ECON 2105 EXAM 1

How is the economic surplus generated by a decision calculated?

• It is the total benefits minus total costs arising from the decision.

American Signature is a furniture company based in Columbus, Ohio. The graph represents American Signature’s production possibility frontier for manufacturing couches and recliners.

The sales team at American Signature has reported that sales of couches have increased. The company would like to increase manufacturing from 10,000 couches to 200,000 couches. As the company’s economist, what is the opportunity cost of producing the 100,000 additional couches?

• 300,000 recliners.

You are a business owner preparing to launch your first ad campaign to attract new customers, and must decide whether to learn about advertising yourself or hire a professional to launch the campaign. The campaign will last three months. If you hire a professional, you’ll have to pay them a lump sum of $1,000 for the entire campaign. But if you decide to do it yourself, you’ll take a course that costs $200 to introduce you to the skill. You’ll also pay an employee $340 per month to work some of the hours you normally work while you manage the campaign. Would it be better to hire a professional rather than doing the campaign yourself?

• Yes, because your economic surplus is $220.

The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of:

• Scarcity.

Following the Rational Rule, the maximum economic surplus occurs when:

• Marginal benefits equal marginal costs.

Dependencies over time reflect the fact that:

• Resources can be spread across time.

The interdependence principle states that your best choice today does NOT depend on this:

• Past decisions you have made.

Vincent makes handcrafted dining tables, and he is trying to decide how many tables to produce. He can sell each dining table for $1,000. The cost of the first table is $900, fr the second it’s $1,100. For each additional table he produces, the marginal cost of each table increases by $200. How many dining tables should Vincent produce, and what is the total cost of his production?

• He will produce one table at a cost of $900.

You just took an Uber home to campus for the first time and were willing to pay $13 for the trip. It was so much easier than driving yourself that you are willing to pay $21 for the same trip tomorrow.

Determine if you have violated the law of demand based on your choices, and why or why not that is the case.

• Your decisions… Do not violate the law of demand because your preference for the product changed after you experienced the good.

Consider your current uses of tap water. Think about some of the ways that you use water that are beyond what is necessary to sustain life.

a. If the price of tap water triples, what are some likely changes that you will make to your consumption of tap water?

b. In general, the consumption of tap water ____ obey the law of demand.

• a. Decrease the length of your showers, Turn water off while brushing your teeth.

• b. Does

A team of analysts at Amazon is researching the viability of producing a smart watch. How might they estimate potential demand for their smart watch?

a. Consider the four-step process that many companies follow to estimate the market demand curve for their product. Place the steps in order, with the first step in the highest position and the last step in the lowest position.

b. Select two factors that the analysts want to keep in mind to create the most accurate demand estimates.

a.

First Step

Survey Customers

Add up the total quantity demanded by customers at each price point

Scale up the quantities demanded by the survey respondants

Plot the demand curve

Last Step

b.

Existing competition in the market

Consumer demographic information

Determine whether each good is a normal good or an inferior good for the average consumer.

a. For most consumers, the newest iPhone is _ _____ good.

b. For most consumers, a 10-year-old used car is _ _____ good.

c. For most consumers, dental services are _ _____ good.

a. A normal

b. An inferior

c. A normal

When Sony released the PlayStation 5, it was reported that Sony was taking a loss of $60 on every console. However, Sony expected to make this up with sales of PS+ subscriptions and increased royalties from video games. Use the interdependence principle to help explain this strategy.

The PS+ subscriptions allow PS5 owners to play their games online, receive new games monthly to download at no charge, and receive additional special discounts on other items. Therefore, the PS5 and PS+ subscriptions are _____ in consumption. Decreasing the price of the PS5 will _____ the demand for PS+ subscriptions. Sony expects that revenue from recurring PS+ subscriptions will be larger than the loss in revenue from PS5 sales.

• Compliments, Increase.

Consider the following statement: “An increase in the cost of oil will cause the price of a plane ticket to increase. This increase in price will cause a decrease in demand for airline travel and a leftward shift in the demand curve.”

What is the flaw in this reasoning?

• An increase in the price of a plane ticket will not cause a decrease in demand but a decrease in quantity demanded.

DoorDash, a food delivery service, has recently expanded to your area. The accompanying table contains the number of deliveries per month that you demand at various delivery prices.

a. Use this information to plot your individual demand curve. Drag each point on the graph to the point that corresponds with the information presented in the table.

b. In general, the slope of the demand curve is:

• a. (See attached image)

• b. Negative.