ECON202 Exam 1 Study Guide CHENG
Introduction to Economics: (a mathematical review) • Graphical Relationships –
o Positive relationship: both x and y variables increase or decrease; upward sloping curve
o Negative relationship: x and y variables do the opposite of one another; as x increases, y decreases (and vice versa); downward-sloping curve (looks like the diagonal line in the letter N(egative))
• Movement Along a Curve –
o Point (x,y) will move along a curve as x and y change at the same time; this only occurs when all other factors are held constant
• Shifting a Curve –
o If there is a positive relationship between two variables, then an increase in one will cause a shift to the right
o If there is a negative relationship between two variables, an increase in one causes it to shift to the left We also discuss several other topics like What are the four cardinal virtues?
• Calculating Area of a Rectangle –
o Length x Width
• Calculating Area of a Triangle –
o (1/2) x base of triangle x height of triangle
Chapter 1: Principles of Microeconomics
• Economics – the study of how human behavior contributes to the supply and demand of its scarce resources; a social science
o Economics is used to predict:
▪ What needs to be produced
▪ How it should be produced
▪ How much should be produced
▪ How income should be distributed
o Three ways to interpret economic phenomena:
• Microeconomics vs. Macroeconomics –
o Microeconomics – the study of individuals and business decisions; the study of how rational individuals/firms make optimal decisions under certain constraints and how they interact in markets If you want to learn more check out How did the understanding of what it meant to be an american change from 1865 to 1939?
o Macroeconomics – the study of the economy as a whole; the study of economy-wide phenomena within the market
▪ How are they connected? – Economy-wide phenomena (i.e. a rise in unemployment rates) are always due to the individual decision-maker; the behaviors of individuals and firms determine the condition of the overall market
• Principles of Microeconomics –
o For Individual Decision-Making:
1. People face trade-offs.
• Rational people weigh benefits and costs of their actions; only
if benefits outweigh costs, they’ll act.
• Trade-offs are due to the scarcity of resources
• Major trade-off within society – efficiency vs. equality
o Efficiency – how to get the most out of our available
o Equality – how to distribute these resources among
regions and individuals
▪ For society to get the most out of its scarce
resources, sometimes the equal distribution of
resources must be sacrificed and vice versa
▪ For example, say a guy owns a bunch of oil rigs.
Can the profit he earns from the oil be distributed If you want to learn more check out What is the role of courts in society?
equally among every citizen in the country? No,
that wouldn’t be very efficient, because now the
guy that own the rigs does not have the money to
keep producing the oil that was making the
2. Whatever “yes” decision you make, you’re saying “no” to
several other options.
• The decisions you say “no” to are called opportunity costs;
opportunity costs are the actions/results you miss out on
when you decide on another option.
• Not all costs are measured in money:
o Explicit costs – costs that involve a monetary
exchange; money that comes out-of-pocket
o Implicit costs – costs that do not affect money, but
other resources instead (like time, energy, etc)
3. Rational people think at the margin. We also discuss several other topics like What are the six mountain ranges in europe?
• Rationality – a rational person consistently takes account of
available information, probabilities of events, and
potential costs and benefits in determining a preference
o But what happens when a human acts irrationally? –
often times, the individual will learn from other rational
people how to be wiser with their resources, thus
adapting and making their own lives easier; basically,
irrationally will eventually become nonexistent
• Marginalism – analyzing additional (incremental) costs and
benefits arising from a decision
o If the marginal benefits outweigh the marginal costs, the
decision is a good one!
• Diminishing Marginal Benefit/Return – the concept that…the more we have of something, the less satisfaction we get from it. If you want to learn more check out What are the knights of labor?
o For example, say you’re super hungry so you eat a slice of pizza you rate how satisfied you are after that first slice. Now, eat another slice. Rate your satisfaction. Now eat a third and fourth slice and rate your satisfaction. Eventually, you’ll start to get full and eating the pizza is a lot less enjoyable.
