EC 202 Exam 1

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Terms in this set (134)
Opportunity costWhatever must be given up to obtain it. The value of the next best alternative.Causal relationshipsIf we change one variable, what changes in response.MeanAverage value of economic variable (income, wealth). Aka per capita income. Divide total income by the population to get per capita income. Influenced by a lot.MedianMiddle value if ranking from highest to lowest. Not influenced by as much.SlopeChange in vertical axis (y) / change in horizontal axis (x) = rise / runNormativeAbout what should be, involve value judgements. Statements that can be disagreeable due to consequences or values. "We SHOULD increase the minimum wage to $15 an hour."PositiveAbout what is, how the world works. Statements that aren't always true, but they are testable. "An increase in the minimum wage reduces employment among low-wage workers."Production possibilities frontierIllustrates scarcity and opportunity cost. A "curve" that depicts maximum attainable combinations of goods, given resources and knowledge.Factors of productionThe resources the economy uses to produce goods and services.Circular flow diagramVisual model of macroeconomy, showing how dollars flow through markets among households and firms.ModelsSimplified representation of reality, a map as a kind of model.SurplusExcess supply = Sellers reduce price (Qs>Qd)ShortageExcess demand = Sellers increase price (Qs<Qd)Change in quantity suppliedIf only price changes, move along the supply curveChange in supplyIf something changes other than price that affects supply, the supply curve shiftsPrices or availability of inputsA change in the price of an input - anything used in the production of a good or service - is the most likely factor to cause the supply curve for a product to shift.Technological changeA change in the ability of a firm to produce a given level of output with a given quantity of inputs.Law of SupplyUsually, quantity supplied is higher at higher prices. "Upward-sloping supply"SupplyRelationship between quantity of a good that sellers are willing and able to sell and its price, holding constant all other factors that influence itWhat shifts supply curves?Change in cost of production (prices/availability of inputs, technological change), number of firms in the market, Natural disasters and other supply chain disruptionsWhat shifts demand curves?Changes in availability/prices of related goods (substitutes, complements), income (normal goods, inferior goods), expectations about future prices or availability.Change in demandIf something changes other than price that affects demand, the demand curve shiftsChange in quantity demandedIf only price changes, move along the demand curveCeteris paribus (all else equal)-Other things influence demand besides price -A demand schedule or curve holds those other things constant -Focuses on effect of price on quantity -A change in another relevant variable shifts the demand curveSubstitutesEx: Coke/pepsi. If the price goes up for coke, pepsi demand increases, right shift.ComplementsEx: PBJ. If the price of jelly goes down, pb demand increases, right shift.Normal goodsIncome higher = buy more.Inferior goodsIncome higher = buy less.Law of DemandPeople buy more of something (or more people buy it) when the price is lower. "Downward-sloping demand."Substitution effectPrices go up, opportunity cost becomes higher, look for things to substitute instead.Market demandThe combination of all individual demands.DemandRelationship between quantity of a good that consumers are willing and able to buy and its price, holding constant all other factors that influence itCompetitiveEach seller competes with many others selling identical products, so none can individually control the price. Buyers and sellers act as "price-takers" They just react to the price and decide how much they want to buy (sell).GDP (Gross Domestic Product)The market value of all final goods and services produced in a country during a period of time.Market ValueWe measure goods and services in dollars spent on themFinal GoodsDistinguish from intermediate (we don't want to double count) e.g., a bakery buys flour used in baking breadProduced in a countryDistinguish from GNPDuring a period of timeResales of used goods will not countThe BEA divides GDP into four major categories of spending1. Consumption 2. Investment 3. Government purchases 4. Net exportsValue addedThe market value a firm adds to a product.Change in nominal GDPReflects both prices and quantity changes.Change in real GDPThe amount that GDP would change if prices were constant (i.e., if zero inflation).The GDP deflatora measure of the price level (how high prices are relative to a base year). 100 x (nominal GDP/real GDP)Nominal GDP- (real GDP x GDP deflator) /100 - %Δ nominal GDP ≈ %Δ real GDP + %Δ GDP deflatorLimitations of GDPDoes not count "household production". Misses the "underground" or "informal" economy.GNP- Value of final goods and services produced by permanent residents of a country, even if the production takes place elsewhere - If a U.S. resident or U.S. company earns income outside the U.S., it counts for our GNP but not GDPTo keep the local professional football team from leaving, the city of San Diego proposed a tax on hotel rooms that would be used to fund a new football stadium. Many people are opposed to using tax revenues to fund sports stadiums. The mayor argued that, because the tax would be paid by out-of-town visitors, the new stadium would be "free" for residents. Which of the following statements is most accurate?The mayor is forgetting about the opportunity cost of spending the tax revenue on a new stadium instead of on something else.You are willing to pay $3 for a bowl of ice cream with one scoop. You are willing to pay $5 for a bowl of ice cream with two scoops. What is the marginal benefit of the second scoop of ice cream?