Micro Quiz/Test #1

Question 1

Definition of PPC

Answer 1

Every combination of 2 goods that can be produced using resources fully

Question 2

How many resources are part of the PPC? What are they?

Answer 2

Five: Land, labor, capital, technology, time

Question 3

Definition of opportunity cost

Answer 3

The lost value of the best alternative not chosen

Question 4

Why is the PPC bowed outward?

Answer 4

Sets a boundary but follows the law of increasing costs

Question 5

Law of increasing costs

Answer 5

To produce constant additions of one good we must give up greater and greater amounts of another good.

Question 6

Two sides of the Market

Answer 6

Demand: consumers
Supply: products/good

Question 7

A change in the price of good..

Answer 7

• leads to a movement along the demand/supply curve
• leads to change in quantity demanded/supplied
• does not shift the demand/supply curve
• does not change “demand”/”supply”

Question 8

What shifts the demand curve?

Answer 8

• Tastes & preferences
• prices of related goods
• income
• number of consumers
• price expectations

Question 9

What shifts the supply curve?

Answer 9

• number of producers
• technology
• cost of inputs

Question 10

Substitute goods

Answer 10

goods that can be used in place of another

Question 11

Complementary goods

Answer 11

goods that can be used together

Question 12

Price ceiling

Answer 12

a maximum price allowed by government benefits consumers (us), set below the free-market price

Question 13

Price floor

Answer 13

a minimum price allowed by government benefits producers set above the free-market price

Question 14

A ____ is a result of a price ceiling as quantity supplied is ____ quantity demanded

Answer 14

shortage, less than

Question 15

A ____ is a result of a price floor as quantity supplied is ____ quantity demanded

Answer 15

surplus, greater than

Question 16

What is elasticity?

Answer 16

looks at how responsive one variable is to a change in another variable

Question 17

definition of elasticity

Answer 17

% change of one variable over % change of another variable

Question 18

three types of elasticity

Answer 18

• price elasticity of demand (Ed)
• income elasticity ((Ey)
• cross-price elasticity (Exy)

Question 19

Ed

Answer 19

% change of quantity demanded of good x over % change of price of good x (absolute value)

Question 20

When is demand “elastic”

Answer 20

% change in quantity demanded is greater than % change in price

Question 21

When is demand “inelastic”

Answer 21

% change in quantity demanded is less than % change in price

Question 22

When is demand “unitary elastic”

Answer 22

% change in quantity demanded is equal to % change in price

Question 23

When demand is elastic ____ follows the ____

Answer 23

total revenue, change in quantity
Ed > 1

Question 24

When demand is inelastic ____ follows the ____

Answer 24

total revenue, change in price
Ed < 1

Question 25

Calculating Ed

Answer 25

(New qty dmd - initial qty dmd / initial qty dmd + new qty dmd) / (new price - initial price / initial price + new price)

Question 26

What determines how elastic or inelastic the demand for a good will be?

Answer 26

• greater number of substitutes than goods more elastic will be the demand for that good
• longer time horizon, greater number of substitutes that can be found, more elastic will be demand

Question 27

Ey

Answer 27

Income Elasticity of Demand
% change in qty dmd for good x over % change in income

Question 28

normal good

Answer 28

Ey > 0
increase in income leads to a increase in demand for good x
decrease in income leads to a decrease in demand for good x

Question 29

inferior good

Answer 29

Ey < 0
increase in income leads to a decrease in demand for good x
decrease in income leads to a increase in demand for good x

Question 30

Inexpensive Good

Answer 30

Ey = 0
increase in income leads to no change in demand for good x
decrease in income leads to no change in demand for good x