Microeconomics Midterm 1 Study Notes
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Questions and Answers

If a decrease in the price of computer software leads to an increase in the demand for personal computers, what can we conclude about the relationship between personal computers and software?

  • They are inferior goods.
  • They are substitutes.
  • They are unrelated.
  • They are complements. (correct)

    • If a decrease in the price of a good leads to a decrease in total revenue for the seller, what can we conclude about the price elasticity of demand for that good?

  • The demand is unit elastic.
  • The demand is perfectly elastic.
  • The demand is elastic.
  • The demand is inelastic. (correct)

    • If an increase in the wages paid to workers leads to a decrease in the supply of a good, what can we conclude about the relationship between wages and the production of that good?

  • Wages are a fixed cost.
  • Wages are an irrelevant cost.
  • Wages are a sunk cost.
  • Wages are a variable cost. (correct)

    • If a decrease in the price of a substitute good leads to a decrease in the demand for a specific good, what can we conclude about the relationship between the two goods?

    <p>They are substitutes. (D)</p> Signup and view all the answers

    If a decrease in demand for a good leads to an increase in the equilibrium quantity of the good, what can we conclude about the supply of the good?

    <p>The supply is inelastic. (C)</p> Signup and view all the answers

    Which of the following best describes the specialization pattern that would lead to the greatest gains from trade between the U.S. and Mexico, given that the U.S. specializes in agricultural goods and Mexico specializes in manufactured goods?

    <p>The U.S. should continue to specialize in agricultural goods and Mexico should continue to specialize in manufactured goods. (D)</p> Signup and view all the answers

    Based on the information provided about Bill and Eileen, who has the absolute advantage in cooking dinner?

    <p>Bill (A)</p> Signup and view all the answers

    Based on the information provided about Bill and Eileen, who has the comparative advantage in mowing the lawn?

    <p>Bill (C)</p> Signup and view all the answers

    Based on the information provided about Bill and Eileen, which specialization pattern would be most efficient?

    <p>Bill should specialize in cooking dinner; Eileen should specialize in mowing the lawn. (B)</p> Signup and view all the answers

    If the price of orange juice increases, what is the likely effect on the demand for cranberry juice?

    <p>Demand for cranberry juice will increase. (D)</p> Signup and view all the answers

    What would happen to the equilibrium price and quantity of chocolate bars if the demand curve for chocolate bars shifted to the left?

    <p>Equilibrium price and equilibrium quantity would both decrease. (B)</p> Signup and view all the answers

    If buyers expect the price of a good to rise in the future, but sellers expect the price to remain unchanged, what is the likely immediate impact on the market for that good?

    <p>The demand for the good will increase because buyers want to buy before the price rises. (A)</p> Signup and view all the answers

    Given the demand and supply equations for chocolate bars, what is the equilibrium quantity of chocolate bars in this market?

    <p>150 (C)</p> Signup and view all the answers

    What is the relationship between the price of fish and the slope of Tom's budget constraint?

    <p>The slope of the budget constraint is inversely proportional to the price of fish. (D)</p> Signup and view all the answers

    Suppose that the price of denim cloth increases. Which of the following statements accurately describes the effect on the market for denim jeans?

    <p>The supply curve for denim jeans shifts to the left, leading to higher prices and lower quantities sold. (D)</p> Signup and view all the answers

    Which of the following scenarios demonstrates a shift in the demand curve for apartment rentals, assuming only one curve shifts?

    <p>The demand for apartment rentals decreases as the average rent increases. (D)</p> Signup and view all the answers

    Assuming only one curve shifts, what would be the most likely scenario for the market for cotton in early 2011, given farmers in China hoarded cotton rather than selling it?

    <p>The supply of cotton decreased, leading to higher prices. (C)</p> Signup and view all the answers

    What is the likely reason for the difference between the short-run and long-run elasticity of demand for cigarettes, with the short-run elasticity being lower than the long-run elasticity?

    <p>Smokers have more time to adjust to higher prices in the long run, making demand more elastic. (C)</p> Signup and view all the answers

    If two demand curves share a point, and we consider a given price change, what is the relationship between the elasticity of demand along the flatter curve and the elasticity of demand along the steeper curve, starting at the shared point?

    <p>Elasticity will be higher along the flatter curve, irrespective of whether the price change occurs at the shared point or not. (D)</p> Signup and view all the answers

    Given the provided data for the demand for rosebushes, what is the relationship between price and quantity demanded, and what does it tell us about the demand curve?

    <p>The relationship is non-linear, showing a curved demand curve. (C)</p> Signup and view all the answers

    In a competitive market with no government intervention, the equilibrium price is $10 and the equilibrium quantity is 10,000 units. If the government imposes an excise tax of $1 per unit, what will be the new equilibrium price and quantity?

    <p>The equilibrium price will increase to $11, and the equilibrium quantity will decrease to less than 10,000 units. (A)</p> Signup and view all the answers

    Suppose the price of denim cloth falls. What is the likely impact on the market for denim jeans, assuming that the only change is a decrease in the price of denim cloth?

