Introduction to Microeconomics
Introduction to Microeconomics EC 201
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This 22 page Class Notes was uploaded by Kareem Larkin PhD on Saturday September 19, 2015. The Class Notes belongs to EC 201 at Michigan State University taught by Y. Sun in Fall. Since its upload, it has received 65 views. For similar materials see /class/207650/ec-201-michigan-state-university in Economcs at Michigan State University.
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Date Created: 09/19/15
1 The production possibilities curve shows C A the amount of waste which results from the inefficient use of society39s resources E B the result of using competitive markets to allocate society39s scarce resources E C the optimal output mix for society E D for a given output of one good the maximum amount of another that can be produced E E the results of consumers incomes going up Correct Answers D 2 spam Manx I ii 5 eggs The diagram above shows a production possibilities curve for spam and eggs Point A is A attainable and efficient B attainable but not efficient C unattainable D the result of not having enough resources in the society 117an E uncertain as to attainability or efficiency Correct Answers B Y Y e rgs The diagram above shows two production possibilities curves for spam and eggs XY and X39Y39 The difference between them is due to differences in E A the welfare of consumers in the economy B the amounts of inputs available C the efficiency with which eggs are produced D the efficiency with which spam is produced E U C C E none of the above Correct Answers B 4 computers 5m 903 3333 501 a cam The diagram above shows the production possibilities frontier for producing computers and cars For production of cars in the range of 500 to 600 the opportunity cost of one more car is E A about 10 computers E B about 100 computers E C about 1000 computers C D about 18 9000500 computers 3 E about 8500 computers Correct Answers A 5 For the production possibilities curve in the last question we know that the opportunity cost of another car E A is constant as more cars are produced E B decreases as more cars are produced E C increases as more cars are produced E D cannot be determined without more information Correct Answers C 6 When a production possibilities curve has its usual shape bowing out what can we say C A It is possible to produce more of one good and give up none of the other good while moving along the curve C B All individuals in the society produce both goods equally well E C The opportunity cost of producing more of one product will change as we move along the production possibilities curve C D Some resources are unemployed C E None of the above is true Correct Answers C I i I l EDJ tn mu N39N FirA The diagram above shows a production possibilities curve between pasta and pizza Current production of pizza is 40 and pasta is 100060 When pizza production is 40 the marginal opportunity cost of pizza of pizza is known to be 11 pasta per pizza If the production of pizza becomes 60 and the economy stays on the production possibilities curve which of the following is true E A The opportunity cost of pizza must be less than 11 E B The opportunity cost of pizza must be greater than 11 U C The opportunity cost of pizza must still be 11 E D You can39t tell which of the above is true without more information Feedback The PPC bows out here which means that the opportunity cost of pizza the thing on the horizontal axis RISES as more pizza is produced The PPC is quotsteeperquot when pizza is 60 than when it was 40 This means that when pizza is 60 you have to give up more pasta in order to get one more pizza than when pizza was 40 Correct Answers B PASTA un n a Inznuuanunan yum PliZZA The diagram above shows two production possibilities curves for pizza and pasta Which of the following changes could have resulted in the change from the quotbaselinequot to the quotcurrentquot production possibilities curve C A A decrease in the technical efficiency in producing pizza E B A decrease in the technical efficiency in producing pasta E C A decrease in the amount of labor available in the economy E D None of the above could cause the change Feedback The current PPC lies quotinsidequot the baseline PPC and the intercepts with BOTH axes are less Of the options given only less resources will do this Option A would have left the intercept on the pizza axis unchanged for example Correct Answers C he problem of distributing society39s output among its members must be resolved by ll A planned economies B any society C any society based on tradition D voting systems in which everyone has the right to vote EDITING E any society based largely on the price system Correct Answers B The role of consumers in an economy is E A to maximize profits E B to demand goods and services and