ECON 101 supply demand equalibrium

Economics is the

(A) study of the distribution of unlimited resources to satisfy limited wants.

(B) study of political organization.

(C) exclusive study of financial markets and instruments.

(D) study of the consumption, production, and distribution of goods and services.

(D) study of the consumption, production, and distribution of goods and services.

Why:

* Many economists have many different definitions for economics. At its core, economics is the study of the consumption, production, and distribution of goods and services.

* Some economists define economics as the study of the distribution of limited resources (scarcity) to satisfy unlimited wants.

An economy is

(A) the political organization of a nation.

(B) the geographical boundaries of a nation.

(C) the system society uses to coordinate productive activities.

(D) the group of individuals who lead a society.

(C) the system society uses to coordinate productive activities.

Why:

* An economy is the system by which society coordinates productive activities. It can be a market economy where buyers and sellers trade to determine what is produced. An economy can also be a command economy where a central authority decides what is produced.

Daniel has decided to open his own bakery using locally sourced ingredients and supplies. He provides income and jobs to local suppliers. He also provides his community with a place to buy delicious baked goods. This is an example of

(A) the invisible hand.

(B) a command economy.

(C) market failure.

(D) a recession.

(A) the invisible hand.

Why:

* Notice, though, that Daniel and his suppliers do not set out to help society. They are motivated by profit. Despite acting "selfishly" by trying to earn profit, they each are taking actions that ultimately benefit society.

* The invisible hand is a term coined by Adam Smith that describes how people acting in their own interest often make choices that benefit society as well.

There are limited resources to satisfy all of society's wants.

(A) business cycle

(B) trade-off

(C) margins

(D) scarcity

(E) entrepreneurship

(F) recession

Comparing the benefits and costs of engaging in an activity

(A) scarcity

(B) trade-off

(C) recession

(D) margins

(E) financial capital

(F) resources

(D) and (B)

Why:

* Economics is the study of how people use their limited resources to satisfy their unlimited wants. In other words, it is the study of how people and society satisfy wants under conditions of scarcity.

* Because of scarcity, people have to decide between alternatives, and may have to give up one good in order to have another. Such decisions involve weighing the benefits of an activity against its costs. This is called a trade-off.

Which is NOT an example of a resource?

(A) land

(B) firms

(C) labor

(D) human capital

(E) machinery

(B) firms

Why:

A resource is anything used in the production of a product or service. The most common examples of resources are land, labor, capital, and human capital. Firms are not examples of resources in the economic sense. Firms typically turn resources into goods and services that are sold in a market.

The $15 Kelly's Big Burger gift card that your friend gave you for your birthday expires today. You can either use the gift card to buy yourself dinner at Kelly's Big Burger, or you can stay home and eat a delicious home-cooked meal. What is the opportunity cost of eating the home-cooked meal?

(A) There is no opportunity cost since you did not pay for the gift card.

(B) The value of a $!5 meal at Kelly's Big Burger.

(C) The time it takes to eat your home-cooked meal, and the value of a $15 meal at Kelly's Big Burger.

(D) the value of the ingredients that go into the home-cooked meal, and the value of a $15 meal at Kelly's Big Burger.

(E) The value of the ingredients that go into the home-cooked meal.

(D) the value of the ingredients that go into the home-cooked meal, and the value of a $15 meal at Kelly's Big Burger.

Why:

The opportunity cost of a decision is the value of the next best alternative. In this case, your next best alternative is to get a $15 dinner at Kelly's Big Burger, and since you didn't use the ingredient to make dinner, you can use the ingredients later. So, the opportunity cost includes the value of the ingredients that went into the home-cooked meal, and the value of a $15 dinner at Kelly's Big Burger. You can think of opportunity cost a the complete cost of doing something.

Which demonstrates a scenario with no opportunity cost?

(A) It's Friday night and you stay up late talking and hanging out with your friends.

(B) The chemistry club is giving out free pizza for lunch to all who come to their table to get it.

(C) Naomi, age 8, is at a bookstore and chooses to buy a book about a young wizard instead of buying a math textbook.

(D) Chez Moi and Chez Nous, two premiere French restaurants with three Michelin stars, both offer you a full time sous chef job at the same salary. You are ecstatic because you know it is a win-win scenario and choose to work for Chez Nous.

(E) All of these scenarios have an opportunity cost.

(E) All of these scenarios have an opportunity cost.

Why:

All scenarios have an opportunity cost; that is part of individual choice. An opportunity cost is what you have to give up to get what you want. While an opportunity cost can involve finances, it doesn't necessarily have to be monetary, but could be one of many other costs, such as time or resources.

For which of the following decisions is marginal analysis least beneficial?

(A) deciding which college to attend

(B) deciding between watching another episode of your favorite TV series and going to bed

(C) deciding whether to do more sit-ups at the gym

(D) deciding how fast to go on the freeway

(E) deciding whether to take a lunch break or knock on another door as a door-to-door salesperson

(A) deciding which college to attend

Why:

* Marginal analysis consists of examining the costs and benefits of doing a little bit more or a little bit less of something. It allows individuals to make optimal decisions about how much of something to consume or do.

* In contrast to all other decisions listed, the decision of which college to attend is an either/or question. When deciding between two different colleges, one might compare the costs and benefits of attending each college, but not the costs and benefits of attending more or less college. How much to attend (i.e., how many courses to take) is a separate decision.

Which is NOT an example of a behavior exhibited in a market economy?

(A) For their wedding, Alex and Erika choose Matte Photography instead of Pro Finish Photography, since Matte Photography is cheaper.

