from P1 to P2 E. Demand for the product is unit elastic when price increases from P1 to P2

D. Demand for the product is elastic when price increases from P1 to P2 Reasoning: is correct because the area 0P1BQ1 is a larger area than 0P2AQ2, and these areas represent the total revenue for P1 and P2 respectively. The total revenue decreases as price increases so demand is elastic.