Introductory Material
What is the definition of opportunity cost?
The highest-valued alternative that must be given up to engage in an activity.
Give an example of something that would cause a rightward shift of supply.
Improved technology, improved natural conditions, decrease in cost of inputs, etc.
Explain what happens to consumers and producers when a price ceiling is implemented in a market. What happens to overall efficiency?
Consumer surplus will increase, producer surplus will decrease, the market will be more inefficient because their will be deadweight loss in the market.
When deciding who should specialize in the production of a good what do we analyze and how do we decide who produces what?
Analyze comparative advantage country with the lowest opportunity cost should produce the good.
How does free trade impact wages?
Free trade increases wages for all of the industries that export goods. Lower wages for sectors where we import goods.
Give an example of a positive statement give an example of a normative statement.
Positive: Federal minimum wage is $7.25.
Normative: Federal minimum wage should be at least $9.
Explain why a demand curve will always have a negative slope.
Law of demand states that as price increases quantity will decrease (or vice versa) the inverse relationship causes the downward slope.
Define a price floor, give a real-world example, and draw a binding price floor on a graph.
A new legal minimum price.
Examples: minimum wage, placed on agricultural products (milk eggs etc)
Provide two examples of factors that would make the price elasticity of demand for a good more elastic.
Time frame (long-run), lots of substitutes, if it is a luxury not a necessity, if it takes up a larger portion of income, etc.
After opening up their borders to free trade consumers demand 1,200 units of a good and producers supply 500. Prior to opening up our borders, the equilibrium quantity was 800 units. How many goods are produced domestically how many are imported?
500 produced domestically
700 imported
What is a market economy and what is a benefit of market economies?
An economy in which the decisions of households and firms as they interact in markets determine the allocation of economic resources.
Market economies encourage innovation.
Consider the market for coffee. Assume the price of coffee beans decreases and that the general public is trying to decrease their caffeine consumption. What impact will this have on P* and Q*?
P will decrease Q cannot be determined
When considering the three types of government intervention discussed in class (price ceilings, price floors, and taxes) explain what happens to producer surplus after the implementation of each one.
Price ceiling: PS decreases
Price floor: PS increases
Taxes: PS decreases
Using the table identify who has the comparative advantage for each good.
Person 1 produces 90 apples and 60 oranges.
Person 2 produces 70 apples and 50 oranges.
Person 1 comparative advantage in apples.
Person 2 comparative advantage in oranges.
What happens to consumer surplus and producer surplus after a quota is implemented.
Does a quota generate government revenue?
Consumer surplus decreases producer surplus increases. No government revenue is generated.
What is sunk cost fallacy. Provide an example.
Sunk cost fallacy is the idea that someone is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial.
Toxic relationships, not finishing a book you don't enjoy, etc.
Using the following equations solve for consumer surplus and producer surplus.
Qd = 15 - 3P
Qs = -5 + 2P
Consumer surplus = 1.5
Producer surplus = 2.25
Who does the burden of a tax fall on if demand for the good is unit elastic (proportional change in price and quantity)?
It falls evenly on consumers and producers.
Explain why PPFs used to represent society are bowed out instead of linear.
Linear curves face constant marginal opportunity costs.
Bowed-out curves face increasing marginal opportunity costs.
Explain the difference between a quota and a tariff. Which one do you think is worse for foreign producers.
A quota is an absolute limit on the amount of the good that can be imported a tariff is a tax placed on imported goods. Generally speaking quotas are worse for foreign producers because they restrict the quantity of goods that can be sold whereas tariffs generate government revenue and allow for continuous import as long as higher prices are paid.
Draw the circular flow diagram (include the flow of resources/goods and services)
What is the difference between demand and quantity demanded? Give an example of something that would change demand and something that would change quantity demanded.
Demand is the relationship between price and quantity for a good. Quantity demanded is the amount of a good a consumer wants at a given price.
Any demand shifter
Quantity demanded changes if there's a change in current prices.
Draw a market after a tax has been placed on an elastic good, include the tax burden (what price will consumers pay what price will producers pay)
N/A
The price of a good increased from $20 to $22 and the quantity demanded decreased from 110 to 100 units. What is the price elasticity of demand? Is the good elastic, inelastic or unit elastic?
Elasticity is 1, it is unit elastic.
Draw and label a graph for a good that we import that has a tariff placed on it. (Label all axis's, curves, and the different areas of the graph)
N/A