(B) Nettoyer decides to introduce a soap scent, Pomegranate, in response to Schoon's new soap scent, Blood Orange, and Sauber's award-winning scent, Tangerine.

(C) Despite the advice of its business partners, Puna discontinues its most popular lines of clothing, and chooses instead to produce retro jean jackets and purple sweatpants, thinking that jean jackets and sweatpants are bound to make a fashion comeback.

(D) The president of the European country of Semolina decrees that pasta must be consumed at all meals in an effort to help domestic pasta makers.

(D) The president of the European country of Semolina decrees that pasta must be consumed at all meals in an effort to help domestic pasta makers.

Why:

* A market economy is one where the individual producers and consumers can make a choice on what to produce or consume. Puna and the various soap companies each chose different products to produce, while Alex and Erika chose Matte Photography, as it was cheaper. None of these choices were forced or limited by any one person's decrees.

* A command economy is one where a central figure or agency makes decisions regarding production and consumption. Here, the president of Semolina has made a decision regarding the food that consumers will eat. This is an example of a behavior that is consistent with a command economy.

In a market-oriented economy, individual's economic lives are said to be

(A) interrelated with many other individuals and firms.

(B) almost completely controlled by government regulation.

(C) illegal and in violation of government rules on prices and sales.

(D) based more on production than on consumption.

(A) interrelated with many other individuals and firms.

Why:

Economies: Every economy seeks to answer three fundamental questions in economics:

1. What good or service is produced?

2. How is the good or service produced?

3. For whom is the good or service produced?

The interactions of buyers and sellers (and government), determine what is produced, how it is produced, and for whom it is produced.

A market-oriented economy interweaves every person, firm, and product into an intricate web of relationships.

You and other college students are deciding whether to major in music or engineering. You learn that there is a shortage of engineers, making it easy for engineering graduates to find employment, while there is a glut of musicians for whom finding a job is difficult. As a result, you and many other college students decide to major in engineering. Which economic principle does this illustrate?

(A) Markets tend to move towards equilibrium as individuals respond to incentives.

(B) Individuals do not normally take into account the decisions of other individuals.

(C) Government intervention can improve efficiency when there is a market failure.

(D) Changes in incentives are unlikely to change the decisions people make.

(E) Specialization leads to economic efficiency.

(A) Markets tend to move towards equilibrium as individuals respond to incentives.

Why:

* This scenario illustrates how markets tend to move towards equilibrium as individuals respond to incentives. In this case, "equilibrium" means the point at which no individual can change his behavior and become better off. Given their affinity for music and engineering, students consider the costs and benefits associated with choosing each major. The market presents students with incentives, such as the likelihood of employment upon graduation, and students then respond to those incentives.

* Note that the principle described is that markets tend to move towards equilibrium. In general, while the concept of equilibrium is regularly used in economic analysis, incentives are constantly changing, so that actually achieving equilibrium is unlikely

Which statement describes the equity-efficiency trade-off?

(A) There is always a more equitable outcome that is also more efficient.

(B) The least efficient economic outcome is the fairest outcome.

(C) Government intervention can increase efficiency in a market.

(D) Actions intended to make economic outcomes fairer may cause efficiency to decrease.

(D) Actions intended to make economic outcomes fairer may cause efficiency to decrease.

Why:

Policies or actions that attempt to improve fairness (equity) in a market often result in a loss of efficiency. This is referred to as the equity-efficiency trade‑off. For example, the government could pay for everyone to attend college. However, this would need to be financed with higher taxes, the payment of which is likely to make some people worse off. Although this system is arguably more equitable (fair), it would also be less efficient.

Determine which economic principle is illustrated by each scenario.

a. The owner of a snow cone trailer realizes that the demand for snow cones is low during the winter, and closes shop until the temperature warms back up near summertime.

b. The local river has so much pollution that three-eyed are forming. The government responds by regulating the amount of chemicals that can be dumped in the river.

c. At a high-end restaurant, the restaurant owner has one chef at a meat station, one chef at a vegetable station, and one chef, who has an artistic eye, plate the food she is given. The result is increased service speed, and the kitchen is able to serve more customers in an evening.

d. During the summer, a bumper crop of oranges in Florida causes a surplus in the supply of oranges nationwide. As a result, prices fall to compensate for the surplus and consumers enjoy the fruits of the famers' labor.

a. market efficiency

Why: Market efficiency is the concept that the government is not needed to create efficiency in the economy since the economy will become efficient naturally. The incentives that result from a market economy drive businesses to not waste resources. The owner of a snow cone trailer would not have much business on a cool fall or snowy winter day. Thus, it makes sense to close the shop until temperatures get warm enough that people will want to cool off by eating snow cones.

b. government intervention

Why: Sometimes markets have inefficient results, or market failure; when this happens, government intervention may be able to improve the situation. In this case, the government intervenes to address the excessive amount of pollution in the river. The amount of efficiency achieved by the intervention can depend upon the type of government intervention. For example, there are more market-oriented approaches to correcting pollution than strict regulation, such as taxes or cap-and-trade methods.

c. specialization

Why: Even if you are able to do multiple jobs by yourself, there are more gains from trade and many benefits to individuals as a result of specialization. As individuals specialize in certain tasks or productions, goods and services can be crafted faster and traded to fulfill needs, and, as a result, the economy can produce more as a whole.

d. equilibrium

Why: Finally, market prices tend to reach an equilibrium point where supply meets demand. In the orange example, farmers have a large excess of fruit, which would mean more income, but in order to be rid of the fruit before it goes bad, they need to sell it at a lower price. No one farmer would increase their fruit prices significantly, since people could just purchase it from someone else.

