People & Decisions
Which of the following statements are true?
a) Normative statements describe how the world should be.
b) Normative statements describe how the world is.
c) Positive statements can be tested or refuted.
d) Positive statements have to be true.
a) and c)
a) Normative statements describe how the world should be.
c) Positive statements can be tested or refuted.
What does the slope of the PPF represent?
The opportunity cost of producing one more unit of good x in terms of good y.
Why might two countries choose to trade with each other?
Interdependence and trade allows everyone to enjoy a greater quantity and variety of goods and services. Countries are able to get better prices abroad for goods they produce, and they can buy goods abroad for cheaper than if they purchased at home.
What are the characteristics of a competitive market?
1. There are many buyers and sellers, and they are both price takers (can not affect price).
2. There are identical products and technology.
3. There is free entry and exit into the market.
Khushi likes to bake matcha cookies and brownies. She can either bake 15 matcha cookies or 9 brownies in 1 hour. She usually spends 3 hours baking. Draw Khushi's PPF (assuming she spends 3 hours baking), placing matcha cookies x-axis. Label the x and y axis, intercepts, and the slopes.
x-intercept (matcha cookies): 45
y-intercept (brownies): 27
slope: -3/5
Is this statement positive or normative? Removing vehicle emission standards would lead to lower prices for automobiles.
Positive
A production possibility frontier illustrates the ________ facing an economy that ________ only two goods.
A)Prices; sells
B)Trade-offs; produces
C)Trade-offs; consumes
D)Shortages; produces
B) Trade-offs; produces
What is the difference between comparative advantage and absolute advantage, both conceptually and mathematically?
Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer. It is measured through opportunity costs or slope of the PPF.
Absolute Advantage: the ability to produce a good using fewer inputs than another producer. It is measured by comparing extremes on the graph.
What does it mean for two goods to be substitutes? What about complements? Give examples for each.
If two goods are...
substitutes if an increase in the price of one good causes an increase in demand of the other.
complements if an increase in the price of one good causes a decrease in demand for the other.
Khushi likes to bake matcha cookies and brownies. She can either bake 15 matcha cookies or 9 brownies in 1 hour. She usually spends 3 hours baking. What is her opportunity cost of baking 1 matcha cookie? What is her opportunity cost of baking 1 brownie?
Her opportunity cost of baking 1 matcha cookie is 3/5 brownies. Her opportunity cost of baking 1 brownie is 5/3 matcha cookies.
What is the central assumption about how people behave in economics?
Rationality.
Bianca and Rosa each own a small farm. They both produce milk and apples. Each hour, Bianca can either produce 1 gallon of milk or 1 pound of apples, and Rosa can either produce 2 gallons of milk or 4 pounds of apples. Each works 4 hours a day. Who has the comparative advantage in producing milk?
Bianca.
Do gains from trade come the comparative advantage or the absolute advantage. In other words, which advantage should be used when countries choose which good to specialize in, with the goal of making the world's economic pie bigger.
the comparative advantage
When the price of a good rises, what happens to the quantity supplied and the quantity demanded?
The quantity supplied increases, and the quantity demanded decreases.
There are two chefs in an Italian restaurant: Billy and Chloe. In 1 hour, Billy can make 25 plates of spaghetti with meatballs or 20 pepperoni pizzas. In 1 hour, Chloe can make 40 plates of spaghetti with meatballs or 30 pizzas. Draw each individual's PPF, placing spaghetti on the x-axis. Who has the comparative advantage in making spaghetti with meatballs? Who has the comparative advantage in making pizza? Who has the absolute advantage in making spaghetti with meatballs? Who has the absolute advantage in making pizza?
CA in spaghetti with meatballs: Chloe
CA in pizza: Billy
AA in spaghetti with meatballs: Chloe
AA in pizza: Chloe
Gaby is deciding how to spend her Saturday evening. She can either have dinner with her friends at a Japanese restaurant or she can watch a movie with her boyfriend at a movie theatre. She can also go to the gym but she prefers spending time with her friends or with her boyfriend. What is her opportunity cost of Gaby watching a movie with her boyfriend?
Having dinner with her friends at a Japanese restaurant.
If the PPF is a straight line, what can we say about the opportunity cost? If it is bow-shaped, what can we say about the opportunity cost? What explains this?
A straight line PPF has constant opportunity cost. This case reflects a situation where resources are not specialized and can be substituted for each other with no added cost.
A bow-shaped PPF has increasing opportunity cost. This is because the cost of production is not constant - as more of good x produced, a higher amount of good y must be given up.
Suppose that two siblings, Fiona and Henry, are required to help their parents around the house. In particular, each week they are required to spend an hour vacuuming and folding laundry. Suppose it takes Fiona 10 minutes to vacuum a room and 15 minutes to fold a load of laundry, while it takes Henry 5 minutes to vacuum a room and 10 minutes to fold a load of laundry. Who has the comparative advantage in each good? Who has the absolute advantage in each good?
Henry has the CA in vacuuming.
Fiona has the CA in laundry.
Henry has the AA in both vacuuming and laundry.
Consider the market for eggs. Describe how the following scenarios will effect the graph of supply and demand for eggs.
1. There is an increase in the price of chicken feed.
2. There is a decrease in the price of bacon, a complementary good.
3. A technological innovation that reduces egg breakage during packing.
1. Supply decreases. The curve shifts to the left on the graph.
2. Demand increases. The curve shifts to the right on the graph.
3. Supply increases. The curve shifts to the right on the graph.
Let the supply curve for gasoline be given by Q=3/2P-3, and let the demand curve for gasoline be given by Q=5-1/2P. Sketch the supply curve and the demand curve. Compute the equilibrium price and quantity of gasoline, and label these on your graph. Suppose the President allows companies to drill for oil in the Arctic National Wildlife refuge. How will the new policy affect the equilibrium price and quantity of gasoline?
Q* = 3 and P* = 4
The policy will increase supply causing the equilibrium price to fall and the equilibrium quantity to increase.
You buy a new Volkswagen Tiguan for $27,000 but after a month, you wonder if you made the right decision. You know you can sell the car for $22,000. What is the opportunity cost of keeping your car?
a) $27,000
b) $22,000
c) $5,000
d) 0
$22,000
What causes the PPF to shift outward? What causes it to shift inward?
Factors that cause the PPF to shift outwards include improvements in technology, availability of new resources, more labor & capital.
Factors that cause the PPF to shift inwards are unemployment and natural disasters.
Fred and Roy live next door to each other and are considering whether they ought to trade with one another. Using the same resources, each produces wheat (W) and pork (P). Let Fred’s Production Possibilities Curve (PPC) for a week is given by W=15-2P and let Roy’ PPC for a week be given by W=10-4P, where wheat is measured in bushels and pork is measured in pound. If Fred and Roy trade, who will sell wheat?
Roy, because he has the CA in wheat
Suppose the demand and supply of transplant organs can be represented
by:
Quantity demanded = 130,000 – 4*Price
Quantity supplied = 10,000 + 2*Price
What is the market clearing or equilibrium price of an organ? What is the market clearing quantity?
Q* = 50,000 P* = 20,000
Consider the market for balloons with the following demand and supply functions.
Pd = 20 - Q Ps = 3Q + 4
Find the equilibrium price and quantity. Then suppose the government imposes a price ceiling of $13. Find the new market quantity and price.
Q* = 4, P* = 16
The price ceiling is binding, the new market price is $13 and the new quantity demanded is 3.