# of slices
5 – 0 = 5
8 – 5 = 3
9 – 8 = 1
6 – 9 = -3
o In the table, you can see how the marginal benefit decreases with each slice of pizza you eat, even though you were the most satisfied when you were eating that third slice. This is the theory of diminishing marginal benefit.
• The Diamond & Water paradox –
o First of all, water is essential to life. Diamonds are not. So why, then, are diamonds more valuable to us than water? Don't forget about the age old question of What are the types of diabetes?
o Scarcity is the root cause. If water were to become scarce, people would pay big bucks for it and diamonds would be considered less valuable.
o To analyze, compare the marginal costs and marginal benefits of diamonds and of water. If you quantify the satisfaction you receive from a diamond (say, you’ll get $5000 of satisfaction) and compare it to the actual cost of the diamond (say it costs $4000), then the net marginal benefit you receive from the diamond is $1000. Now, do the same for a bottle of water. Say you quantify that a bottle of water will give you $3 of satisfaction and it costs $2. The net marginal benefit of a bottle of water is only $1. This is how rational individuals perceive and analyze the values of different products.
4. People respond to economic incentives.
• People are more likely to engage in an activity if they are
given some sort of motivation, even if marginal costs
outweigh marginal benefits
o For example, you may be less likely to drive over the
speed limit if you know you may be fined $200 for doing
so. Let’s compare the costs and benefits of speeding.
▪ Benefits of speeding: you arrive at your
destination earlier (quantify your satisfaction; say
getting there earlier is equal to about $3 in
▪ Costs of speeding: you can get a ticket for $200
o The costs clearly outweigh the benefits, so it’s irrational
to speed, right? Well, not if you factor in the probability
of getting pulled over by a cop… In this case, you would
multiply the cost of the ticket by the probability that
you’ll get pulled over (say that 1 in 1000 speeders will
get pulled over, so .01%). This calculation equals 20
cents. Now, compare that 20 cent marginal cost with the
$3 marginal benefit, and you’ll see why everyone drives
over the speed limit.
o For Market and Economy Decision-Making:
1. Trade can make everyone better off.
• When people interact with each other in a market to exchange goods and services, the market prospers and the individuals
2. Markets are usually a good way to organize economic activity. • Because market economies allocate resources through
individuals’ decisions (usually out of self-interest) instead of
from a centralized decision-maker, an “invisible hand”
moves the market and promotes general economic well
3. Governments can sometimes improve market outcomes. • When people only us the market out of self-interest, sometimes there is a trade-off that negatively affects other variables;
government can then step in to regulate the economy (i.e.
industrial factories produce quality items at low prices, but
they emit pollution that kills animals in the region, so the
government gives them rules to follow).
Chapter 2: The Economist
• The Scientific Method of Economics –
o Observe economic phenomenon
o Formulate a theory/model that is testable
o Collect data and test the theory through empirical analysis
o Revise the theory if it fails to explain the data well
▪ Example: Do couples have more children when they earn more? This is a testable question that can lead economists to an answer to this
• Economic models/theories – when trying to understand economics, the answer to most economic phenomena is knowing the causation of such phenomena. Economists are required to simplify complex human behaviors by…
▪ Assuming away unnecessary details
▪ Understanding the simplest scenario first before adding
complexities to it
▪ Making assumptions to make things simple, then relaxing (or
specifying) these simple assumptions when analyzing complicated
o The balance of economic models is extremely important.
▪ If a model is overbroad (meaning it includes too many moving
variables and not enough assumptions), an economist task of
explaining a phenomenon will be almost impossible.
▪ If a model is oversimplified (meaning it includes too many
assumptions), an economist will not come to an accurate conclusion
when testing his model/theory.