Thom, Juliana, Melissa, and Danny are trying to form a band.

After a year of practice and rehearsals the band still sounds awful. Thom cannot keep a steady beat on bass or drums, Melissa sounds terrible on everything except bass, nobody except Juliana can remember all guitar, Danny can't sing. What would you say to them?

(A) Invest their remaining savings in new instruments, as they are at a point where the marginal product of capital exceeds the marginal product of labor.

(B) Abandon the band, as continued practice is doomed to suffer diminishing marginal returns.

(C) Have each band member specialize in the role that they are best in to take advantage of benefits from specialization.

(D) Continue with the current plan, as economies of scale should eventually kick in.

(E) Change the rotation to be random rather than equal to take advantage of heteroskedasticity.

(C) Have each band member specialize in the role that they are best in to take advantage of benefits from specialization.

Why:

As Adam Smith (the father of modern economics) observed at a pin factory, there can be tremendous gains from the division of labor and specialization. According to Smith, "One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head." This division allows each person to specialize in a single task and become better at it — to become a specialist — which is much more efficient than having each person do all of these tasks.

Similarly, it would take a lot of time for each band member to become proficient in three instruments as well as singing. Specializing lets them concentrate on a single instrument. It also lets them stick to what they do best and avoid what they do badly (that is, keeping Danny from singing and Thom from playing drums or bass).

In each of the following four situations, identify which of the four given principles is at work.

a. You choose to purchase your textbooks online through Chegg rather than paying a higher price for the same books through your college bookstore.

b. On your spring break trip, your budget is limited to $35 a day.

c. After a hurricane did extensive damage to homes on the island of St. Crispin, homeowners wanted to purchase many more building materials and hire many more workers than were available on the island. As a result, prices for goods and services rose dramatically across the board.

d. Craigslist allows departing students to sell items such as used books, appliances, and furniture, rather than giving them away as they formerly did.

a. People usually respond to incentives, exploiting opportunities to make themselves better off.

Why:

People usually exploit opportunities to make themselves better off. In this case, you make yourself better off by buying textbooks at a lower price.

b. People must make choices because resources are scarce.

Why:

Even on vacation, resources are scarce. Since you have only $35 a day, your resources are limited (scarce).

c. Overall spending sometimes gets out of line with the economy's productive capacity.

Why:

Overall spending sometimes gets out of line with the economy's productive capacity. The spending by St. Crispin homeowners on building materials and workers fell short of the economy's ability to produce those goods and services. As a result, prices on the island rose across the board (inflation).

d. Because people usually exploit gains from trade, markets usually lead to efficiency.

Why:

Markets usually lead to efficiency. The market here is represented by the buyers and sellers who use Craigslist to trade goods, in contrast to the "nonmarket" of simply giving items away to one's roommate. The market is efficient because it enables people who want to sell items to find those who want to buy those items. This is in contrast to a system in which items are simply left, maybe with a roommate, who may have little or no desire to have them.

In each of the following four situations, identify which of the four given principles is at work.

a. You buy a used textbook from your roommate. Your roommate uses the money to buy songs from iTunes.

b. You decide how many cups of coffee to have when studying the night before an exam by considering how much more work you can do by having another cup versus how jittery it will make you feel.

c. There is limited lab space available to do the project required in Chemistry 101. The lab supervisor assigns lab time to each student based on when that student is able to come.

d. You realize that you can graduate a semester early by forgoing a semester a study abroad.

a. One person's spending is another person's income.

Why:

One person's spending is another person's income. Your spending on the used textbook is your roommate's income.

b. "How much" decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less.

Why:

"How much" is a decision at the margin. Your decision is one of "how much" coffee to consume, and you evaluate the trade-off between keeping yourself awake and becoming more jittery from one more cup of coffee.

c. Resources should be used as efficiently as possible to achieve society's goals.

Why:

Resources should be used as efficiently as possible to achieve society's goals. Allocating scarce lab space according to when each student can use that space is efficient.

d. The opportunity cost of an item - what you must give up in order to get it - is its true cost.

Why:

The real cost of something is what you must give up to get it. The real cost of a semester abroad is giving up the opportunity to graduate early.

In each of the following four situations, identify which of the four given principles it at work.

a. At the student center, there is a bulletin board on which people advertise used items for sale, such as bicycles. Once you have adjusted for differences in quality, all the bikes sell for about the same price.

b. You are better at performing lab experiments, and your lab partner is better at writing lab reports. So the two of you agree that you will do all the experiments, and she will write up all the reports.

c. State governments mandate that it is illegal to drive without passing a driving exam.

d. Your parents' after-tax income has increased because of a tax cut passed by Congress. They therefore increase your allowance, which you spend on a spring break vacation.

a. Markets move toward equilibrium.

b. There are gains from trade.

c. When markets do not achieve efficiency, government intervention can improve society's welfare.

d. Government policies can change spending.

Why:

First, markets move toward equilibrium. Any bicycle that a buyer chooses will leave him or her equally well off. That is, a buyer who chooses a particular bicycle cannot change actions and find another bicycle that makes him or her better off. Also, no seller can take a different action that makes him or her better off: no seller can charge a higher price for a bicycle of similar quality, since no one would buy that bicycle.

The lab example shows that there are gains from trade. If each person specializes in what he or she is good at (that is, in comparison with others, that person has an advantage in producing that good), then there will be gains from specialization and trade.

The next item suggests that when markets do not achieve efficiency, government intervention can improve society's welfare. Unsafe drivers do not take into account the dangers they pose to others and often to themselves. So when unsafe drivers are allowed to drive, everyone is made worse off. Government intervention improves society's welfare by assuring a minimum level of competence in driving.

