Microeconomics
A student has 5 hours to cook servings of turkey or scented candles. Assuming he has an unlimited amount of materials for both, the more time spent on making candles, the more candles he can make, but he will be able to cook less turkey. This situation illustrates the concept of:
What is opportunity cost? /Trade-Off
*Mention: In PPC, opportunity cost is increasing:
resources originally used to produce the other good are less and less suited to produce the good
What is the difference between real and nominal GDP?
Nominal GDP: The total value of all goods and services produced within a country measured at current prices (the prices that actually exist in that year).
Real GDP: The total value of all goods and services produced, adjusted for inflation, measured using constant prices from a base year.
Nominal GDP includes inflation but real does not.
The reason why countries trade with each other is because of __.
Also define the concept.
Comparative Advantage
Where one country has a lower opportunity cost of producing a product than the other (and export the good).
Even if one country is absolutely better at producing both goods (larger amount given same cost), still trade according to comparative advantage not absolute advantage principle.
What is the term used to refer to two goods where an increase in the price of one leads to an increase in the demand of the other?
Substitute
You skip the usual thanksgiving marketplace and drive across town to save 25 cents to get a cheaper pumpkin. The trip takes 12 extra minutes, and your time is worth $18 per hour. Was that worth it?
no, because the opportunity cost of time is greater than the money saved
Opportunity cost of time is 360 cents, larger than the money saved which is 25 cents
What is the formula of (1) GDP deflator (2) CPI?
When they are used to calculate inflation, what is the difference between the two measures?
GDP deflator= (Nominal GDP)/(Real GDP)
CPI= (Cost of basket in current year)/(cost of basket in base year)
CPI reflects how expensive goods and services are for households (cost of living) while GDP deflator reflects how much prices have risen for the entire economy’s production.
Jamie can bake cookies or cupcakes. In one hour, she can make 30 cookies or 10 cupcakes. Alex can make 40 cookies or 20 cupcakes per hour. Who has the comparative advantage in cookies?
Jamie because she has a lower opportunity cost of 1/3 cupcakes/cookies,
which is larger than Alex's opportunity cost of 1/2 cupcakes/cookies.
What is the measurement of the responsiveness of demand to a change of price?
Price elasticity (of demand)
The demand for Thanksgiving candles is Qd=80−4P, and the supply is Qs=4P. If the government imposes a maximum price of P=8, what will be the shortage (in terms of quantity)?
P=8, Q=10
When P=8, Qd=80-32=48
When P=8, Qs=4*8=32
Q(Shortage)=48-32=16 cups of smoothie
No need to solve for the equilibrium price for speed.
If the CPI rises from 200 to 210 between 2024 and 2025, calculate the inflation rate, and explain whether workers whose nominal wages increased by 3% experienced an increase or decrease in real income.
The inflation rate is 5%. Real income fell, because wages increased by less than the inflation rate.
In the country of Florin, workers can sew 1 dress or bake 8 bagels per hour. In Guilder, a worker can sew 2 dresses or bake 12 bagels. If they trade, which good will Florin export?
What is bagels, since Florin has the lower opportunity cost in bagel production?
Use a simple division to calculate o.c.:
For Florin, D/B=1/8 which is smaller than
for Guilder D/B=1/6
What is the term used to refer to a government-imposed minimum price for a good/service (e.g. minimum wage)
The demand for Thanksgiving candles is Qd=80−4P, and the supply is Qs=4P. The total amount of social welfare (consumer welfare + producer welfare) is...
400.
Solve for the equilibrium price and quantity by Qs=Qd, P=10, Q=40.
Solve for price when Qd=0 to get P=40. Solve for price wen Qs=0 to get P=0.
CS= 1/2 * 40 * (20-10)
PS=1/2 * 40 * (10-0)
CS+PS=200+200=400
During the post-Thanksgiving retail season, 200 workers were hired temporarily to handle high shopping demand. After the holidays, 180 of these workers were laid off. At the same time, a major U.S. electronics company automated part of its assembly line, permanently displacing 500 factory workers whose skills do not match the new technology. The total labor force is 10,000 workers.
Which types of unemployment each group of workers is experiencing,
and what is the unemployment rate?
Retail workers: Seasonal unemployment
Factory workers: Structural unemployment
Unemployment rate: (180+500)/10,000=680/10,000=6.8%.
You’re hosting a big Thanksgiving dinner and want the table to smell festive. You plan to buy special Thanksgiving candles during your business trip in the UK then bring them back home for Thanksgiving.
The nominal exchange rate is $1 = £0.80.
A Thanksgiving candle costs $25 in the United States.
The same candle costs £15 in the United Kingdom.
If you want to compare how expensive candles really are between countries (after adjusting for the exchange rate), what is the real exchange rate? Is a candle relatively more expensive in the U.S. or the U.K.?
1.33, more expensive in the U.S.
RER=Nominal exchange rate * (Domestic Price)/(Foreign Price)
=0.80*25/15
=1.33
An RER of 1.33 means that after accounting for the exchange rate, U.S. Thanksgiving candles are about 33% more expensive than U.K. candles. Put another way, one U.S. candle (priced in U.S. terms) buys 1.33 times the quantity of candles priced in the U.K., so U.S. candles are relatively more expensive.
What's the U.S. institution that manages the nation's money supply and interest rates?
Federal Reserve
The market for Cornucopias is defined by the functions Qd=120−4P and Qs=2P. The government imposes a unit tax of $6 on each Cornucopia sold. What is the amount of deadweight loss created by this tax?
1. Equilibrium without tax: P=20, Q=40
2. Supply function after tax: Qs=2(P-6)=2P-12
3. New equilibrium: P=22, Q=32.
5. Amount of DWL: 1/2*6 [unit tax] * (40-32) [height] = 24
An economy produces 1,000,000 Thanksgiving turkeys, each valued at $25.
Of these:
600,000 are sold to households for family dinners,
200,000 are purchased by restaurants and catering companies,
100,000 are bought by the government for food assistance programs, and
50,000 are exported abroad for international Thanksgiving celebrations.
The remaining turkeys are unsold and added to inventory by turkey farmers.
Assume no turkeys are imported into the country this year.
Find GDP in terms of the components of expenditure.
$25,000,000
C=600,000×25=15,000,000
Inventory=50,000×25=1,250,000
Business Investment=200,000 × 25 = 5,000,000
G=100,000×25=2,500,000
X=50,000×25=1,250,000
M=0 (no imports)
GDP=15,000,000(C)+5,000,000(I)+2,500,000(G)+1,250,000(X)+1,250,000(inventory I)=$25,000,000
Before you leave for a summer trip in Britain, you change $1,000 into pounds.
The exchange rate at that time is $1 = £0.80.
You only spend 4/5 of your money while you’re gone, so when you return to the U.S. you need to change your remaining pounds back into dollars.
While you’re away, the dollar has depreciated against the pound, and now the exchange rate is $1 = £0.70.
After you change your pounds back to dollars, how many U.S. dollars will you have left?
$228.57.
Starting your trip with $1,000×0.80=£800.
1/5 money left so £800×51=£160.
Convert back to dollars: £160/0.7= $228.57
What are the two main tools of Fiscal policy, controlled by Congress?
Government spending & taxes