Study Guide Questions Flashcards
The opportunity cost of an item
is what you give up to get that item.
It is said that the U.S. is an “economy of scarcity”. This statement:
is true, because our resources are not sufficient to realize all of our goals
Production possibilities frontiers are usually bowed outward. This is because:
resources are specialized. That is, some are better at producing particular goods rather than other goods.
Mary and Jane both graduated from Cornell with Ph.D.s in economics last year. Both were offered teaching jobs at Harvard this year at $100,000. Mary accepted the offer but Jane got married and is now a homemaker. If war breaks out in Syria and Mary and Jane are drafted into the Army, what is the best estimate of the cost to society of drafting these two women at a salary of $40,000 each?
At least $200,000, because the value of Jane’s services as a homemaker must be at least $100,000.
The cost to society, is the sum of the cost of each individual in that society that best knows the value of their actions. Because Mary turned DOWN 100k to be a housemaker, her time and value to society must be ATLEAST 100,000 because she felt it was worth not taking the Harvard job. So though she does not take the job, she would have been in that position and therefore their cost to society is BOTH 100,000 each aka 200,000
A dentist purchased one ounce of gold in 2000 when gold was selling for $300/ounce. She has kept the gold ever since. Today, gold is valued at $600/ounce. The opportunity cost of using this gold now:
is $600
What matters for this is not the history or the type of thing the good is used for, it is the value of it in today’s market.
Last year Delta airlines purchased and stored 1 million gallons of aviation fuel at a time when aviation fuel was selling for $2.00 per gallon. Aviation fuel is now valued at $3.00 per gallon. The opportunity cost of using this stored fuel now:
is $3M.
If Delta does not use the fuel, they can sell it for $3 million. So by using the fuel for whatever purpose they will be giving up $3 million.
To increase the “Wealth of Nations” or to “reduce poverty,” it is most important to
ensure that consumers receive the goods and services they are most willing and able to pay for at the lowest price. . Ensuring that consumers are able to receive the goods and services they are most willing able to receive at the lowest price also ensures that the resources of the economy are allocated in the most productive manner.
One would expect that if the price of staples doubled
the price of staplers would fall. . Both products are complements. The demand for staplers falls because it is more expensive to own and facilitate a stapler now that staples are expensive.
One would expect that an increase in the price of tomato juice from $1.50 to $2.00 would:
Increase the price of orange juice. Products are substitutes
If the elasticity of demand is 1.5 then, a 10 percent reduction in price
will increase quantity demanded by 15 percent
If the elasticity of demand is 0.5 then, a 20 percent increase in price will:
decrease quantity demanded by 10 percent
Other things constant, an increase in the cost of labor which shifted the supply curve for automobiles inward would increase the equilibrium price of automobiles to a greater degree
The more inelastic is the demand curve
All else being equal, a decrease in the price of microchips being used to make computers, which would shift the supply curve of computers to the right, would decrease the equilibrium price of computers to a lesser degree:
the more elastic is the demand curve
All else equal, an increase in the price of aluminum used to make airplanes, which would shift the supply curve of airplanes to the left, would increase the equilibrium price of airplanes to a greater degree:
the more inelastic is the demand curve
A drought destroys part of the lemon crop but has no effect on the lime crop. How will total revenue be affected in both industries?
Increase for lime producers but might increase or decrease for lemon producers
A new technology is discovered that makes it much cheaper to produce desktop computers. If there is no change in how producers make printers, how will the total revenue in the desktop computer market and the printer market be affected?
total revenue will increase in both markets
A hurricane destroys the cotton crop in Louisiana. How will this affect the total revenue in the cotton market and in the polyester market?
Total revenue will increase in the polyester market but may increase or decrease in the cotton market.
A massive oil deposit is discovered in Kansas. How will this affect total revenue in the oil market and in the automobile market?
Total revenue will increase in the automobile market but may increase or decrease in the oil market.
In the presence of rent control, as we move from the short run to the long run, we should expect the shortage of apartments to:
decrease as the supply curve for apartments becomes more elastic
The tax incidence is equivalent
regardless of whether the tax is levied on the buyer or the seller
If you wanted to raise revenues with the least burden of the tax placed on consumers you would tax a product:
Whose demand elasticity was greater than its supply elasticity
Suppose that a tax is placed on DVDs. If the sellers end up bearing most of the tax burden, we know that the
supply is more inelastic than demand.
On the basis of supply and demand analysis, you could reasonably predict that one effect of the minimum wage law would be to:
cause some people to lose their jobs
If the federal government sets a price ceiling on natural gas (prohibits natural gas from being sold in excess of a stated amount) below the equilibrium price, which of these would happen?
The supply and demand curves will both shift until a new equilibrium is achieved at the ceiling price
If the U.S. congress passes a law that sets a price ceiling on milk (i.e. milk cannot be sold for a higher price than the price stated in the law) which is above the equilibrium price of milk, which of the following would happen?
The price and quantity of milk will not change
If New York passes a law that sets a price ceiling on gasoline below the equilibrium price of gasoline, which of the following would happen?
Both the supply and demand for gasoline will shift so that the quantity of gasoline sold in New York is achieved at the ceiling price.
Several years ago, Cornell students put their lives in danger by rushing to buy Cornell Ice Hockey season tickets. This behavior indicates:
The price of Cornell hockey games is below equilibrium price, and this behavior is the result of this pricing policy.
If you wanted to raise revenues with the least burden of the tax placed on consumers you would tax a product:
Whose demand elasticity was greater than its supply elasticity
In order to make the homeless feel better, the U.S. government requires all new homes to have a large emblem on the front door stating “Living in a house isn’t everything.” The cost of this emblem will be borne
Partly by new home buyers and partly by home builders
I recently paid $1,000 to have my portrait painted and it really turned out well. However, a visitor came to my house today and liked the painting so much that she offered me $5,000 to sell it to her. The opportunity cost of keeping my painting is:
$5,000.
You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?
$10
You are about to purchase a ticket to watch a wrestling contest between Madonna and Sean Penn for $100 when a guy comes up to you and offers you $400 to wait outside and watch his pet iguana so he can see the wrestling match of the century. Assuming you derive no pleasure or pain from consorting with the iguana, how much would you have to value the wrestling match to buy the ticket and go to the match?
$500.
You won a free ticket to see a Barry Manilow concert (which has no resale value). Amy Winehouse is performing the same night and is your next-best alternative activity. Tickets to see Winehouse cost $60. On any given day, you would be willing to pay up to $100 to see Winehouse. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Barry Manilow?
$40.
You purchased a $500 refundable ticket to spend this weekend in Dallas with your best friend, when your roommates offer you $2,000 to help them study for their Econ 1110 exam. Assuming that you derive no pleasure from teaching, how much would you have to value visiting your friend to use the ticket and turn down this offer?
$2500
Suppose the Federal Government places a 50 cents/gallon tax on the producers of gasoline. What would you expect to happen to the deadweight loss related to the gasoline tax after two years?
It will decrease