Finally, government policies can change spending. In this case, a tax cut has increased spending.

Describe some of the opportunity costs when you decide to do the following.

a. Attend college instead of taking a job.

1) Developing a deeper understanding of concepts that will benefit you when you eventually take a job.

2) Being able to find a better, more highly paid job after graduation.

3) Forgoing the joy of learning.

4) The income you would have earned on the job and the valuable on-the-job experience you would have acquired.

b. Watch a movie instead of studying for an exam.

1) A lower grade on the exam, most likely.

2) The popcorn being too salty.

3) The enjoyment you have if the movie is good.

4) Not realizing your friends were also at the movie until you saw them afterward.

c. Ride the bus instead of driving your car.

1) Walking to your destination from the bus stop on a beautiful fall day.

2) Gas and wear on your car.

3) Waiting for the bus.

4) Fees at a parking garage.

a. The income you would have earned on the job and the valuable on-the-job experience you would have acquired.

b. A lower grade on the exam, most likely.

c. Waiting for the bus.

Why:

a. One of the opportunity costs of going to college is not being able to take a job. By choosing to go to college, you give up the income you would have earned on the job and the valuable on-the-job experience you would have acquired. Another opportunity cost of going to college is the cost of tuition, books, supplies, and so on. Alternatively, the benefit of going to college is being able to find a better, more highly paid job after graduation, in addition to the joy of learning.

b. Watching the movie gives you a certain benefit, but allocating your time (a scarce resource) to watching the movie also involves the opportunity cost of not being able to study for the exam. As a result, you will likely get a lower grade on the exam—and all that that implies.

c. Riding the bus gets you where you need to go more cheaply than, but probably not as conveniently as, driving your car. That is, some of the opportunity costs of taking the bus involve waiting for the bus, having to walk from the bus stop to where you need to go rather than parking right outside the building, and probably a slower journey. If the opportunity cost of your time is high (your time is valuable), these costs may be prohibitive. On the other hand, if you enjoy the longer walk from the bus stop, that is an additional benefit of taking the bus.

Liza needs to buy a textbook for the next economics class. The price at the college bookstore is $65. One website offers it for $55 and another site for $57. All prices include sales tax. The accompanying table indicates the typical shipping and handling charges for the textbook ordered online.

Standard shipping: 3-7 days, $3.99

Second-day air: 2 business days, $8.98

Next-day air: 1 business day, $13.98

What is the opportunity cost of buying the cheapest option (book plus shipping cost) possible? Note that if Liza buys the book online, she must wait to get it. Assume her second choice is to get the book from the campus bookstore.

a. The time value of 3 to 7 days.

b. $3.99.

c. $58.99 plus the time value of the 3 to 7 day wait minus the $65 she does not spend at the bookstore.

d. $55.

e. $10.

c. $58.99 plus the time value of the 3 to 7 day wait minus the $65 she does not spend at the bookstore.

Why:

The cheapest way to buy the book is to buy from the site offering the book for $55 and pay $3.99 for 3-7 day shipping.

The opportunity cost of this purchase is whatever Liza must give up to get the book online. So the opportunity cost of buying online is the sum of the price of the book, the shipping charges and the opportunity cost of her time spent waiting for the book to arrive (at the bookstore the book is available immediately) minus the price she would have paid at the bookstore. By buying online, Liza can save $6.01 but incur the cost of waiting for the book, so the question she needs to answer is: Is getting the book now worth an extra $6.01?

(See Liza question)

Below are the relevant choices for this student. What is the monetary cost of each of Liza's options?

Buy from bookstore: ____

Buy from first site with 1 - day delivery: ____

Buy from first site with 2 - day delivery: ____

Buy from first site with 3 to 7 day delivery: ____

Buy from second site with 1 - day delivery: ____

Buy from second site with 2 - day delivery: ____

Buy from second site with 3 to 7 day delivery: ____

Which option will Liza choose?

a. The bookstore, since she gets the book the fastest.

b. The first online site with standard shipping, since it is the cheapest overall option.

c. If she is in a big hurry for the book, she will choose the bookstore; otherwise, she will choose the second online site with standard shipping.

d. Until we know more about how much she values the time she may spend waiting, we will not know her preferred choice.

$65, $68.98, $63.98, $58.99, $70.98, $65.98, $60.99.

d. Until we know more about how much she values the time she may spend waiting, we will not know her preferred choice.

Why:

Below is a list of all of Liza's options and their purely monetary costs:

Buy from bookstore equals $65

Buy from first site (price $55), 1-day delivery $55 + $13.98 = $68.98

Buy from first site (price $55), 2-day delivery $55 + $8.98 = $63.98

Buy from first site (price $55), 3- to 7-day delivery $55 + $3.99 = $58.99

Buy from second site (price $57), 1-day delivery $57 + $13.98 = $70.98

Buy from second site (price $57), 2-day delivery $57 + $8.98 = $65.98

Buy from second site (price $57), 3- to 7-day delivery $57 + $3.99 = $60.99

It is clear that Liza would never buy from the second site, where the book costs $57: for each delivery time, she is better off buying the book from the first site, where the book costs $55. It is also clear that she would never buy the book from the first site and have it delivered the next business day: it costs more that way ($68.98) than getting it from the bookstore (assuming that it is costless to get to and from the bookstore). But it is not clear whether she will buy the book from the bookstore or the first site with delivery times of 2 or 3 to 7 days: this depends on her opportunity cost of time. The higher the cost of waiting, the more likely she is to buy the book from the bookstore, where she does not need to wait.

Use the concept of opportunity cost to explain the following scenario.

