Rational decision making under conditions of scarcity requires individuals to

understand that trade-offs are necessary.

Opportunity cost is the ________ alternative sacrificed when a choice is made.

highest-valued

Ishmael has four potential jobs to consider, each with different salary offers. From highest to lowest, the salaries are: $58,500, $57,000, $56,000, and $53,000. Based on the information provided, what is the opportunity cost of Ishmael accepting the position that pays $56,000?

$58,500

Why is voluntary trade a good thing, from an economic perspective?

Trade creates value for all parties involved.

The term ________ means “additional.”

marginal

According to marginal thinking, an individual will stop buying more of a good when the ________ of the next unit exceeds the ________.

cost; benefit

For a market to be competitive

each buyer and seller is small relative to the whole market; no single decision maker has any influence over the market price.

A decrease in demand is represented by a

shift of the demand curve to the left.

Something is a normal good if the demand for the good

increases as the consumer’s income increases.

If good A and good B are substitutes, a price increase for good A will ____ the demand for good B.

increase

Refer to the accompanying graph. When the price changes from P₁ to P₂, we will see a(n)

decrease in quantity supplied from Q₁ to Q₂

Which of the following will cause a movement along a good’s supply curve?

The price of the good increases

When the number of firms in a market decreases, generally

the supply curve shifts to the left.

Which of the quantity (Q) and price (P) combinations in the accompanying graph represents the market at competitive equilibrium?

(100, $30)

According to the accompanying graph, if the price is $20, there is a ________ of ________ units.

shortage; 100 `

Consider the table below that shows the supply and demand for the donut market. How do you know what the equilibrium price of donuts is?

The equilibrium price occurs where Qd=Qs.

What is true when the price in this market is equal to $2.50?

There is a surplus of donuts equal to 40 donuts.

If the number of buyers in a market increases from 50 to 100, you would expect the equilibrium price (P*) to ________ and quantity (Q*) to ________, holding all else constant.

increase; increase

The difference between a tax and a subsidy is when the government places a tax on the producers of a good, it ________ the equilibrium price (P*) and ________ the equilibrium quantity (Q*), but when the government grants a subsidy to the producers of the good, it ________ the equilibrium price (P*) and ________ the equilibrium quantity (Q*).

increases; decreases; decreases; increases

In the market for computers, two effects occur simultaneously. Computers have become more commonly used every day, and technology has improved, making them easier to produce. What are the effects on the equilibrium price (P*) and quantity (Q*)?

Q* increases, and the effect on P* is ambiguous.

Consider the market for donuts, and suppose two things happen simultaneously:

1. The price of flour increases (an input for donuts);
2. The price of ice cream, a substitute for donuts, decreases.

What are the effects on the equilibrium price (P*) and quantity (Q*) for donuts?

Q* decreases, and the effect on P* is ambiguous.

The price elasticity of demand for bubble gum is -4. Demand for bubble gum is considered _____, and Graph _____ is more likely to represent that demand curve (see graphs below to answer the question).

Elastic; B

For a good, imagine that price increases by 2 percent and quantity demanded decreases by 1 percent. What is the price elasticity of demand?

-0.5

Using the midpoint formula, what is the price elasticity of demand over the segment between P=4 and P=6? Round to two decimal points, if necessary.

-1

The sign and absolute value for the cross-price elasticity of demand helps us to determine whether two products are

substitutes or complements.

A good that has more substitutes has more _____ price elasticity of demand.

elastic

Income elasticity of demand is ____ for a normal good and ____ for an inferior good.

positive; negative

Which good is most likely to have an income elasticity of demand equal to –0.2?

used clothing

When the price increases and the demand curve is INELASTIC, we expect quantity demanded to ___ and total revenue to ____.

decrease by a small amount; increase

A perfectly elastic supply curve

is horizontal.

Over time, the price elasticity of supply for sunglasses will become more

elastic.

In the above graph, which region represents the consumer surplus?

Area B

In the above graph, which area represents the producer surplus?

Area C

In the above graph, which combination of areas represents the social welfare?

B + C

Holding all else constant, when the price of a good increases,

consumer surplus decreases, and producer surplus increases.

Social welfare (i.e., the sum of producer and consumer surplus) is maximized when

the market reaches its equilibrium price and quantity.

The difference between the price consumers pay and the price sellers receive after a tax is imposed is equal to the

dollar amount of the tax.

The incidence of a tax reflects

who bears the burden of the tax.

If a tax is imposed on a good with equally elastic supply and demand, the burden of the tax will be borne

by consumers and producers equally.

When a good with a perfectly inelastic demand is taxed, the incidence of the tax is borne

entirely by consumers.

Based on the graph above, what is the total consumer surplus after a tax of $20 per unit is imposed on sellers?

$160

Based on the graph above, what is the total deadweight loss when a tax of $20 per unit is imposed on sellers?