• Example: Say you need a map from your house to your next
class. Do you need a map that includes all of the trees, lakes,
buildings, etc all along your route? (Probably not, this would
be overbroad.) What if I gave you a map with a squiggly line
from point A to point B? (Not helpful either, because it’s
• Production Possibilities Frontier (PPF)
o This economic model explains efficient production possibilities, or the allocation of 100% of available resources in the most
▪ It will demonstrate how a specific choice of action will result in an
efficient, inefficient, or unfeasible manner
• Efficient – economy uses ALL available resources to produce a
combination of 2 goods; the PPF is the set of all efficient
• Inefficient – economy does NOT have to use all of its
resources to produce it, meaning there are resources
leftover; this point would be plotted BELOW the PPF line on a
• Infeasible (not possible) – economy cannot produce the
combination of goods, even if all resources are used (this point
would be plotted ABOVE the PPF line on a graph)
o Example: Consider an economy that uses the scarce resource (labor, measured by labor hours) to produce computers and wheat. Assume the economy has 50,000 labor hours per month available for production. In addition, producing one computer requires 100 hours labor; producing one ton of wheat requires 10 hours labor. Below are five production plans in terms of allocating the 50,000 labor hours:
• A. 50,000 hours in producing computers + 0 hour in producing wheat
• B. 40,000 hours in producing computers + 10,000 hours in producing wheat
• C. 25,000 hours in producing computers + 25,000 hours in producing wheat
• D. 10,000 hours in producing computers + 40,000 hours in producing wheat
• E. 0 hour in producing computers + 50,000 hours in producing wheat
▪ From the information above, we know that we can produce 500C/0W, 400C/1000W, 250C/2500W, 100C/4000W, or 0C/5000W. This is the PPF line on the graph, because all labor hours would be used in each output scenario.
▪ Say you wanted to produce 100C and 3500W. This would be inefficient, because there would be leftover labor hours that were not used. The point would fall below PPF.
▪ Say you wanted to produce 300C and 3500W. This would be infeasible, because you don’t have enough labor hours available. The point would fall above PPF. Remember, resources are scarce!
Chapter 4: Demand and Supply
• Laws of Supply and Demand –
o Why do we need to understand these in the market?
▪ Helps determine market price of a product
▪ Helps determine the quantity of products needed in the market
o Markets – the environment in which a buyer and seller interact in the exchange of goods, services, and payments
▪ Competitive markets – environment where multiple buyers and sellers interact; results in the buyers/sellers having little to no impact on
• Perfectly competitive markets – makes market analysis simple;
they don’t really exist in reality, but it serves as a
benchmark/baseline when we’re evaluating more complicated
market scenarios; characterized by the following features:
o Homogenous goods – goods in each category are the exact
same (e.g. a laptop is simply a laptop; there’s no MacBooks,
no Microsoft Studio…there are just..laptops)
o Price takers – buyers and sellers have no influence on the
market price of a good
o Law of Demand (LOD) – states that, when all other variables remain constant, the quantity of a good decreases when its price increases; there is a negative relationship between price and quantity demanded (downward sloping curve)
• NOTE: In some instances, the demand curve CAN slope upward,
meaning that people will buy more when the price goes up. (e.g.