More people choose to get graduate degrees when the job market is poor.

1) Because the number of people applying to graduate programs will be relatively high, there is a lower chance of being accepted.

2) If the job, market is bad, the salary you can expect to earn is low, or you might be unemployed.

3) Because there will be more graduate students, the chances of receiving a research or teaching assistantship will be lower.

4) When the job market eventually turns around, a graduate degree will put you in a good position to get a better job.

2) If the job, market is bad, the salary you can expect to earn is low, or you might be unemployed.

Why:

The worse the job market, the lower the opportunity cost of getting a graduate degree. One of the opportunity costs of going to graduate school is not being able to work. But if the job market is bad, the salary you can expect to earn is low, or you might be unemployed, so the opportunity cost of going to school is also low.

Use the concept of opportunity cost to explain the following scenario.

More people choose to do their own home repairs when the economy is slow and hourly wages are down.

1) Whether the economy is slow or not, some people simply do not know enough about plumbing, wiring, or carpentry to do their own repairs.

2) When the economy is slower, unemployed people may not be able to afford the materials needed to repair their own homes.

3) When the economy is slow, the opportunity cost of peoples' time is also lower, so the opportunity cost of spending time doing their own repairs is lower.

4) When the economy is slower, the demand for home repairs falls, so home repair companies will offer their services at lower costs.

3) When the economy is slow, the opportunity cost of peoples' time is also lower, so the opportunity cost of spending time doing their own repairs is lower.

Why:

When the economy is slow, as in the second scenario, the opportunity cost of people's time is also lower: the wages they could earn by working longer hours are lower than when the economy is booming. As a result, the opportunity cost of spending time doing their own repairs is lower, so more people will decide to do their own repairs.

Use the concept of opportunity cost to explain the following scenario.

There are more parks in suburban areas than in urban areas.

1) Since population density is much higher in urban areas, parks located there would be too crowded to be enjoyable.

2) Urban dwellers prefer to journey to the suburbs for parks rather than live next to dog walks and soccer fields.

3) The price per square foot of land is much higher in urban areas than in suburban areas.

4) People in suburban areas value green space much more highly than people in urban areas do.

3) The price per square foot of land is much higher in urban areas than in suburban areas.

Why:

The third part suggests that the opportunity cost of parkland is lower in suburban areas. The price per square foot of land is much higher in urban areas than in suburban areas. By creating parkland, you therefore give up the opportunity to make much more money in cities than in the suburbs.

Use the concept of opportunity cost to explain the following scenario.

Convenience stores, which have higher prices than supermarkets, cater to busy people.

1) Many people are willing to pay a premium for higher quality.

2) Convenience stores may have items that are unavailable in supermarkets.

3) Convenience stores may have loyalty programs just like the ones at many supermarkets.

4) Driving long distances to supermarkets takes time that could be spent doing other things.

4) Driving long distances to supermarkets takes time that could be spent doing other things.

Why:

The key to the fourth part is that the opportunity cost of time is higher for busy people. Driving long distances to supermarkets takes time that could be spent doing other things. Therefore, busy people are more likely to use a nearby convenience store.

Use the concept of opportunity cost to explain the following scenario.

Fewer students enroll in classes that meet before 10 a.m.

1) In the winter, classrooms may be frigid early in the morning.

2) If you are in a later section, it is possible to get test questions from someone who took the test earlier in the day.

3) Classes that meet later in the day are usually easier to enroll in.

4) An extra hour of sleep is much more valuable before 10 a.m. than later in the day.

4) An extra hour of sleep is much more valuable before 10 a.m. than later in the day.

Why:

Finally, before 10 a.m. the opportunity cost of time for many students is very high—it means giving up an extra hour's sleep. That extra hour is much more valuable before 10 a.m. than later in the day.

For the following examples, state how you would use the principle of marginal analysis to make a decision.

Deciding how many days to wait before doing your laundry:

a. The marginal benefit of waiting is:

1) eventually having to ask your roommate to lend you some clothes.

2) friends avoiding you after you start dipping into the hamper for clothes.

3) free time to do other things now.

4) wearing clothes you have not worn in a while because you did not like the color.

b. The marginal cost of waiting is:

1) fewer clean clothes from which to choose.

2) getting compliments on your novel fashion statements.

3) deciding to use laundry money to go on a lunch date.

4) discovering your roommate's clothes look pretty good on you.

a. 3) free time to do other things now.

b. 1) fewer clean clothes from which to choose.

Why:

Each day that you wait to do your laundry imposes a cost: you have fewer clean clothes to choose from. However, each day that you wait also confers a benefit: you can spend your time doing other things. You will wait another day to do your laundry if the benefit of waiting to do the laundry that day is greater than the cost.

For the following examples, state how you would use the principle of marginal analysis to make a decision.

a. Deciding how much time to spend researching before writing your term paper:

The marginal benefit of more research is:

1) less time for your other classes.

2) more time to spend on a subject you like less.

3) taking breaks from online research to check e-mail and shop.

4) finding prior research that supports your thesis.

b. The marginal cost of more research is:

1) running out of money because you spent so much buying things online.

2) continually finding more pertinent data that you need to investigate.

3) discovering that your thesis is invalid theoretically and empirically.

4) less time for your other classes, or for other things.

a. 4) finding prior research that supports your thesis.

b. 4) less time for your other classes, or for other things.

Why:

The more research you do, the better your paper will be. However, there is also an opportunity cost: every additional hour you spend doing research means you cannot do other things. You will weigh the opportunity cost of doing one more hour of research against the benefit gained (in terms of an improved paper) from doing research. You will do one more hour of research if the benefit of that hour outweighs the cost.

