Introduction to Microeconomics
Introduction to Microeconomics
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This 2 page was uploaded by Tessa Tudor on Thursday April 17, 2014. The belongs to a course at University of Washington taught by a professor in Fall. Since its upload, it has received 131 views.
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Date Created: 04/17/14
Quiz 2 Review Chapter s 2 and 3 1Apply your understanding of the notion of lending and borrowing the following scenario consider two families A and B that both have incomes of 50000 this year The incomes of each family varies year to year but A s income is usually 60000 a year and therefore are having a relatively poor year this year Whereas B s family income averages about 40000 a year so they are having an unusually good year Which of these families is likely to have higher savings this year Answer Family B due to smooth consumption Since that family is used to spending a lower income they want to spread their surplus into the future with smooth consumption Their marginal value is currently 10000 which they want to increase in the future 2 Explain what the diamondwater paradox is and how marginal analysis resolves it Answer Prices represent marginal values not the total values of diamonds and water Because the supply of diamonds is low and the supply of water is great marginal value of diamonds is higher than the marginal value of water but total value of water is higher than the total value of diamonds Problems 3 On Super Sunday when the Superbowl is played some corpulent gentlemen hurl themselves at an ovoid of pigskin For these exertions they earn more than most people due in a year even those who provide a vital service Does this mean society values football players more than nurses and teachers Answer No similarly to the diamondwater paradox these wages reflect only the marginal value of these workers not their total values to customers 4 The hourly wage of a technician is higher than that of a school teacher Does this imply that people care more about the services a technician can provide than education of their children and the future of America Answer No price is a reflection of marginal value not total value Since technicians are relatively scarce compared to school teachers their services have a high marginal value compared to school teachers Where as the total value of the school teacher would be larger than that of a technician The consumer surplus for a teacher is also very high and our consumer surplus for technicians is relatively less Therefore explaining the higher total value For more on this question refer back to the diamond water paradox 5Which of the following has a higher price elasticity of demand 1 yogurt or 2 Brand of yogu Answer 2 a brand of yogurt has a higher price elasticity of demand because a brand of yogurt is most easily substituted for another brand of yogurt but basically relieving the same good or service If price were to increase in that original brand of yogurt consumers would switch to a similar brand with a lower cost Where as yogurt itself is not as easily substitutable because it is a unique and general food source so if yogurt in general had a price increase demand would remain the same 6 A strictly proportional change in prices implies Answer Change in absolute price only 7 Suppose that between 1990 and 1995 the consumer price index increased by 15 and the average income level increased by 10 According to the law of demand the number of gallons of milk that a consumer will by in 1995 would most likely Answer decrease relative to the number of gallons bought in 1990 8 For demand curves the value of elasticity is negative when the price and quantity demand Answer Move in opposite directions 9 When the demand is unitary elastic the percent change in quantity is Answer Absolutely equal to the percent change in price 10 The second law of demand considers the Answer Change in price over time 11 Given the second law of demand if the price of milk is expected to rise by 5 and remain at this price for two years the consumer would most likely respond by Answer Changing diet to include less milk and more water 12 A subsidy of a fixed amount will MOST likely lead to Answer greater relative consumption of lower quality goods 13 In an effort to predict the extent to which basic human activities will be pursued the law of demand Answer quantifies cost in connection with choices 14 An immeasurable influence on a person s decision to smoke would be a Answer Constant desire for the person to obtain nicotine
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