Exam 3: Chapter 2, 9, 10 & 10's Appendix

Question 1

Utility

Answer 1

Happiness or satisfaction you get from buying or doing something

Question 2

What does utility drive

Answer 2

demand

Question 3

What do we assume about how people consume to maximize their utility

Answer 3

they consume based on what they can afford

Question 4

Does utility vary person to person on the same object

Answer 4

yes

Question 5

Marginal Utility

Answer 5

the additional happiness you get when you consume one more of the same thing

Question 6

Diminishing Marginal Utility

Answer 6

as you consume more units, you get more utility as a total but the additional utility you get per unit decreases

Question 7

Describe a situation of diminishing marginal utility

Answer 7

When drinking beer (2nd beer is never as good as the 1st)

When eating a food (5th one is never as good as the 2nd)

Question 8

What does the graph (plotted points connected with straight lines) look like for Total Utility

Answer 8

Starts increasing then levels out and then eventually goes down

Question 9

What does the graph (plotted points connected with straight lines) look like for Marginal Utility

Answer 9

Starts high and then slowly decreases as more are consumed

Question 10

Does diminishing marginal utility apply to money, if so explain why

Answer 10

YES because the more money you make, the higher the taxes you pay because it matters that you pay out as much of your salary as a poor person does (you both pay enough to hurt you the same amount even if it is different amounts of money)

Question 11

What is the abbreviation for Marginal Utility

Answer 11

MU

Question 12

As long as MU is > 0 you are getting…

Answer 12

satisfaction/happiness from what you are consuming

Question 13

Demand isn’t only what we want…it is what we

Answer 13

are willing to pay for it

Question 14

If consumers did not operate on a budget, how would we maximize our utility

Answer 14

we would just buy whatever gave us the most utility no matter the cost

Question 15

How do we maximize our utility on a budget

Answer 15

We buy the thing with the highest utility per dollar

Question 16

What is the formula for finding utility per dollar

Answer 16

MU/P

Question 17

Calculate the utility per dollar for the following items:

Total Utility: 100 Price: $40
: 12 : $3
:90 : $30

Answer 17

1. 2.5
2. 4
3. 3

Question 18

Which of the following is true?

a) As consumption increases, total utility must increase
b) Total utility increases initially but then decreases as marginal utility approaches zero
c) If marginal utility is greater than zero, total utility is increasing
d) If marginal utility is zero, total utility is at a minimum

Answer 18

C

Question 19

How does utility drive demand?

Answer 19

as price goes up, we get less MU per dollar than before so we buy less

Question 20

Indifference Curve

Answer 20

set of combinations of goods that provide the same level of utility

Question 21

Marginal Rate of Substitution

Answer 21

how many of one thing would you give up to get more of another and be just as happy

Question 22

if there is a steep indifference curve (more like L shape) which good do you like more… the top or bottom

Answer 22

Bottom

Question 23

If there is a small sloped indifference curve (L on long side w/ short side sticking up vertical axis) which good do you like more…the top or bottom

Answer 23

Top

Question 24

The higher the indifference curve… the higher or lower the utility

Answer 24

Higher

Question 25

What are the top four countries we import from

Answer 25

China Canada Mexico European Union

Question 26

What are the top four countries that we export to

Answer 26

Canada Mexico China European Union

Question 27

What is a PPF and what is the other abbreviation/name for it

Answer 27

Production Possibilities Frontier | PPC- Production Possibilities Curve

Question 28

What is a Production Possibilities Frontier/Curve

Answer 28

All posible combinations of output that can be produced using all inputs efficiently

Question 29

How do companies get gains from trade

Answer 29

specialize in the thing that they do best in and then trade

Question 30

What side of the PPF is all things the company cannot produce on it's own

Answer 30

top/right

Question 31

Comparative Advantage

Answer 31

Where opportunity cost is lowest

Question 32

Should a company export the good with or without the competitive advantage

Answer 32

with

Question 33

Absolute Advantage

Answer 33

a party can produce more of a good than its competitors using the same amount of resources

Question 34

autarky

Answer 34

not trading

Question 35

What are the two steps to figure out the terms of trade

Answer 35

1. Calculate the opportunity cost of making 1 of each good in each country 2. Take any ratio in between and that is the terms of trade

Question 36

What do you need to make sure to do when you write the terms of trade on the test

Answer 36

LABEL BOTH NUMBERS WITH WHAT GOOD IT IS

Question 37

Can trade make both countries better off

Answer 37

yes

Question 38

who are the losers from free trade and what do they do about losing

Answer 38

the individual companies that experience loses. they ask for tariffs and quotas to be placed in action

Question 39

What is a tariff

Answer 39

a tax on an import

Question 40

what are the two types of tariffs

Answer 40

specific and ad valorem

Question 41

what is a specific tariff

Answer 41

a specific dollar amount

Question 42

what is a ad valorem tariff

Answer 42

a percentage of the value of the import

Question 43

why do we care about tariffs

Answer 43

because they not only raise the price of the imported good but also the domestic good

Question 44

Smoot-Hawley

Answer 44

Act from the 1930s that was attempting to protect the industries in america only it made the depression worse

Question 45

does the Smoot-Hawley act still affect us today

Answer 45

yes

Question 46

what are the four punchlines of tariffs

Answer 46

1. under a tariff, economic surplus is reduced... 2. even taking into account $ earned by the government (tax revenue)... 3. Tariffs create waste (deadweight loss) 4. Most economists do not support tariffs

Question 47

what is the difference between tariffs and quotas in terms of revenue

Answer 47

the revenue goes to the foreign producers

Question 48

Price will be bid up in a quota until...

Answer 48

the quantity that is the quota exactly fills the gap between quantity demanded and quantity supplied by domestic producers

Question 49

What are the four arguments in support of tariffs and quotas

Answer 49

1. Saving jobs 2. Protecting higher wages 3. Protecting infant industries 4. Protecting national security

Question 50

Describe and then tear apart the national security argument for quotas

Answer 50

if we put a quota on the food imported from a country so that they don't supply all of our food, then if we go to war with them they cannot cut off our complete supply and starve us. ARGUMENT: why don't we then just get our food from someone else because unless we are at war with the world then their will be no issue of starving.

Question 51

Describe and tear apart protecting infant industries argument for quotas

Answer 51

some industry new to america will one day compete in the market but right now it needs help so it doesn't go under. ARGUMENT: if we protect them then they will never learn to flourish

Question 52

describe and tear apart the saving jobs and protecting higher wages arguments for quotas

Answer 52

trying to save jobs and wages by setting a quota on the goods benefits very few and hurts many, 5000 people might get to keep jobs but everyone else pays $10 more for a pair of shoes, benefit of tariff: $200 million cost of tariff: $250 million

Question 53

Elasticity formula

Answer 53

Change in Quantity Demanded/Average Quantity Demanded _______________________________________________________________ Change in Price/Average Price

Question 54

How do you calculate opportunity cost (give example)

Answer 54

If a country can make 16 wheat or 8 oil...what is the opp. cost of making 1 wheat? If they make 16 wheat...then they make no oil Make the wheat 1 (16/16) and the oil (8/16) When they make 1 wheat, they do not make 1/2 an oil