State how you would use the principle of marginal analysis to make a decision.

Deciding how many bags of chips to eat.

a. The marginal benefit of eating more chips is

1) satisfying your hunger.

2) leaving crumbs behind where you eat the chips.

3) substituting chips for veggies as a snack.

4) profits for potato chip makers will rise.

b. The marginal cost of eating more chips is

1) crunching loudly and distracting people around you.

2) the money you pay and the calories you consume.

3) offering to share your chips with friends.

4) pretzel makers will suffer.

a. 1) satisfying your hunger.

b. 2) the money you pay and the calories you consume.

Why:

Each bag of chips you eat gives you a benefit: it satisfies your hunger. But it also has a cost: the money spent for each bag (and, if you are weight-conscious, the additional calories). You will weigh the cost against the benefit of eating one more bag. If the cost is less than the benefit, you will eat that one more bag of chips.

State how you would use the principle of marginal analysis to make a decision.

Deciding how many class lectures to skip

a. The marginal benefit of skipping lectures is

1) getting further behind with the material.

2) you can spend the time doing other things.

3) learning the material on your own without your professor's explanations.

4) getting partial tuition remission for each class you skip.

b. The marginal cost of skipping lectures is

1) you can spend the time doing other things.

2) getting further behind with the material.

3) not having to listen to your professor's dreadful puns.

4) sleeping later if it is an early class - or even if it is not.

a. 2) you can spend the time doing other things.

b. 2) getting further behind with the material.

Why:

Each lecture that you skip implies a cost: getting further behind with the material and having to teach it to yourself just before the exam. But each skipped lecture also means you can spend the time doing other things. You will continue to skip lectures if the cost of skipping is lower than the benefit of spending that time doing other things.

The Hatfield family lives on the east side of the Hatatoochie River, and the McCoy family lives on the west side. Each family's diet consists of fried chicken and corn-on-the-cob, an each is self-sufficient, raising their own chickens and growing their own corn. Explain the conditions under which each of the following could be true.

a. The two families are made better off when the Hatfields specialize in raising chickens, the McCoys specialize in growing corn, and the two families trade.

1) The McCoys have a lower opportunity cost for chickens, and the Hatfields have a lower opportunity cost for corn.

2) The opportunity costs for both chickens and corn are the same for both families.

3) The Hatfields have a lower opportunity cost for chickens, and the McCoys have a lower opportunity cost for corn.

4) The McCoys have a lower opportunity cost for each good.

3) The Hatfields have a lower opportunity cost for chickens, and the McCoys have a lower opportunity cost for corn.

Why:

Gains from trade usually arise from specialization. If the Hatfields, compared to the McCoys, are better at raising chickens, and the McCoys, compared to the Hatfields, are better at growing corn, then there will be gains from specialization and trade.

Each family should produce the good for which it has a lower opportunity cost. In the first scenario, the Hatfields specialize in chickens, so they must have a lower opportunity cost of producing chickens than the McCoys do. Therefore, the McCoys must have the lower opportunity cost in corn production.

The Hatfield family lives on the east side of the Hatatoochie River, and the McCoy family lives on the west side. Each family's diet consists of fried chicken and corn-on-the-cob, an each is self-sufficient, raising their own chickens and growing their own corn. Explain the conditions under which each of the following could be true.

b. The two families are make better off when the McCoys specialize in raising chickens, the Hatfields specialize in growing corn, and the two families trade.

1) The McCoys have a lower opportunity cost for chickens, and the Hatfields have a lower opportunity cost for corn.

2) The Hatfields have a lower opportunity cost for chickens, and the McCoys have a lower opportunity cost for corn.

3) Neither family has an opportunity cost for chickens, but both do for corn.

4) The Hatfields have lower opportunity costs for each good.

1) The McCoys have a lower opportunity cost for chickens, and the Hatfields have a lower opportunity cost for corn.

Why:

Gains from trade usually arise from specialization. If the Hatfields, compared to the McCoys, are better at raising chickens, and the McCoys, compared to the Hatfields, are better at growing corn, then there will be gains from specialization and trade.

Similar to the answer to the first part, if the McCoys, compared to the Hatfields, are better at raising chickens, and the Hatfields, compared to the McCoys, are better at growing corn, then there will be gains from specialization and trade. Only this time, the McCoys have the lower opportunity cost of producing chickens, and the Hatfields have the lower opportunity cost of producing corn.

Which of the following describes an equilibrium? Which does not?

a. Many people regularly commute from the suburbs to downtown Pleasantville. Due to traffic congestion, the trip takes 30 minutes via highway but only 15 minutes via side streets.

b. At the intersection of Main and Broadway, are two gas stations. One station charges $3 per gallon, for regular gas, and the other charges $2.85 per gallon. Customers can get service at the first station but must wait in a long line at the second.

c. Every student enrolled in Economics 101 must also attend a weekly tutorial. This year two sections are offered: section A and section B, which meet at the same time in adjoining classrooms and are taught by equally competent instructors. Section A is overcrowded, with people sitting on the floor and often unable to see what is written on the board at the front of the room. Section b has many empty seats.

a. not an equilibrium.

Why:

The commuters are not in equilibrium. Assume that all people care about is the travel time to work (not, for instance, how many turns they need to make or what the scenery is like). Some people could be better off using the side streets, which would cut down their travel time. Eventually, as the situation moves to equilibrium (that is, as more people use the side streets), travel times on the highway and along the side streets will equalize.

b. equilibrium.