    <p>The supply curve for denim jeans will shift to the right, reflecting a greater quantity supplied at all prices. (C)</p> Signup and view all the answers

    If the government pays a subsidy of $5 per unit produced in a competitive market, what will be the effect on the equilibrium price and quantity?

    <p>The equilibrium price will decrease by $5, and the equilibrium quantity will increase. (C)</p> Signup and view all the answers

    If the government sets a price floor of $12 in a competitive market where the equilibrium price is $10, what will be the effect on the market?

    <p>The price floor will result in a surplus of goods, as the quantity supplied will exceed the quantity demanded at the price floor. (D)</p> Signup and view all the answers

    If the price of personal computers continues to decline, while sales skyrocket, which of the following is the most likely explanation, assuming only one curve shifts?

    <p>The demand curve for personal computers has shifted to the right, reflecting an increase in demand. (B)</p> Signup and view all the answers

    If the government sets a price ceiling of $8 in a competitive market where the equilibrium price is $10, what will be the effect on the market?

    <p>The price ceiling will result in a shortage of goods, as the quantity demanded will exceed the quantity supplied at the price ceiling. (A)</p> Signup and view all the answers

    The cross-price elasticity of demand between two goods is positive. What can we conclude about the relationship between these goods?

    <p>The goods are substitutes. (D)</p> Signup and view all the answers

    For the pair of goods 'DVD players and VCRs', would you expect the cross-price elasticity of demand to be positive, negative, or zero? Explain your answer.

    <p>Positive, as DVD players and VCRs are close substitutes. (B)</p> Signup and view all the answers

    Suppose a consumer has an income of $1000 and faces prices of $20 for good A and $10 for good B. Which of the following baskets is NOT on the consumer's budget line?

    <p>A = 20, B = 40 (D)</p> Signup and view all the answers

    Consider the following graph, which represents the market for basketballs with no tax. If sellers are taxed $6 per basketball, what will be the seller's price and the quantity of basketballs sold after the tax?

    <p>Seller's price = $16, quantity sold = 8 million (B)</p> Signup and view all the answers

    If the country moves from point C to point B, what is the opportunity cost of producing 6 additional tanks?

    <p>14 pizzas (D)</p> Signup and view all the answers

    Why does the production possibilities frontier curve inwards?

    <p>It demonstrates the law of increasing opportunity cost - as production of one good increases, the opportunity cost of producing more of that good also increases. (C)</p> Signup and view all the answers

    If the country is currently operating at point D, what is the maximum number of pizzas it can produce without producing any tanks?

    <p>20 (C)</p> Signup and view all the answers

    Moving from point A to point C, what is the approximate opportunity cost of producing 10 more tanks?

    <p>14 pizzas (C)</p> Signup and view all the answers

    If the country decides to move from point B to point D, what is the change in its production of tanks?

    <p>A decrease of 6 tanks (A)</p> Signup and view all the answers

    Why does the weapons plant have an opportunity cost of producing tanks?

    <p>The resources used to produce tanks cannot be used to produce guns. (D)</p> Signup and view all the answers

    What does the opportunity cost of 10 tanks represent in this context?

    <p>The number of guns that must be given up to produce 10 tanks. (C)</p> Signup and view all the answers

    If the United States produces only manufactured goods and Mexico produces only agricultural goods, will the total production in the US and Mexico be maximized?

    <p>Yes, because specialization allows each country to focus on what they are relatively best at. (B)</p> Signup and view all the answers

    Flashcards

    Demand Curve Shift Left

    Occurs when demand decreases at every price level, leading to less quantity demanded.

    Equilibrium Quantity Increase

    An increase in the equilibrium quantity occurs when both supply and demand increase.

    Inferior Good Demand Increase

    An increase in the quantity demanded for an inferior good occurs when buyers' incomes decrease.

    Price Elasticity of Demand

    When demand responsiveness to price changes is perfectly elastic, quantity demanded changes proportionately.

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    Effects of Price Increase on Demand

    If a price increase results in an equal percentage decrease in quantity sold, demand is unitary elastic.

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    Production Possibilities Frontier (PPF)

    A curve showing the maximum feasible amount of two goods that can be produced with available resources.

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    Opportunity Cost

    The value of the next best alternative foregone when making a decision.

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    Point C to Point B Transition

    Moving from producing 10 tanks and 14 pizzas to 6 tanks and 18 pizzas.

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    Increasing Opportunity Cost

    As production of one good increases, the opportunity cost of producing another good also increases.

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    Absolute Advantage

    When a country can produce more of a good with the same resources than another country.

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    Comparative Advantage

    When a country can produce a good at a lower opportunity cost than another country.

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    Manufacturing Opportunity Cost

    In the given example, producing one tank costs approximately 20 guns.

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    Efficient Resource Utilization

    All available resources are being used to their maximum potential without waste.

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    Specialization

    The process of focusing resources on a limited number of activities to gain greater efficiency.

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    Substitute Goods

    Goods that can replace each other in consumption; an increase in the price of one increases demand for the other.

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    Demand Schedule

    A table that shows the relationship between the quantity demanded of a good and the price of that good.