$2Suppose that you have received $650 as a birthday gift. You can spend it today or you can put the money in a savings account for a year and earn 2 percent interest. The opportunity cost of spending the money today, in terms of what you could have after one year, is$663.00. Explanation: $650 * 0.02 = $13 $650 + $13 = $663Bo buys and sells real estate. Two weeks ago, he paid $400,000 for a house on Cypress Street, intending to spend $50,000 on repairs and then sell the house for $500,000. Last week, the city government announced a plan to build a new landfill on Cypress Street just down the street from the house Bo purchased. As a result of the city's announced plan, Bo is weighing two alternatives: He can go ahead with the $50,000 in repairs and then sell the house for $390,000, or he can forgo the repairs and sell the house as it is for $350,000. He shouldforgo the repairs and sell the house as it is for $350,000. Explanation: - If Bo decides not to repair the house and just sells it for $350,000 , he will lose $50,000 ($350,000-$400,000). If he still repairs the house and sells it for $390,000, he will lose $60,000 ($390,000-$400,000-$50,000). The marginal cost of the repairs is higher than the marginal benefit.A hair stylist currently cuts and colors hair for 50 clients per week and earns a profit. He is considering expanding his operation in order to serve more clients. Should he expand?It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients.Both the production of goods and services and the unemployment rate are used to measurethe business cycle.Savion is restoring a car and has already spent $4,000 on the restoration. He expects to be able to sell the car for $5800. Savion discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. He could also sell the car now, without completing the additional work, for $3,800. What should he do?He should sell the car now for $3,800. Explanation: - If Savion sells the car for $3800, he will lose $200 ($3800-$4000). However, if he decides to spend an additional $2400 to repair the car, he will lose $600 ($5800-$4000-$2400). The marginal cost of the additional work is $2,400 and the marginal benefit is only $2,000.Stephen is restoring a car and has already spent $4,000 on the restoration. He expected to be able to sell the car for $5,800. Stephen discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. He could also sell the car now, without completing the additional work, for $3,800. What should he do?He should sell the car now for $3,800. Explanation: - The marginal cost of the additional work is $2,400. The marginal benefit is only $2,000 (5,800 - 3,800). He should not pay for the additional work.Alana decides to spend 2 hours working overtime rather than going shopping with her friends. She earns $11 per hour for overtime work. Her opportunity cost of working isthe enjoyment she would have received had she gone shopping.Productivity is defined as theamount of goods and services produced from each unit of labor input.Suppose the cost of flying a 350-seat plane for an airline is $350,000 and there are 10 empty seats on a flight. The marginal cost of flying a passenger isThis cannot be determined from the information given, but it is probably less than $350.Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline shouldsell the ticket because the marginal benefit exceeds the marginal cost.You go to the movieplex where movies ordinarily cost $8.00. You are intending to see a movie for which you have a $2.50-off coupon good for only that movie at that time. However, when you get there you see a friend who asks if you would rather see a new release. Both movies start and end at the same time. If you decide to see the new release with your friend, what is your opportunity cost?The amount you value the first movie + $2.50Prices direct economic activity in a market economy byinfluencing the actions of buyers and sellers.You have decided to buy a pizza with one topping. A cheese pizza costs $10 and the topping costs $1. You're deciding between pepperoni and mushrooms - you think both sound good and are worth paying $1 for. You decide to buy the pepperoni pizza. What A was the opportunity cost?A pizza with mushrooms.The fact that different countries experience different standards of living is largely explained by differences in those countries'productivity levels.The primary determinant of a country's standard of living isthe country's ability to produce goods and services.Hamid spends an hour studying instead of watching TV with his friends. The opportunity cost to him of studying isthe enjoyment he would have received if he had watched TV with his friends.A rational decisionmakertakes an action only if the marginal benefit of that action exceeds the marginal cost of that action.Savion's aunt gave him $25 for his birthday with the condition that Savion buys himself something. In deciding how to spend the money, Savion narrows his options down to four choices: Option 1, Option 2, Option 3, and Option 4. Each option costs $25. Finally, he decides on Option 2. The opportunity cost of this decision isthe value to Savion of the option he would have chosen had Option 2 not been available.Economic modelsincorporate simplifying assumptions that often contradict reality, but also help economists