Why:

The situation for the gas stations might be an equilibrium. Those who buy gas at the first station would be worse off by buying gas at the second if the value of their time spent waiting exceeded the savings at the pump: they would save 15 cents per gallon but would incur the opportunity cost of waiting in a long line. You should expect very busy people (a high opportunity cost of time) to buy gas at the first station. Those who buy gas at the second station might be worse off by buying gas at the first: they would not have to wait in line but would pay 15 cents more per gallon. You should expect people with a lot of free time (a low opportunity cost of time) to buy gas at the second station.

c. not an equilibrium.

Why:

The classrooms are not in equilibrium. If students from section A attended section B instead, they would be better off: they could get seats and see the board without incurring any cost (since the sections meet at the same time and are taught by equally competent instructors ). Over time, you should expect students to switch from section A to section B until equilibrium is established.

Electricity is included in the rent at your dorm. Some residents in your dorm leave lights, computers, and appliances on when they are not in their rooms.

a. Is this situation efficient?

1) Inefficient.

2) Cannot be determined.

3) Efficient.

4) Partially efficient.

b. Why or why not?

1) Students have already paid for the electricity, so there is no cost to using more.

2) Even if students cut electricity use, there is no guarantee that room fees would be reduced.

3) It is efficient, since, like water, the use of power is difficult to monitor.

4) Less of this activity could be done without harming anyone.

c. Can anything be done to improve efficiency?

1) Hire students to patrol the dorms and periodically open doors to see if anyone left a light on.

2) Ban the use of personal electronic devices and appliances.

3) Require that students pay for the electricity they use.

4) No, the situation is efficient.

a. 1) Inefficient.

b. 4) Less of this activity could be done without harming anyone.

c. 3) Require that students pay for the electricity they use.

Why:

If the lights were turned off, some students could be made better off without making other students worse off because the college would save money on electricity that it could spend on student programs. By leaving lights and appliances on when leaving their rooms, residents do not take into account the negative side effect they impose on their college—the higher cost of electricity. If students were forced to pay their own individual electricity costs (that is, if they fully took into account the cost of their actions), then they would turn the lights and appliances off when leaving their rooms. This situation would be efficient.

Assume that fixed costs at $10. the point of diminishing returns begins when output exceeds:

(Quantity of cakes, Variable cost (VC)):

(0,0)

(1,15)

(2,25)

(3,30)

(4,38)

(5, 50)

(6, 70)

a. 2

b. 4

c. 3

d. 5

c. 3

Why:

The point of diminishing returns occurs when the additional output (quantity of cakes in this case) no longer leads to a proportionate increase in returns or when the marginal cost starts to increase at an increasing rate. In this case, we can observe the variable costs (VC) associated with each quantity of cakes.

MC at 1 unit:

VC1​−VC0​=15−0=15

MC at 2 units: VC2−VC1=25−15=

10

MC at 3 units: VC3−VC2=30−25=5

MC at 4 units: VC4−VC3=38−30=8

MC at 5 units:

VC5−VC4=50−38=12

MC at 6 units: VC6−VC5=70−50=20

The point of diminishing returns begins when output exceeds 2 units, but the marginal cost starts to increase at an increasing rate after 3 units (from 5 to 8 to 12 to 20).

Christophe recently purchased a St-Viateur Bagel Shop franchise that he opened in the ByWard Market, a trendy location in Ottowa. His costs are given in the table below. Average total cost reaches its minimum value wiht the ____ bagel.

(Quantity of bagels (per period), Total variable Costs, Total Fixed Costs):

(0, $0, $0.10)

(1, 0.20. 0.10)

(2, 0.30, 0.10)

(3, 0.35, 0.10)

(4, 0.45, 0.10)

(5, 0.60, 0.10)

(6, 0.80, 0.10)

(7, 1.05, 0.10)

(8, 1.35, 0.10)

a. fourth

b. first

c. fifth

d. third

a. fourth

Why:

To find the quantity of bagels at which average total cost reaches its minimum value, you need to calculate average total cost for each quantity using the formula:

Average Total Cost (ATC)= (Total Variable Costs+Total Fixed Costs)/(Quantity of Bagels)

Let's calculate the ATC for each quantity:

* ATC at 1 bagel: (0.20+0.10)/1=0.30(0.20+0.10)/1= 0.30

* ATC at 2 bagels: (0.30+0.10)/2= 0.20

* ATC at 3 bagels: (0.35+0.10)/3= 0.15

* ATC at 4 bagels: (0.45+0.10)/4=

0.1375

* ATC at 5 bagels: (0.60+0.10)/5=0.14(0.60+0.10)/5=0.14

* ATC at 6 bagels: (0.80+0.10)/6= 0.15

* ATC at 7 bagels: (1.05+0.10)/7=

0.1643

* ATC at 8 bagels: (1.35+0.10)/8=

0.1813

The minimum average total cost occurs at the 4th bagel (0.1375). Therefore, the correct answer is:

a. fourth

The costs that vary with Barbara's level of production are her:

(Number of sewing machines, Number of jerseys):

(0,0)

(1, 75)

(2, 150)

(3, 250)

(4, 325)

(5, 375)

a. costs that remain the same regardless of what she produces.

b. fixed costs.

c. variable costs.

d. rent and insurance.

c. variable costs.

Why:

The costs that vary with Barbara's level of production are her variable costs. Variable costs change in proportion to the level of production or activity. In this case, as the number of jerseys produced increases, the cost also increases.

Lenore's puppy pampering salon has a total cost curve expressed by the equation TC = 100 + 3Q^2, where Q is the quantity of dogs pampered. Given this expression, Lenore is operating in the:

a. long run.

b. short run, and there are no fixed costs.

c. short run, and her fixed costs are $100.

d. long run, and her fixed costs are $100.

c. short run, and her fixed costs are $100.