supply inputs resources E C to keep within their budgets E D to promote technical change E E make goods and services available Correct Answers B ghe role of firms in the economy is to E A maximize the utility levels of consumers E B produce goods in such a way as to maximize society39s social welfare E C promote technological change C D avoid polluting the atmosphere whenever possible E E supply goods and services and demand resources Correct Answers E the basic circular flow diagram households and firms interact E A in the markets for goods and services and in the markets for factors of production E B in the markets for goods and services and in the financial markets E C in the stock markets and the market for the factors of production E D in the markets for goods and services and in the foreign exchange markets C E none of the above Correct Answers A EH hich of the following is a principal determinant of the market supply curve A consumer tastes and preferences B the level of input prices C the price elasticity of demand D the number of buyers in the market BEBE E all of the above Correct Answers B 2 The diagram above shows the supply and demand curves for cherries The shift in the supply curve could be caused by E A an improvement in the technology of cherry production C B a tax on cherries E C an increase in incomes of consumers E D an increase in the price of cherries E E an increase in the price of apples a substitute for cheeries Correct Answers A O The diagram above shows the market for personal computers The change shown in the supply curve could be caused by E A an increase in consumer incomes E B a fall in the price of floppy disks a complementary good E C a tax on computers E D a decrease in the price of memory chips an input to computers E E a change in consumer preferences in favor of having more computers Correct Answers D 4 Which of the following would be expected to shift the supply curve for apples to the left E A An increase in the prices of inputs used in the production of apples E B A decrease in the price of apples E C A tax of 2 per bushel of apples produced E D All of the above E E Options A and C only Correct Answers E Which of the following would cause a movement along the supply curve for spaghetti That is which of the following causes an increase in the quantity supplied of spaghetti A an improvement in the technology for producing spaghetti B a change in the price of sauce an ingredient to spaghetti C a tax of 1 per plate of spaghetti the tax to be paid by producers D a reduction in the wages of workers employed to make spaghetti M E an increase in the price of spaghetti Correct Answers E a r e v l Q a mm mm mm sum mum The diagram above shows supply curves for spaghetti The most likely reason for the shift in the supply curve from quotbaselinequot to quotcurrentquot is A an increase in the price of sauce an input to spaghetti B imposition of a tax of 7 per plate on all spaghetti produced C an increase in the price of tacos a substitute for spaghetti D a decrease in the price of tacos BEEF E a decrease in the price of spaghetti Feedback The supply curve has shifted up by exactly 7 Option A would have a different effect keeping the intercept through the origin Options C and D change demand not supply Option E would be a movement along the supply curve not a shift Correct Answers B 1 Two important characteristics of competitive markets are that C A each firm produces a slightly different version of the industry39s product and consumers are price takers E B there is one firm and it produces a homogeneous product E C creating lower prices through technical change is impossible and there are many consumers C D the number of consumers is limited and the number of firms is very large E E there are many buyers and many sellers Points Earned 1010 Correct Answers E 2 The Law of Demand means that E A demand curves are negatively sloped E B at higher incomes more of normal goods will be demanded E C the prices of substitutes and complements surely affect the amount of a good demanded E D at higher incomes more of inferior goods will be demanded E E none of the above Correct Answers A The diagram above shows a market demand curve for hamburgers The shift in the demand curve could be caused by E A an increase in the price of beef an input to hamburgers E B a tax on hamburgers E C formation of a cartel of hamburger firms E D a decrease in the price of French fries a complement of hamburgers E E an improvement in the technology for producing hamburgers Correct Answers D ifhe demand curve for baseball tickets will shift to the rig ht if A there is a decrease in the price of baseball tickets B there is an increase in the fees charged for parking at baseball games C there is a decrease in the salaries of baseball players D there is an increase in consumers39 incomes C C E