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    Supply Schedule

    A table that shows the relationship between the quantity supplied of a good and its price.

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    Equilibrium Price

    The price at which the quantity demanded equals the quantity supplied in a market.

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    Market Expectation Effect

    A situation where buyer expectations of future price changes impact current demand and supply.

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    Price Floor

    A minimum price set by the government for a good or service.

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    Indifference Curve

    A graph showing combinations of goods that provide equal satisfaction.

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    Budget Constraint

    A line that represents all combinations of goods a consumer can purchase with their budget.

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    Utility Maximizing Bundle

    The combination of goods that yields the highest satisfaction within a budget.

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    Marginal Rate of Substitution

    The rate at which a consumer is willing to give up one good for another without changing satisfaction.

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    Inferior Good

    A good for which demand increases as income decreases.

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    Consumer Surplus

    The difference between what consumers are willing to pay and what they actually pay.

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    Diminishing Marginal Utility

    The decrease in additional satisfaction from consuming an additional unit of a good.

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    Opportunity Cost in Production

    Opportunity cost remains constant when producing more of good 1 or good 2.

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    Supply Shift with Price Increase

    When furniture prices rise, the quantity sold generally falls, indicating a supply shift.

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    Economic Slowdown Effects

    A decline in household incomes due to an economic slowdown decreases demand for goods.

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    Short-Run vs. Long-Run Elasticity

    Short-run elasticity of demand for cigarettes is lower than long-run elasticity.

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    Hoarding of Cotton

    Farmers hoard crops when they expect prices to rise despite high current costs.

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    Elastic Demand Curve

    Demand is more elastic along flatter demand curves for given price changes.

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    Demand for Rosebushes

    Demand can be analyzed through price and quantity demanded to assess demand curve shape.

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    Vacancy Rates and Rent

    Increased apartment vacancy rates typically lead to lower rent prices, shifting the supply curve.

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    Excise Tax Effect

    A $1 tax increases costs, possibly decreasing quantity supplied and raising price.

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    Subsidy Impact

    A $5 subsidy reduces costs for producers, likely increasing quantity supplied and lowering price.

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    Price Floor Concept

    A minimum allowable price, potentially causing excess supply if set above equilibrium price.

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    Price Ceiling Concept

    A maximum allowable price, possibly leading to a shortage if set below equilibrium price.

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    Cross-Price Elasticity

    Measures how the quantity demanded of one good changes in response to the price change of another good.

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    Cross-Price Elasticity Example

    Tylenol and Advil have positive cross-price elasticity; they are substitutes.

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    Consumer Budget Constraint

    The limit on the combination of goods a consumer can purchase given their income and prices.

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    Study Notes

    Midterm 1 Study Notes

    • Production Possibilities Frontier (PPF): A graph that shows various combinations of two goods that can be produced by a country using its available resources and technology. Points on the curve represent efficient production, while points inside represent inefficiency. Moving from one point on the curve to another reveals opportunity cost.
    • Opportunity Cost: The value of the next best alternative that must be forgone when a choice is made. This can be calculated as the ratio of given up quantities of two goods.
    • Production Possibilities Frontier (PPF): Points on the curve indicate efficient use of resources; points inside the curve represent inefficiency; and points outside the curve are unattainable with current resources and technology. The slope of the PPF demonstrates opportunity cost.
    • Technology and Resources: PPF shifts outwards with advancements in technology or increased resources (e.g., labour, raw materials).
    • Comparative Advantage: A producer has a comparative advantage in producing a good if its opportunity cost of producing that good is lower than the other producer's opportunity cost. Specialization based on these advantages leads to greater overall output.
    • Absolute Advantage: A producer has an absolute advantage in producing a good if it can produce more of the good than the other producer using the same amount of resources.
    • Substitute Goods: An increase in the price of one good results in an increase in the demand for the other good. (e.g., orange juice and cranberry juice)
    • Market Equilibrium: Where the supply and demand for a good are equal. Any price/quantity combination that is not set at the equilibrium point reflects disequilibrium.
    • Shifting Supply and Demand: The demand curve shifts when prices of complementary or substitute goods or consumer incomes change. The supply curve shifts when input costs, technology, or expectations of future prices change. Equilibrium shifts when one of these curves shifts.
    • Elasticity of Demand: The responsiveness of the quantity demanded to a change in price. Elastic demand means the Qd changes significantly with a small change in price; inelastic demand means the change in Qd is small for a large change in price.
    • Income Elasticity of Demand: The responsiveness of demand to changes in consumer income.
    • Cross-Price Elasticity of Demand: The responsiveness of demand for one good to a change in the price of another good.
    • Inferior Goods: Demand decreases as consumer income increases or vice versa.
    • Normal Goods: Demand increases as consumer income increases.

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    Description

    Prepare for your Microeconomics Midterm with these study notes focused on the Production Possibilities Frontier (PPF) and opportunity cost. Understand how efficient production is represented on the PPF and how technological advancements can shift the frontier. Test your grasp of critical economic concepts and improve your performance.

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