$20

The following graph depicts a market where a tax has been imposed. P _e was the equilibrium price before the tax was imposed, and Q _e was the equilibrium quantity. After the tax, P _C is the price consumers pay, and P _S is the price producers receive. Q _T units are sold after the tax is imposed.
NOTE: The areas B and C are rectangles that are divided by the supply curve S _T . Include both sections of those rectangles when choosing your answers.

Which area(s) represent producer surplus before the tax is imposed?

E + C + G

The following graph depicts a market where a tax has been imposed. P _e was the equilibrium price before the tax was imposed, and Q _e was the equilibrium quantity. After the tax, P _C is the price consumers pay, and P _S is the price producers receive. Q _T units are sold after the tax is imposed.
NOTE: The areas B and C are rectangles that are divided by the supply curve S _T . Include both sections of those rectangles when choosing your answers.

Which area(s) represent producer surplus after the tax is imposed? Assume Pc – Ps = Ps.

E

The following graph depicts a market where a tax has been imposed. P _e was the equilibrium price before the tax was imposed, and Q _e was the equilibrium quantity. After the tax, P _C is the price consumers pay, and P _S is the price producers receive. Q _T units are sold after the tax is imposed.
NOTE: The areas B and C are rectangles that are divided by the supply curve S _T . Include both sections of those rectangles when choosing your answers.

What is the amount of the tax, as measured along the y-axis?

P_C - P_S

The following graph depicts a market where a tax has been imposed. P _e was the equilibrium price before the tax was imposed, and Q _e was the equilibrium quantity. After the tax, P _C is the price consumers pay, and P _S is the price producers receive. Q _T units are sold after the tax is imposed.
NOTE: The areas B and C are rectangles that are divided by the supply curve S _T . Include both sections of those rectangles when choosing your answers.

Which area(s) represent the revenue collected from this tax?

B + C

According to the graph shown, a binding price ceiling would exist at a price of

$8

At the binding price ceiling what would happen?

A shortage of 20 units

According to the graph shown, a binding price floor would exist at a price of

$14

If a price ceiling is imposed at $15 per unit when the equilibrium market price is $12, in the long run, there will be

no surplus or shortage.

Market for TVs:

Demand: Q _d = 2,600 – 5P

Supply: Q _s =–1,000 + 10P

What would be the quantity demanded and the quantity supplied if a price ceiling is set at $200?

1,600; 1,000

What is the long-run consequence of a price floor law?

A surplus will continue to exist and will grow larger over time

Consider the graph. Which area(s) represent(s) CONSUMER surplus after the price ceiling is imposed?

A+C

In our minimum wage example (a price floor), what happens to consumer surplus when the minimum wage is instituted? The figure below may help you answer this question.

It decreases overall

Apartment rent control in New York City is an example of

a binding price ceiling.

Assume that a firm's demand for labor in very inelastic. What does this mean for the number of people that will lose their job when a minimum wage in instituted?

The number of job losses will be small because it is difficult for firms to find substitutes for labor

Assume a production possibilities frontier (PPF) with two goods in a country. A production allocation point that lies on the PPF line itself is a production point

that is using all of its resources efficiently

One has an absolute advantage in producing something when

one can produce more of it than someone else using the same quantity of resources.

To determine which of two producers has a comparative advantage, one would need to know their

opportunity costs of production for both goods.

Based on the figure below, what would be the opportunity cost of producing 20 more pizzas (i.e. the number of wings that must be given up) if the economy is currently efficiently producing 150 wings and 50 pizzas?

60 wings

The graph below illustrates the effect on the production possibilities frontier if the population grows, making more workers available. This new production possibilities frontier reflects the ability of society to

produce both more wings and more pizza.

Imagine that country A produces pens and scissors. If it dedicates all of it's resources to pens, it can produce 1000 pens. If country A dedicates all of it's resources to scissors, it can produce 3000 scissors.

How many pens does Country A have to give up to produce 1500 scissors?

500

Imagine there are two countries: A and B. These countries have the same amount of resources and both produce two goods, pens and scissors.

If country A dedicates all of its resources to pens, it can produce 1000 pens. If country A dedicates all of its resources to scissors, it can produce 3000 scissors.

If country B dedicates all of its resources to pens, it can produce 500 pens. If country B dedicates all of its resources to scissors, it can produce 1000 scissors.

What is true about the absolute advantage between these two countries?

Country A has an absolute advantage in both goods

Imagine there are two countries: A and B. These countries have the same amount of resources and both produce two goods, pens and scissors.

If country A dedicates all of its resources to pens, it can produce 1000 pens. If country A dedicates all of its resources to scissors, it can produce 3000 scissors.

If country B dedicates all of its resources to pens, it can produce 500 pens. If country B dedicates all of its resources to scissors, it can produce 1000 scissors.

What is true about the comparative advantage between these two countries?

Country A has a comparative advantage in scissors, Country B in pens

Imagine there are two countries: A and B. These countries have the same amount of resources and both produce two goods, pens and scissors.