E 3 E a tax is put on baseball tickets Correct Answers D Fifi1e demand curve for any good shows C A the relationship between the amount demanded and consumer income C B the relationship between supply and demand E C the relationship between the prices of substitutes and the amount demanded E D the relationship between input prices and the amount demanded E E the relationship between the amount demanded and the good39s own price Correct Answers E The diagram above shows a demand curve in the market for turkeys The shift in the demand curve might be due to E A a change in tastes for turkey E B a decrease in the cost of turkey feed E C a decrease in the price of chicken a substitute for turkey C D an increase in the price of cranberry sauce a complement for turkey E E none of the above as more information is needed to decide Correct Answers A hicken wings are an example of an inferior good because ON A they are a poor source of nutrition B they are bought by low income people and not usually by high income people C consuming more makes people worse off D they are an example of the violation of the Law of Demand DEFEND E a decrease in the price of chicken feed leads to increases in supply of chicken wings Correct Answers B 50M estaurant meals are a normal good This implies that A if incomes go up the demand curve for restaurant meals will shift to the right B the income elasticity of demand for restaurant meals is positive C if incomes go down the demand curve for restaurant meals will shift to the left D all of the above are true DEBUG E A and B only are true Points Earned 1010 Correct Answers D 3quot It CLIPPENT Ci 20111 4000 6000 80m 100m The diagram above shows the demand curve for spaghetti a normal good The following changes are predicted to happen in the market for spaghetti 1 Consumer incomes increase 11 The price of tacos a substitute for spaghetti decreases III The price of wine a complement with spaghetti decreases Which of the following statements is true E A If I and III happen the demand curve will surely shift to the right C B If 11 and III happen the demand curve will surely shift to the left C C If I and II happen the demand curve will surely shift to the right E D none of the above is true Feedback Items 1 and III cause the demand curve to shift up rig ht while 11 causes the demand curve to shift down left Because I and 111 both increase demand that39s the only combination that will surely shift the demand curve to the rig ht In the other cases the shifts are all or partially offsetting so we can39t know with the information given which shift will be larger Correct Answers A SELIWE r as gin H l l Q 0 2000 4000 6000 0000 10000 The diagram above shows the demand curve for spaghetti a normal good The following changes are predicted to happen in the market for spaghetti I The price of spaghetti decreases 11 Consumer incomes increase 111 The price of tacos a substitute for spaghetti increases Which of the following statements is true E A If I and III happen the demand curve will surely shift to the right E B If 11 and III happen the demand curve will surely shift to the left E C If I and II happen the demand curve will surely shift to the left C D Both A and C are true Feedback Option 1 is causes a movement along the demand curve It doesn39t shift it Options 11 and 111 both shift the demand for spaghetti to the right Correct Answers A 11 510 so CLIR F39EI39IT quot I 2quot ll 78 ELIlJE 2539 ll 7 l 20 391 Q I l I I 0 Zilllll mm EDD mum mum I 2000 4000 000 BDBI IUUUO The two diagrams above show the demand for spaghetti a normal good The difference between the amounts of spaghetti demanded must be due to E A a change in the price of spaghetti E B a change in consumer incomes E C a change in the price of tacos a substitute for spaghetti C D none of the above Feedback The change shown is a movement along the demand curve for spaghetti Only a change in the good39s own price results in such a change The other factors listed cause the demand curve to shift Correct Answers A Illl 739 CURRENT Q I 2mm mun le Cl Hillquot lfll l The diagram above shows demand curves for spaghetti a normal good The change from quotbaselinequot to quotcurrentquot could be caused by C A a decrease in the price of wine a complement for spaghetti E B a decrease in the price of tacos a substitute for spaghetti E C an increase in the price of spaghetti E D an increase in income Feedback The demand curve is shifting down left here Options A and D would cause demand to increase Option C doesn39t cause the demand curve to shift at all it is a movement along the curve Correct Answers B 1 Suppose that incomes of consumers of white flour decrease White flour is an inferior good Assuming all other variables affecting demand and supply remain constant one would predict that the E A equilibrium price and quantity of