wealthy people might buy a luxury car that’s super expensive
because it’s a status symbol)
▪ Quantity Demanded (QD) – the amount of a good that buyers are willing and able to purchase
▪ Market Demand Curves – can be determined when there are multiple consumer’s being analyzed
• Example: Helen buys 8 lattes when they’re priced at $4 a piece,
and Ken buys 4 lattes at $4 a piece; when the lattes are $5, Helen
buys 6 and Ken buys 3. Market demand curve is determined by
adding the quantities of Helen and Ken’s lattes that they bought at
the different price levels. So two of the points on the curve would
be (4, 12) and (5, 9)
▪ Change in Quantity Demanded vs. Change in Demand
• Change in QD – due to a change in the good’s price; curve itself
does NOT shift, only the point on the curve shifts from one position
• Change in Demand – due to a change in ANY factors (“other
things”), excluding the good’s price; entire curve shifts from one
location on the graph to another (left or right of its original
o Demand shifters – the “other things” that can affect the position of the demand curve; there are 5 demand shifters we should be aware of:
▪ Number of buyers – when there are more buyers present, there is an increase in demand, which shifts the demand curve to the right (e.g. during football season, there are more fans in town to buy Ole Miss related goods)
▪ Levels of income –
• When income increases, demand increases for normal goods like new cars (demand curve
shifts to the right)
• When income increases, demand decreases for inferior goods like public transit (demand
curve shifts to the left)
▪ Prices of related goods –
• Substitutes (e.g. Coke and Pepsi) – if the
price of one substitute increases, the demand
for the OTHER substitute increases (curve for
good 2 shifts to the right)
• Complements (e.g. smartphones and apps) – if the price of a good increases, the demand
for its complement goods decreases (curve for
complement good shifts to the left)
▪ Tastes – when a consumer’s taste for certain products changes,
▪ Expectations – sometimes there are events that allow consumers to make predictions about price changes (e.g. iPhone 7 comes out in September, so we assume the price of iPhone 6s will go down in September)
o Law of Supply (LOS) – states that, when other factors are held constant, the quantity of a good supplied increases when the price of a good increases (sellers want to sell more when they’re selling their goods at a higher price); there is a positive relationship between price and quantity supplied (upward sloping curve)
▪ Quantity Supplied (QS) – the amount of a good that sellers are willing and able to sell
▪ Change in Quantity Supplied vs. Change in Supply
• Like quantity demanded, when there is a change in the quantity supplied, there will only be a move ALONG the curve; the curve itself will not shift
• When there is a change in supply, it is due to factors other than the price of the good and the entire curve can shift left or right
o Supply shifters – the “other things” that can affect the
position of the supply curve; there are 4 supply shifters we
should be aware of:
▪ Number of sellers – when there is an increasing
number of sellers in a market (regardless of price)
they will sell more, so the supply curve will shift to
▪ Input prices – an increase in input prices (cost of
materials/labor to make a product) is less profitable
for the seller, so supply decreases; supply curve
shifts to the left
▪ Technology – advanced technology often makes
production easier and more profitable for sellers,
therefore supply increases and the supply curve
shifts to the right
▪ Expectations – if a producer/seller expects that his
product will become less and less desirable (say, an
MP3 player producer hears about the invention of the
iPod), he will increase supply now so he can sell as
many as he can before the iPod is released
o Combining Supply and Demand
▪ Market Equilibrium – when sellers produce exactly as many goods as the buyers will purchase; QS = QD
• Market Equilibrium Price/Market Clearing Price (P*) – the price of a good when QS and QD are equal; basically the perfect price that benefits sellers and suppliers equally
• Market Equilibrium Quantity (Q*) – the quantity of goods that are supplied at that perfect price
• P* and Q* are located at the intersection of the demand and supply curves
o Example: Market research has revealed the following
information about the market for chocolate bars: the
demand schedule/curve can be represented by the
equation Qd = 1600 – 300P; the supply schedule/curve can
be represented by the equation Qs = 1400 + 700P. What are
market equilibrium price and quantity?
▪ Set each equation equal to one another and solve for
P (price). Then substitute this value of P into one of
the individual equations to determine Q (quantity).
o What happens when the market is not in equilibrium?
▪ Surplus – excess supply; occurs when quantity supplied is greater than quantity demanded; on a supply/demand graph, a surplus is any points above the intersection
• To determine the surplus on the supply/demand graph, take the higher quantity and subtract it from the lower quantity.
▪ Shortage – excess demand; occurs when quantity supplied is less than quantity demanded; on a supply/demand graph, a shortage is any points below the intersection
• To determine the shortage, take the higher quantity and subtract it from the lower quantity.
▪ How does the market overcome shortages and surpluses?
• The market will cure itself with adjustments in price. If there is a surplus of goods, sellers will lower the price, so people will buy more. If there is a shortage of goods, the seller will raise
the price so less people are interested in the good. Rational people rely on self-interest, which will eliminate any surpluses or shortages.
