Concepts!
What does microeconomics examine?
Microeconomics examines decisions of individual households, firms, or markets.
How to determine who has comparative advantage?
Person with the lowest opportunity cost to produce a good has the comparative advantage.
Substitutes and Complements in consumption
Substitutes: Two or more products that can be used for the same purpose or to satisfy a similar need or desire.
Complements: Products that are often used or consumed together.
What is a price ceiling and a price floor?
A price ceiling is a maximum price set by the government that can be charged for a good or service.
A price floor is a miminum price set by the government that can be charged for a good or service.
Functions to calculate Elasticity
%△Q/%△P
(△Q/Q)/(△P/P)
P/Q * 1/|slope|
The value of the things you have to give up (the next best alternative) to get something else
An economy has two workers, Paula and Ricardo. Every day they work, Paula can produce 4
computers or 16 shirts, and Ricardo can produce 6 computers or 12 shirts. To maximize total output,
Paula should specialize in producing _____ while Ricardo should specialize in producing _______.
Shirts; Computers.
Substitutes and Complements in production
Substitutes: Products that can use the same rinputs to produce.
Complements: By-products of production.
Provide an example of a good or service where a government might impose a price ceiling and a price floor.
Examples:
Price ceiling: rent control, organ market...
Price floor: minimum wage...
What is the total producer's surplus in this market?
$125
Principle of Increasing Opportunity Cost
In explaining the production of any good, first employ those resources with the loest opportunity cost, and only afterwards turn to the resources with higher opportunity costs. [In textbook, low hanging fruits principle.]
Bowed out PPF
he absolute value of the slope of the production possibilities curve gives the:
A. opportunity cost of the good on the vertical axis.
B. maximum amount of the good on the vertical axis that can be produced.
C. maximum amount of the good on the horizontal axis that can be produced.
D. opportunity cost of the good on the horizontal axis.
D. opportunity cost of the good on the horizontal axis.
Sejal's reservation price for her economics textbook is $100. The week before the semester begins,
Sejal finds a copy of her textbook online for $75. Sejal's consumer surplus from buying the textbook
online is
$25.
Suppose a minimum wage law required the wage to be at least $20 per hour in this market. If that
happened, then
A) there would be an excess supply of person-hours.
B) there would be excess demand for person-hours.
C) the demand for person-hours would shift to the right.
D) there would be no change in the equilibrium number of person-hours
D) there would be no change in the equilibrium number of person-hours
If consumers can readily switch to a close substitute when the price of a good increases, the demand
for that good is likely to be:
A. elastic.
B. inelastic.
C. unit elastic.
D. perfectly elastic.
A. elastic.
If a good has close substitutes, then consumers will respond to a price increase by switching to the substitute and the change in quantity demanded will be large relative to the change in price, implying that demand is elastic.
Why is everybody winning with trade?
They are working on the lowest opportunity cost. Have low cost producers work and then trade.
Refer to the accompanying figure, which shows the annual domestic supply and annual domestic demand for jeans in a small country.
If the world price of a pair of jeans is $40, and this country is open to trade with the rest of the world,
then it will ______ pairs of jeans each year.
A) export 24,000
B) import 24,000
C) import 28,000
D) export 4,000
B) import 24,000
f supply increases, then
A. demand will increase
B. the quantity demanded will increase
C. the quantity demanded will decrease
D. the price will increase
B. the quantity demanded will increase
The government sets a price ceiling on apartment rents that is below the equilibrium rent. Which of the following outcomes is most likely to occur?
A) An increase in the quantity of apartments supplied, leading to a surplus.
B) A decrease in the demand of apartments, leading to a surplus.
C) A decrease in the quantity of apartments supplied, leading to a shortage.
D) An increase in the equilibrium rent, eliminating any surplus or shortage.
C) A decrease in the quantity of apartments supplied, leading to a shortage.
Suppose the elasticity of labor demand is less than 1 in absolute value. Imposing a minimum wage
above the equilibrium wage will
A) increase the earnings of every worker.
B) result in full employment.
C) increase the earnings of workers as a group.
D) make few workers better off.
C) increase the earnings of workers as a group.
Please draw the free market circular flow diagram.
Output Market (Final goods + services)
demand ⬆ supply
Households Firms
supply ⬇ demand
Input or Factor Market (Land, Labor, Capital...)
The accompanying graph is the production possibility curve for a three-person economy, with workers Janna, Drew, and Kari.
Who has the greatest comparative advantage in rice production?
A) Janna
B) Drew
C) Kari
D) None of them
C) Kari
If the supply for x1 falls when the price of x2 rises, then we know that x1 and x2 are ______.
Substitutes in production.
How a price ceiling set below the equilibrium price affects consumer surplus, producer surplus, and total economic surplus. Illustrate your answer with a graph.
Shortage, as the quantity demanded exceeds the quantity supplied.
Consumer surplus initially increases as consumers pay lower prices. Producer surplus decreases because producers receive less revenue and supply less. Total economic surplus decreases because the loss in producer surplus and the inefficiencies from the shortage outweigh the gain in consumer surplus.
Suppose an 10% fall in the price of strawberries increases the quantity of strawberries demanded by
2% and increases the quantity of chocolate demanded by 5%. What is the cross-price elasticity of
demand for chocolate with respect to the price of strawberries? Do these data suggest strawberries and
chocolate are substitutes or complements in consumption?
C.
It suggests that strawberries and chocolate are complements. As the price of strawberries
falls, people buy more strawberries and more chocolate. The cross price elasticity of demand for
chocolate is (5%/-10%)=-.5