white flour would both increase B equilibrium price and quantity of white flour would both decrease C C equilibrium price would increase and the quantity would decrease C D equilibrium price would decrease and the quantity would increase E E equilibrium price and quantity would change but there is insufficient information to be more specific Feedback For an inferior good income and demand move in opposite directions The decrease in income makes the demand curve for white flour shift to the rig ht Correct Answers A 22oke and Pepsi are substitute goods An increase in the price of Coke would E A shift the demand curve for Coke to the left E B shift the demand curve for Pepsi to the left E C decrease the price of Pepsi E D increase the price of Pepsi E E none of the above Feedback The goods are substitutes so an increase in the price of Coke makes the demand for Pepsi shift to the right This in turn raises the price of Popsi Be sure you understand why option A is not the rig ht answer Correct Answers D 3 Citric acid is an input to Spartan Lemon Lime Peanuts are a complementary good with Lemon Lime Suppose there is an increase in the price of citric acid and a decrease in the price of peanuts These two simultaneous changes would cause the price of Lemon Lime to E A increase E B decrease E C probably either increase or decrease depending on the magnitude of the shifts of the curves E D stay the same E E none of the above Feedback The increase in the price of citric acid causes the supply of L L to decrease The decrease in the price of peanuts causes an increase in the demand for L L Correct Answers A 4 Apple farms produce and sell apples and hire labor as an input A decrease in the price of labor the wage rate would cause the apple market to have A the demand curve shift to the rig ht B the supply curve shift to the right C the supply curve shift to the left D an increase in the quantity supplied of the product BEEF E none of the above Correct Answers B 0301 icycles and roller blades are substitutes If the price of bicycles decreases then A the supply curve for blades will shift to the right B the demand curve for blades will shift to the right C the demand curve for blades will shift to the left D the equilibrium price of blades will be unchanged HEEGD E none of the above will happen Correct Answers C 6 During the last recession characterized by a general decline in incomes enrollments at Great Lakes Community College increased This suggests that schooling at GLCC is A a substitute for schooling at Michigan State University B characterized by inelastic demand C an inferior good D investment rather than consumption GDPInn E a substitute for enlisting in the Armed Forces Correct Answers C 7 The price of stainless steel goes down Stainless steel is an input into the production of toasters As a result of the decrease in the price of stainless steel what will happen ot the equilibrium price and quantity of toasters E A Price will rise quantity will rise E B Price will rise quantity will fall E C Price will fall quantity will rise E D Price will fall quantity will fall E E You can39t tell definitely from the information given Correct Answers C 8 The wages of workers go down in the commercial aircraft industry Assume that commercial aircaft are a normal good As a result A the demand curve for commercial aircraft will shift to the rig ht B the supply curve for commercial aircraft will shift to the left C the supply curve for commercial aircraft will shift to the right D the equilibrium price of commercial aircraft will increase E the demand curve for commercial aircraft will shift to the left Correct Answers C 9 The demand curve for candy bars shifts to the right At the same time the supply curve for candy bars shifts to the left What will be the net effect on the equilibrium price and quantity of candy bars if the two are taken together E A Price will rise but the effect on quantity is indeterminate B Price will fall but the effect on quantity is indeterminate E E C Quantity will rise but the effect on price is indeterminate E D Quantity will fall but the effect on price is indeterminate E E Price and quantity will both fall Correct Answers A 10 Which of the following would lead to a decrease in the equilibrium price and an increase in the equilibrium quantity of candy bars E A An increase in both the demand for and supply of candy bars E B An increase in the demand for candy bars with supply unchanged E C An increase in the supply of candy bars with demand unchanged E D A decrease in the demand for candy bars with supply unchanged E E None of the above Correct Answers C 11 When the market price is above equilibrium there is A an excess demand and price will fall B an excess demand and price will rise C an excess supply and price will fall D an excess supply and price will rise WHEEL E None of the