• This concept is referred to as the market mechanism, which is driven by the law of demand and the law of supply.
o The market mechanism only applies to a market economy,
and has no effect in a centrally-planned economy, where
the government has control over the production of goods
and the land they’re produced on.
o Shifts in Supply and Demand – the factors of supply and demand determine the equilibrium price and quantity. As these factors shift, the equilibrium price and quantity will also change.
▪ DECREASES in DEMAND:
• Demand curve shifts to the LEFT because buyers are willing and able to buy a lower quantity at each price.
• Possible causes:
o Fall in income
o Fall in the price of a substitute
o Rise in the price of a complement
• Results in:
o Lower equilibrium price
o Lower equilibrium quantity
• If the demand decreases, for example a particular style of
sunglasses becomes less popular, (i.e., a change a tastes and
preferences), the quantity demanded at each price has
decreased. At the current price there is now a surplus in the
market and pressure for the price to decrease. The new
equilibrium will be at a lower price and lower quantity. Note that the supply curve does not shift but a lower quantity is supplied due to a decrease in the price.
▪ INCREASES in DEMAND:
• Demand curve shifts to the RIGHT because there’s an increase in QD at every price.
• Possible Causes:
o Rise in income
o Rise in the price of a substitute good
o Fall in the price of a complement good
• Results in:
o Higher equilibrium price
o Higher equilibrium quantity
• If the demand curve shifts right, there is a greater quantity demanded at each price, the newly created shortage at the original price will drive the market to a higher equilibrium price and quantity. As the demand curve shifts the change in the equilibrium price and quantity will be in the same direction, i.e., both will increase.
▪ DECREASE in SUPPLY:
• Supply curve shifts LEFT because suppliers are willing and able to supply a lower quantity at each possible price.
• Possible Causes:
o Expectations of a future rise in price
o Less sellers in the market
o Increase in input prices
• Results in:
o Higher equilibrium price
o Lower equilibrium quantity
▪ If the supply curve shifts left, say due to an increase in the price of the resources used to make the product, there is a lower quantity supplied at each price. The result will be an increase in the market equilibrium price but a decrease in the market equilibrium quantity. The increase in price, causes a movement along the demand curve to a lower equilibrium quantity demanded.
▪ INCREASE in SUPPLY:
• Supply curve shifts RIGHT because suppliers are willing and able to supply a higher quantity at each price.
• Possible causes:
o Expectations of a future drop in price
o More sellers in the market
o Decrease in input prices
• Results in:
o Lower equilibrium price
o Higher equilibrium quantity
• A rightward shift in the supply curve, say from a new production technology, leads to a lower equilibrium price and a greater quantity. Note that as the supply curve shifts, the change in the equilibrium price and quantity will be in opposite directions.
o What happens to equilibrium when supply and demand curves shift at the same time?
▪ For either price or quantity, if all changes are in the same direction, then the cumulative change will be in that direction.
▪ If changes go in opposite directions, the cumulative changes will be unknown, or indeterminate. Changes in opposite direction are
indeterminate unless you know which change is larger.
Review questions for EXAM 1:
1.Which of the following statements is correct? …Buyers determine demand, and sellers determine supply.
2. For a market for a good or service to exist, there must be a …group of buyers and sellers.
3.A competitive market is a market in which…no individual buyer or seller has any significant impact on the market price.
4. If a seller in a competitive market chooses to charge more than the going price, then…buyers will make purchases from other sellers.
5. In competitive markets, which of the following is NOT correct? …Some sellers can set prices.
6.A movement upward and to the left along a demand curve is called a(n)…decrease in quantity demanded.
7.When the price of a good or service changes, …there is a movement along a given demand curve.
8. The movement from point A to point B on the graph shows…an increase in quantity demanded.
9.When we move along a given demand curve, …all non price determinants of demand are held constant.