If country A dedicates all of its resources to pens, it can produce 1000 pens. If country A dedicates all of its resources to scissors, it can produce 3000 scissors.

If country B dedicates all of its resources to pens, it can produce 500 pens. If country B dedicates all of its resources to scissors, it can produce 1000 scissors.

Which of these countries would accept and/or not accept a trade of 100 pens for 100 scissors (i.e. the trade would benefit them)?

Country A would accept this trade and Country B would not accept this trade

Imagine there are two countries: A and B. These countries have the same amount of resources and both produce two goods, pens and scissors.

If country A dedicates all of its resources to pens, it can produce 1000 pens. If country A dedicates all of its resources to scissors, it can produce 3000 scissors.

If country B dedicates all of its resources to pens, it can produce 500 pens. If country B dedicates all of its resources to scissors, it can produce 1000 scissors.

Now try a different terms of trade. Which of these countries would accept and/or not accept a trade of 200 pens for 500 scissors (i.e. the trade would benefit them)?

Both Country A and Country B would accept this trade

Consider the PPFs below to answer the following question. Which country has an absolute advantage in which good?

Country B has an absolute advantage in wine, Country A in cheese

Consider the PPFs below to answer the following question. Which country has a comparative advantage in which good?

Country A has a comparative advantage in cheese; Country B has a comparative advantage in wine

Consider the PPFs below to answer the following question. Which of these countries would accept and/or not accept a trade of 200 wine for 100 cheese (i.e. the trade would benefit them)?

Both Country A and Country B would accept this trade

Consider the PPFs below to answer the following question. Now try a different terms of trade. Which of these countries would accept and/or not accept a trade of 400 wines for 100 cheese (i.e. the trade would benefit them)?

Country A would accept this trade and Country B would not accept this trade

Specialization and trade allow individuals to

consume outside their own production possibilities frontiers (PPFs).

Implicit costs are

also opportunity costs.

Donna owns a small custom upholstery business. Her total revenue last year was $270,000, and her rent was $9,000 per month. She pays her one employee $3,000 per month, and the cost of materials and overhead averages $800 per month. Donna could earn $85,000 per year as the manager of a competing business nearby. Her explicit costs last year were

$153,600.

When a firm hires another employee and, as a result, total output increases, this change in total output is also known as

marginal product.

Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus's output on a given day.

After which worker does marginal product begin diminishing?

3rd

As a firm hires more labor and each worker is able to specialize, what happens to workers’ marginal productivity?

It increases at first, then decreases

What is the value of the average fixed costs (AFC) when Q is equal to 40? Enter the number below. Do not include a dollar sign. You will not need to round, but you may need to include one digit after the decimal point.

12.5

What is the value of the average variable costs (AVC) when Q is equal to 40? Enter the number below. Do not include a dollar sign. You will not need to round, but you may need to include one digit after the decimal point.

1.0

What is the value of the average total costs (ATC) when Q is equal to 40? Enter the number below. Do not include a dollar sign. You will not need to round, but you may need to include one digit after the decimal point.

13.5

What is the value of the marginal cost (MC) when Q is equal to 40? Enter the number below. Do not include a dollar sign. You will not need to round, but you may need to include one digit after the decimal point.

1.0

What is true about the relationship between the average variable cost (AVC) and the average total cost (ATC)?

ATC is always greater than or equal to the AVC

What is the value of the average fixed costs (AFC) when Q is equal to 5? Enter the number below. Do not include a dollar sign. You will not need to round, but you may need to include one digit after the decimal point.

100.0

What is the value of the average variable costs (AVC) when Q is equal to 5? Enter the number below. Do not include a dollar sign. You will not need to round, but you may need to include one digit after the decimal point.

2.0

What is the value of the average total costs (ATC) when Q is equal to 5? Enter the number below. Do not include a dollar sign. You will not need to round, but you may need to include one digit after the decimal point.

102.0

A firm characterized as a price taker

has no control over the price at which its product sells.

Profit maximization occurs when

a firm expands output until marginal revenue is equal to marginal cost.

Consider the graph below. Which area(s) represent(s) the firms total fixed costs?

B

Which of the following conditions will result in the firm making a profit?

P > ATC

If all of the firms in an industry are making negative economic profit, what does it mean for those firms?

The firms' accounting profit < the firms' opportunity cost

Consider the graph below. Which area(s) represent(s) the firm's profit?

-A

Consider the graph below. Which area(s) represent(s) the firm's total fixed costs?

A+B

Consider the graph below. Should this firm stay open or shut down in the short run and why?

Stay open because their loss from operating is less in magnitude than their fixed costs

Consider the graph below. Should this firm stay open or shut down in the short run and why?

Shut down because their loss from operating is greater in magnitude than their fixed costs

Consider the graph below. Which area(s) represent(s) the firm's profit?

-(A+B)

Consider the graph below. Which area(s) represent(s) the firms total fixed costs?

A

What is true about economic profit in a long-run competitive equilibrium?

Economic profit is equal to zero