above is certain More information is needed Correct Answers C 12 Ham and beef are substitutes A tax of 2 per pound is imposed on the production of beef The effect of the tax on the market for beef is to E A raise the price of beef by less than 2 per pound E B reduce incomes among consumers C C shift the demand curve for beef upward E D raise the elasticity of demand for beef E E increase the equilibrium quantity of beef Correct Answers A 13 Following on from the last question and remembering that ham and beef are substitutes the effect of the tax on beef production on the market for ham is to E A cause the supply curve of ham to shift to the left E B cause the supply curve of ham to shift to the rig ht U C cause the demand curve for ham to shift to the left E D cause the demand curve for ham to shift to the right E E cause changes that can39t be determined without more information Correct Answers D price supply 30 A 25 i 20 lt 15 i 10 5 39 39 o o 2000 4000 saw some moan quantity The diagram above shows the market for spaghetti Spaghetti is a normal good and the current equilibrium price is 10plate The following changes are predicted to happen in the market for spaghetti I An increase in consumer incomes II A tax on spaghetti of 5 per plate III A decrease in the price of tacos a substitute for spaghetti Which of the following statements is true A If all events happen then the equilibrium price of spaghetti will rise B If all events happen the equilibrium quantity of spaghetti will fall C If I and II happen then the equilibrium price of spaghetti will rise D If I and II happen then the equilibrium quantity of spaghetti will fall E None of the above is true Feedback Item I shifts the demand curve to the right Item II shifts the supply curve to the left Item III shifts the demand curve to the left the opposite of item I If all events happen price change is indeterminate but depends on the sizes of the changes If I and II happen then quantity is indeterminate but depends on the sizes of the changes Correct Answers C 15 hourly wage L I I LIth iUiIlel ASHLLI LIZJul T I Jllh The diagram above shows the market conditions for hiring workers in a competitive labor market The demand is by firms in an area that sell their products into a competitive market These firms are a small part of the competitive market Three predictions have been made about changes in the labor market in the year ahead I The price of the product produced by these firms will rise II The productivity of labor used by firms in these industries will rise III The wage offered in alternative occupations will rise What effect will each of these changes have on market conditions 3 A II and III will shift supply to the right I will shift demand to the left E B Iand III will shift demand to the right II will shift supply to the left E C I and II will shift demand to the right III will shift supply to the left E D I will shift demand to the right II will affect only quantity demanded not demand and III will shift supply to the left C E III will shift supply to the right I and II will shift demand to the left Correct Answers C 16 n i l w 0 2000 4000 5000 some 10 00 quantity The diagram above shows the market for spaghetti Spaghetti is a normal good and the current equilibrium price is 10plate Economists predict that in the next year both the equilibrium price and quantity of spaghetti will increase Which of the following statements gives conditions that would make those increases happen with certainty E A Incomes increase and there is a per unit tax on spaghetti E B Incomes decrease and there is a per unit subsidy for spaghetti E C The price of tacos a substitute for spaghetti falls and the price of labor an input into spaghetti rises E D The price of wine a complement with spaghetti falls and there is no change in the supply conditions Feedback In option A demand increases and supply decreases so equilibrium quantity is uncertain In option B demand decreases and supply increases so equilibrium quantity is uncertain In option C demand decreases and supply decreases so equilibrium price is uncertain Correct Answers D he price elasticity of demand for a good is A the slope of the demand curve B price divided by quantity C the percent change in quantity divided by the percent change in price D the ratio of spending at the higher price to spending at the lower price 393 E C E E E the change in quantity divided by the change in price Correct Answers C 2 If a 10 percent decrease in the price of tacos leads to a 20 percent increase in the quantity demanded the price elasticity of demand for tacos is A 30 B 20 C 5 D 15 10 202 nn E none of the above Correct Answers B 3 Ripoff Cable TV of East Lansing raises its monthly fee from 38 to 42 per month As a result the number of households subscribing to the service falls by exactly 10 percent