10. When quantity demanded decreases at every possible price, the demand curve has …shifted to the left.
11. The market demand curve…represents the sum of the quantities demanded by all the buyers at each price of the good.
12. To obtain the market demand curve for a product, sum the individual demand curves…(not sure on this one, but it’s not diagonally or vertically, lol)
13. If Consumer A and Consumer B are the only consumers in a market, then the market quantity demanded when the price is $6 is…12 units.
14. The shift from D to D’ is called…a decrease in demand.
15. If the demand curve shifts from D to D’, then…(not sure on this one either ☹)
16. The movement from D to D’ could be caused by…a decrease in the price of a substitute.
17. The movement from D’ to D could be caused by…(idk, sorry.)
18. The movement from D’ to D in the market for potato chips could be caused by a(n)
19. Which of the following changes would NOT shift the demand curve for a good or service? …a change in the price of the good or service.
20. Soup is an inferior good if the demand…for soup falls when income rises.
21. Suppose that a decrease in the price of good X results in fewer units of good Y being demanded. This implies that X and Y are…substitute goods.
22. If toast and butter are complements, then which of the following would increase the demand for toast? …a decrease in the price of butter.
23. Suppose scientists provide evidence that chocolate pudding increases the bad cholesterol levels of those who eat it. We would expect to see…a decrease in the demand for chocolate pudding.
24. Ford Motor Company announces that next month it will offer $3000 rebates on new Mustangs. As a result of this information, today’s demand curve for
Mustangs…shifts to the left.
25. A movement along the supply curve might be caused by a change in…the price of the good or service that is being supplied.
26. A supply curve slopes upward because…an increase in price gives producers an incentive to supply a larger quantity.
27. When quantity supplied decreases at every possible price, we know that the supply curve has…shifted to the left.
28. Which of the following changes would not shift the supply curve for a good or service? …a change in the price of the good or service.
29. In a market, to find the total amount of supplied at a particular price, we must…sum the quantities that individual firms are willing and able to supply at that price.
30. A market supply curve shows…the total quantity supplied at all possible prices.
31. Which supply schedules obey the laws of supply? …Firm B’s and Firm D’s only.
32. If these are the only four sellers in the market, then the market quantity supplied at a price of $4 is…30 units.
33. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1 per hour, then it is likely that the…supply of bicycles will shift to the left.
34. An improvement in production technology will…decrease a firm’s costs and increase its supply.
35. If suppliers expect the price of their product to fall in the future, then they will…increase supply now.
36. A decrease in the number of sellers in the market causes…the supply curve to shift to the left.
37. The shift from S to S’ could be caused by a(n)…improvement in production technology.
38. The shift from S to S’ in the market for peaches could be caused by a(n)…decrease in the labor costs of the workers who pick peaches.
39. The shift from S’ to S in the market for chocolate cake could be caused by a(n)…decrease in the number of commercial bakers.
40. At the equilibrium price, the quantity of the good that buyers are willing and able to buy…exactly equals the quantity that sellers are willing and able to sell.
41. If the demand can be represented by the equation QD = 2400-200P and supply can be represented by the equation QS = 2000+200P, what are the equilibrium price and quantity? …P=1; Q=2200
42. In markets, prices move toward equilibrium because of…the actions of buyers and sellers.
43. When the price of a good is higher than the equilibrium price, …sellers desire to produce and sell more than buyers wish to purchase.
44. When a surplus exists in a market, sellers…lower price, which increases quantity demanded and decreases quantity supplied until the surplus disappears.
45. Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a…shortage to exist and the market price of roses to increase.
46. The law of supply and demand asserts that…the price of a good will eventually rise in response to an excess demand for that good.
47. If there is currently a shortage of 20 units of the good, then the law of …supply and demand predicts that the price will rise by $2 to eliminate the shortage.
48. The equilibrium price and quantity, respectively, are…$6 and 30 units.
49. If the price were $8, a…surplus of 25 units would exist, and price would tend to fall.
50. If the price were $4, a…shortage of 25 units would exist, and price would tend to rise.
51. Which of the following events must cause equilibrium quantity to fall? …demand and supply both decrease.
52. If the demand for a product decreases, then we would expect equilibrium price…and equilibrium quantity to both decrease.
53. Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would happen in the market for the good?
…Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
54. If scientists discover that steamed milk, which is used to make lattes, prevents heart attacks, what would happen to the equilibrium price and quantity of lattes? …both the equilibrium price and quantity would increase.
55. What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts goes up, the price of jelly falls, fewer firms decide to produce peanut butter, and health officials announced that eating peanut butter was good for you? …price will rise and the effect on quantity is ambiguous.
56. All else equal, an increase in the income of buyers who consider turkey to be an inferior good would cause a move from…DA to DB.
57. All else equal, in increase in the number of turkey sellers would cause a move from …y to x.
58. Robb only has $100 to spend. He wants to buy either a new jacket for his trip to Colorado, or a pair of Beats so
he can listen to music on his trip. Both items cost $100, so he can only buy one or the other. What principle of microeconomics does this illustrate? People face trade offs.
59. A typical society strives to make the most of its limited supply of resources, but also wants to distribute the benefits of these resources fairly among the members of society. This illustrates society’s trade-off between: efficiency and equality.
60. High-school athletes who skip college to become professional athletes… understand that the opportunity cost of attending college is very high.
61. A rational decision-maker takes an action only if the… marginal benefit is greater than the marginal cost.
62. You’re considering staying in college for an extra semester to receive an additional degree in economics. In deciding whether or not to stay, you should… compare the cost of staying another semester to the benefits of staying another semester.
63. People are likely to respond to a policy change if… the policy alters either the costs or the benefits of their typical behavior.
64. What do we mean by “There ain’t no such thing as free lunch”? Kendra must decide between going to
Colorado or Cancun for spring break. (I THINK this is the right answer….)
65. Denise decides to work overtime for 3 hours at $10/hour instead of seeing a movie with her friends. Her opportunity cost of working is…the enjoyment she would have received if she has seen the movie with her friends.
66. Bob has 2 cars. Bob wants to buy a third car. What is Bob’s marginal benefit from purchasing another car? The total benefit he receives from purchasing 3 cars, minus the total benefit he received from purchasing the first 2 cars.
67. People are willing to pay more for a diamond than for a bottle of water because… the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.
68. Suppose Oxford were to raise the tax rates on liquor. As a result, people drive to Batesville to get liquor for a better price. Which microeconomic principle does this best illustrate? People respond to incentives.
69. One thing economists do to help them understand how the real world works is… make assumptions.
70. Economists make assumptions to… make a complex world easier to understand.
71. An economic theory about international trade that is based on the assumption that there are only two countries trading two goods… can be useful in helping economists understand the complex world on international trade involving many countries and many goods.
72. Which of the following statements about economic models is correct?... Because economic models omit many details, they allow us to see what is truly important.
73. Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that... the nation is not using all of its available resources.
74. If this economy devotes all of its resources to the production of clocks, then it will produce… 16 clocks and 0 candles.
75. This economy has the ability to produce at which points?... A, B, C, F, G
76. If the resource is not fully utilized (e.g., unemployment), could this economy produce at which point(s)?... C, F, G
77. What is the opportunity cost of moving from point A to point B?... 15 candles.
78. For this economy, as more and more clocks are produced, the opportunity cost of an additional clock produced (in terms of candles)… increases.
79. The movement from point B to point D could NOT be caused by… unemployment.
80. Which of the following events would explain the shift of the production possibilities frontier from A to B?... The economy experienced a technological advance in the production of books.
81. When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good… (not sure… will update when I know the answer!)
82. If the production possibilities frontier is bowed outward, then "?" could be… (not sure, will update when I know the answer!)
83. Production possibilities frontiers are usually bowed outward. This is because… it reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is produced.
84. Which of the following is an example of a positive, as opposed to normative, statement?... When the quantity of money grows rapidly, inflation is a predictable consequence.