better understand reality.In the early 19th century, the Russian government sent doctors to southern Russian villages to provide assistance during a cholera epidemic. The villagers noticed that wherever doctors appeared, people died. Therefore, many doctors were chased away from villages, and some were even killed. This reaction to the correlation between doctors and deaths is most likely a problem ofreverse causality.When a curve describes a relationship between two variables and a relevant variable that is not named on either axis changes,the curve will shift.Economists, like physicists and biologists,- make use of the scientific method. - try to address their subject with a scientist's objectivity. - devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. (all of the above are correct).In the circular-flow diagram, which of the following items flows from firms to households through the markets for goods and services?Goods and servicesThe production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production andthe available production technology.The production possibilities frontier provides an illustration of the principle thatpeople face trade-offs.Suppose a nation is currently producing at a point inside its production possibilities frontier. We know thatthe nation is not using all available resources or is using inferior technology or both.When constructing a production possibilities frontier, which of the following assumptions is not made?The quantities of the factors of production that are available are increasing over the relevant time periodIn the circular-flow diagram, in the markets forthe factors of production (inputs), households are sellers and firms are buyersWhich of the following events would cause a movement downward and to the left along the supply curve for kiwis?The price of kiwis falls.An decrease in the price of oranges would lead to a(n)a movement down and to the left along the supply curve for oranges.Which of the following would cause the demand for hotdogs to shift to the right?An increase in the price of ground beef.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.If muffins and bagels are substitutes, a higher price for bagels would result inan increase in the demand for muffins.If consumers often purchase croissants to eat while they drink their cappuccinos at local coffee shops, what would happen to the equilibrium price and quantity of cappuccinos if the price of croissants rises?Both the equilibrium price and quantity would decrease.Suppose that a more efficient way to produce a good is discovered, thus lowering production costs for the good. This will causea shift of the supply curve to the right.In a simple circular-flow diagram, total income and total expenditure arealways equal because every transaction has a buyer and a seller.Sarah owns a cupcake shop. Which of the following belongs in this year's US GDP, measured by the value of final goods and services produced?Sarah has $500 in cupcake sales.If in some year nominal GDP was $20 billion and the GDP deflator was 80, what was real GDP?$25.0 billionFor the purpose of calculating GDP, investment is spending oncapital equipment, inventories, and structures, including household purchases of new housing.A transfer payment is a payment made bygovernment, but not in exchange for a currently produced good or service.According to the circular-flow diagram, GDP can be computed aseither the revenue firms receive from the sales of goods and services or the payments they make to factors of production.Consumptionthe sum of household purchases of durable goods, household purchases of nondurable goods, and household purchases of services.Net exports equalY − (C + I + G).A Texas household receives a Social Security check for $1500, which it uses to purchase a $40 pair of shoes made in Thailand by a Thai firm, a $1240 television made by a Korean firm in Korea, and $220 on groceries from a local store. The amount reflected in US GDP from these transactions is$220.When the consumer price index falls, the typical familycan spend fewer dollars to maintain the same standard of living.If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as$40.00 purchased in 1975. Explanation: $100*(90/225) = $40When computing changes in the value of the Consumer Price Index, which of the following changes from year to year?the prices of the goods and services in the market basketAn upward bias in the CPI would mean that it tends to overstate the rate of inflation. All of the following may create upward bias in the CPI for measuring changes in the price level, exceptfood producers have been reducing the standard size of many products, such as cookies and potato chips, if the BLS does not take this into accountIf the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is−2 percent.If the CPI changes from 125 to 120 between 2010 and 2011, how did prices change between 2010 and 2011?Prices decreased by 4% Explanation: The percentage change is (-5/125 ) x 100 = -.04 x 100 = -4%.The inflation rate is defined as thepercentage change in the price level from the previous period.One of the differences between the GDP deflator and the consumer price index isthe GDP deflator reflects prices for all goods and services produced domestically and the consumer price index reflects prices for a representative basket of goods and services bought by consumers.At the grocery store, Sally learns that oranges are $2 per pound but if you buy at least 3 pounds the price for your entire purchase is $1.50 per pound. She was planning to buy 2 pounds at a price of $2 per pound. She shouldbuy a third pound as long