Using the midpoint formula the elasticity of demand for Ripoff39s services is C A 25 B 40 C 100 D 25 HEB E none of the above Correct Answers C In the last question we know that when Ripoff raised price the company39s receipts E A rose E B fell E 3 E E you can39t tell without more information Correct Answers C C stayed the same D either rose or stayed the same both A and C are true 5 The price of felt tipped pens increases from 1 to 2 each As a result the quantity of pens demanded decreases from 500 to 300 per day What is the own price elasticity of demand for pens E 20 Correct Answers C 6 The Smooth Move Dance Studio wants to increase its total revenue In order to achieve this goal the manager of Smooth Move drops the price of dance lessons What does this imply about the manager39s beliefs about the demand for dance lessons E E C U E E The demand curve shifts to the right Correct Answers A A Demand is elastic B Demand has unit elasticity C Demand is inelastic D More information is needed to answer the question The demand curve for speedboats is elastic The supply curve for speedboats shifts to the left What will happen as a result E A Price will rise and quantity will fall E B Total revenue for sellers will decrease E C price will rise and quantity will rise E D Both A and B are true E Both B and C are true Correct Answers D Ifa good has lots of close substitutes we expect its demand to E C E E E E be either A or B unless more information is given Correct Answers A A be elastic B be inelastic C have unit elasticity D shift by a large amount when price changes 9 The demand for accountants as a group is inelastic A program in the MSU College of Business to increase the number of accountants by increasing the number of accounting majors will have the effect of A increasing the wages of accountants B shifting the demand for accountants to the left C reducing the demand for accounting faculty D reducing the incomes of accountants as a group SEED E making both A and D true Correct Answers D 10 p KKKk 1200 1000 D Q The diagram above shows a demand curve for personal computers and the prices of 1200 and 1000 Between these two prices E A demand is inelastic E B demand is elastic E C demand has unit elasticity E D both A and B are true E you can39t tell anything about elasticity without more information especially about quantities Correct Answers B Which of the following is likely to have the highest elasticity of demand E A MampM39s candy in Michigan E 3 E D Snack foods in Michigan B MampM39s candy in the United States C Candy in the United States E E Snack foods in the United States Correct Answers A 12 Due to a drought in the eastern United States the national corn crop fell by 2 percent The elasticity of demand for corn is 20 We are therefore able to predict that A the incomes of corn farmers as a group in the US will fall B the supply of corn is elastic C the income elasticity of demand for corn is less than 20 D the price of corn in the US will rise by 10 percent manna E none of the above is true Correct Answers D 13 The income elasticity of demand E A is the percentage change in the demand for a good divided by the percentage change in income I E C measures how the incomes of sellers of a good are affected when there is a change in a good39s price 3 E E measures the response of sellers to changes in income Correct Answers A B is the change in demand divided by the change in income D measures how the incomes of consumers are affected by supply shifts for a good 14 The price of a type of picture frame falls from 18 to 14 The price elasticity of demand for this type of picture frame is 20 As a result of the decrease in price the quantity demanded of this type of picture frame will increase by A 16 percent B 5 percent C 40 percent D 50 percent HEDGE E 25 percent Feedback The percent change in price is 25 percent Because the elasticity is 20 the percent change in quantity must be twice as large as the percent change in price Correct Answers D 1 The equilibrium price of roller blades is 110 per pair A price control law is put into effect which sets a price floor of 150 per pair of blades What effects will the price floor have A The price floor will lead to a shortage B The price floor will lead to a surplus C The price floor will have no effect D As a result of the price floor a black market may develop in roller blades nnnmn E Both A and D will occur Feedback The price floor is effective in this case because the floor is above the free market equilibrium price So there will be excess supply Draw the graphs and identify the amount of the surplus Correct Answers B 2 The equilibrium price of tennis rackets is 150 A price control law is put into effect that sets a price ceiling of 200 per tennis racket What effects will the price ceiling have
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