Why:

* The presence of fixed costs ($100) indicates that there is a component of costs that does not vary with the quantity of dogs pampered.

* The distinction between the short run and the long run is related to the ability to adjust all inputs. In the short run, at least one input is fixed, while in the long run, all inputs are variable.

Assume that the fixed input consists of 10 hectares of land and a tractor, which have a combined cost of $150 per day. The cost of labour is $100 per worker per day. The total cost of producing 70 bushels of quinoa is:

(Number of workers, Bushels of quinoa):

(0,0)

(1, 25)

(2, 45)

(3, 60)

(4, 70)

(5, 75)

a. $250.

b. $550.

c. $400.

d. $1,024.

b. $550.

Why:

To calculate the total cost, you need to consider both the fixed costs and the variable costs. The fixed costs in this case are the cost of land and the tractor, which is $150 per day. The variable costs include the cost of labor, which is $100 per worker per day.

Let's calculate the total cost for each scenario:

For 0 workers (only fixed costs): $150

For 1 worker: $150 (fixed) + $100 (variable) = $250

For 2 workers: $150 (fixed) + $200 (variable) = $350

For 3 workers: $150 (fixed) + $300 (variable) = $450

For 4 workers: $150 (fixed) + $400 (variable) = $550

For 5 workers: $150 (fixed) + $500 (variable) = $650

Now, let's find the total cost for producing 70 bushels of quinoa:

For 70 bushels (with 4 workers): $550.

Assume that the fixed input consists of 10 hectares of land and a tractor, which have a combined cost of $150 per day. The cost of labour is $100 per worker per day. The fixed cost of producing 25 bushels of quinoa is:

(Number of workers, Bushels of quinoa):

(0,0)

(1, 25)

(2, 45)

(3, 60)

(4, 70)

(5, 75)

a. $250.

b. $50.

c. $150.

d. $100.

c. $150.

Why:

The fixed cost remains constant regardless of the number of workers or the quantity of bushels produced. In this case, the fixed cost includes the cost of 10 hectares of land and a tractor, which is $150 per day.

A cost that does NOT depend on the quantity of output produced is:

a. variable.

b. average.

c. marginal.

d. fixed.

d. fixed.

Why:

Fixed costs are costs that do not vary with the quantity of output produced. These costs remain constant regardless of the level of production. Fixed costs include expenses such as rent, salaries of permanent staff, and certain types of equipment. Since fixed costs do not change with the quantity of output, they are independent of production levels.

Suppose that hiring one, two three, or four workers at a glass factory generates a total output of 200, 350, 450, and 500 fancy glasses, respectively. The marginal product of the second worker is:

a. 100.

b. 200.

c. 50.

d. 150.

d. 150.

Why:

The marginal product of labor is the additional output produced by hiring one more worker while keeping other inputs constant. It is calculated as the change in total output divided by the change in the number of workers.

Let's calculate the marginal product of the second worker:

Marginal Product of the Second Worker: (Change in Output)/(Change in Workers).

= (350-200)/(2-1) = 150.

The marginal product of the second worker is ____ bagels.

(Workers per day, Dozens of bagels per day):

(0,0)

(1,5)

(2, 15)

(3, 30)

(4, 42)

(5, 51)

(6, 57)

(7, 60)

(8, 50)

(9, 57)

a. 9 dozen.

b. 15 dozen.

c. 12 dozen.

d. 10 dozen.

d. 10 dozen.

Why:

(15-5)/(2-1) = 10.

The Mile End Deli serves traditional delicatessen food in Montreal, Quebec. Which input is MOST likely fixed at the deli?

a. the rye bread used to make smoked meat sandwiches.

b. the staff.

c. the tomato sauce used to make soups.

d. the chairs customers sit on.

d. the chairs customers sit on.

Why:

Fixed inputs typically refer to factors that do not easily vary with changes in production levels in the short run. Staffing levels often represent a fixed input because it may be challenging to quickly adjust the number of staff members based on short-term changes in customer demand. Other inputs, such as ingredients (rye bread, tomato sauce) or physical items (chairs), can be more easily adjusted in the short run to match changes in production.

Use Figure: The Total Product for Swimming Pool Cleaning Company. As labour is hired between zero and L1:

a. the marginal product of labour is increasing.

b. the marginal product of labour is decreasing.

c. the total product is decreasing.

d. the total product is increasing at a diminishing rate.

a. the marginal product of labour is increasing.

Why:

If the marginal product of labor is increasing as more labor is hired, it suggests that each additional unit of labor is contributing more to the total output than the previous unit. This is a scenario where the efficiency of labor is improving.

Use Figure: The Total Product for Swimming Pool Cleaning Company. Between points A and B, the marginal product of labour is:

a. increasing.

b. zero.

c. infinite.

d. decreasing.

d. decreasing.

Why:

Each additional unit of labor is contributing less to the total output than the previous unit. This is in line with the typical pattern seen in the law of diminishing marginal returns.

The total product, given three workers, is ____ bushels.

(Number of workers, Marginal Product of Labour):

(0,20)

(1, 18)

(2, 16)

(3, 14)

(4, 12)

(5, 10)

(6, 8)

(7, 6)

(8, 4)

a. 51.

b. 45.

c. 15.

d. 39.

a. 51.

Why:

Total Product with 3 workers =

Marginal Product of Labor with 1 worker + Marginal Product of Labor with 2 workers + Marginal Product of Labor with 3 workers

= 20 + 18 + 16 = 54. The closest provided option is 51.