as it is worth at least $.50 to her.If all quantities produced rise by 10 percent, and all prices fall by 5 percent, which of the following occurs?Real GDP rises by 10 percent, while nominal GDP rises by less than 10 percent.Suppose a country has government purchases of $3,500, taxes of $2,200, consumption of $9,000, exports of $2,500, imports of $2,700, transfer payments of $750, and investment of $3,000. GDP equals$15,300 Explanation: Y = C + I + G + NX = 9,000 + 3,000 + 3,500 + (2,500 - 2,700) = $15,300.To calculate GDP by the expenditure method, one must addconsumption spending, investment spending, government spending and net exports.Many things that society values, such as good health, high-quality education, the enjoyment of time spent with friends, and personal freedom are not directly captured in GDP. Which statement is most accurate?Societies with higher GDP per capita also tend to do better on most other indicators of well-being.In 2010, Hooverville consumed 205,000 tons of sugar. In 2011, sugar consumption rose to 245,000 tons. Which is the correct formula for the percentage change in sugar consumption?[(245,000-205,000)/205,000] x 100.In the early days of the pandemic it got more difficult to find protective face masks in stores. How would you interpret this development using demand-supply theory?Demand for masks increased, and the market price had not risen to a new equilibrium price.Michigan Cranberry Company sold $10 million worth of cranberries it produced. In producing cranberries, it purchased $1 million dollars of supplies from foreign countries and also paid workers who reside in Canada but commute to the U.S. $1 million. How much did these transactions add to U.S. GDP and U.S. GNP?$9 million, $8 million.Which of the following is likely to increase measured GDP?Marijuana, previously an illegal drug, becomes legal to grow and sell.Randi is choosing between two on-campus jobs: working at the student bookstore and working the desk at IM West. The student bookstore will pay her $9 per hour for 10 hours per week, but working at IM West will pay her $11 per hour for 15 hours per week. She thinks the working conditions at both jobs are equally good. Which of the following is true?Her opportunity cost for the IM West job is $90 per week plus the value that she places on the extra hours of free time.Suppose that, at the urging of the U.S., all countries stop purchasing oil from Iran, which was previously one of the largest suppliers, and turn to other suppliers. According to the demand-supply model, how is the oil market affected?If no one will buy from Iran the supply of oil in effect shifts left, so the price rises and quantity purchased falls.Suppose a study finds a strong positive correlation between airmiles traveled per year and length of life. What is the most likely explanation?Omitted variables. Some other factors are correlated with both frequent air travel and length of life.In the simple circular-flow model discussed in class, GDPcould be computed as either the revenue firms receive from the sales of goods and services or as the amount that is spent on goods and services.Suppose the CPI was 140 in Year 1 and 147 in Year 2. The nominal interest rate during the period was 9 percent. What was the real interest rate during this period?4 percent Explanation: Inflation (the percentage change in CPI) was 5 percent. The real interest rate is the nominal rate minus inflation.Which statement follows most directly from the economic theory of supply and demand?If the price of coffee rises, the demand for tea (a substitute good) will shift to the right.Suppose that in a class of 15 students, all students took the midterm and received positive scores. How would the mean and median change if the two students who received the lowest scores had skipped the exam and received scores of 0 instead? (These students are still to be counted in calculating mean and median.)The mean would fall but the median would be unaffected.The phrase "an increase in supply" refers toa shift of the supply curve to the right.Economists say that optimal decisions are usually made at the margin. For the Michigan Flyer bus company deciding how many buses to run on a busy day this means adding busesas long as the added benefits exceed the added costs. MB > MC.Suppose a law is passed that milk can only be sold at $1.50 per gallon. Afterwards, consumers find that when they go to stores there is often no milk available. From demand-supply analysis we would conclude thatthe $1.50 price is below the natural market equilibrium and has created a shortage of milk.Suppose that over a period of several years, the CPI shows that prices increased by 20%, but a number new products were introduced and widely purchased, while the Bureau of Labor Statistics kept its market basket the same. Which statement is true?The true increase in the cost of living was less than 20%.Which of the following is an example of a normative economic statement?Requiring all Medicaid beneficiaries to work will do more harm than good.Supply curves usually slope upward becausean increase in price gives producers an incentive to supply a larger quantity.Suppose that a market was in equilibrium and then both price and quantity increased. According to demand-supply analysis, which of the following shifts in curves is NOT a possible explanation?Demand decreased while supply increased.In 2010 the nominal GDP of a country was $450 and the real GDP was $300. The base year was 2005, so the GDP deflator equaled 100 in that year. Which of the following must be true?The value of the GDP deflator in 2010 was 150.