ME 102 Exam 1

Scarcity

The state of having limited resources, necessitating the need for choices.

If there is no scarcity
A. Choices are no longer rational
B. all marginal benefits would equal zero
C. marginal cost of an action is greater than its marginal benefit
D. the opportunity cost of an action would be greater than its sunk cost
E. an action would have zero opportunity cost

An action would have zero opportunity cost

Suppose there are three things that Linda can do. From least valuable to most valuable those things are: hang out with Tina, dance, or sing. Choosing one of these activities means that she cannot do the others. What is the opportunity cost of singing?

The value Linda would have gotten from dancing

A theory is general when

It is applicable everywhere and always

John has two hours of free time this evening. He ranked his alternatives, first go to a concert, second go to a movie, third study for an economics exam, and fourth answer his email. What is the opportunity cost of attending the concert for John?

Attending a movie

Consider the following statements:
1. Access to health care for free is a human right
2. The government should prioritize housing policies
What statements are positive or normative or both or none?

Both statements are normative

Which of the following is an example of a positive economic statement?
A. The death penalty is a strong deterrent to violent criminal activity.
B. Voter ID laws should be strictly enforced in all states
C. Medicare recipients should only be allowed to visit a doctor for non-emergency reasons on Monday, Wednesdays, and Fridays.
D. Illegal immigration is the biggest threat to national security that we face today.
E. The Affordable Care Act should be repealed.

The death penalty is a strong deterrent to violent criminal activity.

Whenever a choice is made

An alternative is given up

When a dote (combination) is outside the PPF it is considered what?

Impossible given the PPF

Scarcity requires that we

make choices about what goods and services to produce

Normative Statement

A value judgment about what ought to be, often subjective.

Theory

A simplified representation of how two or more variables interact.

Autarky

A situation where an entity consumes only what it produces, with no trade.

Absolute Advantage

The ability of an entity to produce the most of a good with given resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than others.

Production Efficiency

Producing goods such that increasing the production of one good requires giving up some of another.

Allocation Efficiency

The optimal distribution of resources to maximize total benefit.

Law of Demand

As the price of a good rises, the quantity demanded falls, and vice versa.

Indifference

A state where an individual derives equal satisfaction from two or more options.

Market-Clearing Price

The price at which the quantity demanded equals the quantity supplied.

Equilibrium

A state where there is no tendency for price to change, as demand and supply are balanced.

Choke Price

The price at which quantity demanded is zero units; the price intercept of a demand curve.

Suppose that there is a downward-sloped demand line for bongos that has a choke price of $50. At a price of $40, the quantity demanded is 100. Which of the following is true? A. If the price was $60, the quantity demanded would be 100. B. If the price was zero the quantity demanded would be 100. C. If the price was $30, the quantity demanded would be greater than 100.

If the price was $30, the quantity demanded would be greater than 100.

A supply curve will generally ___

Slope upwards because of increasing marginal costs

When looking at a supply curve, to find the marginal cost of the 5th unit, you would ___

From the quantity axis at 5 units, go up to the supply curve then over to the price axis

Prices will tend to adjust over time by __

Moving towards the market-clearing price

A surplus will tend to cause price to __________. A shortage will tend to cause price to __________.

Fall, Rise

Price is the outcome of

the forces of demand and supply

It requires energy to get clean water. Energy can also be used to create light. Which of the following is true asked on the course definition of "scarce"?

Both clean water and light would be considered scarce. 

Consider the following definitions. Definition I) The optimal combination of all possible combinations of goods. Definition II) Producing so that you cannot produce more of one good without giving up some of the other. -

Definition I is Allocation Efficient and Definition II is Production Efficient.

Suppose that in an hour, Ryan can either wash 16 dishes or 4 clean windows. Calculate the opportunity cost of washing 1 window.

The cost is 4 washed dishes per 1 clean window.

True or false to all: Exchange can benefit individuals and nations. Autarky is the absence of trade. Just because one nation is bigger doesn’t mean it isn’t set up to do one thing relatively better than another. Trade makes the impossible possible. 

All true

Trade allows for ___

specialization

If there were no scarcity, all resources would be unlimited, meaning any choice would not require giving up an alternative. Therefore,

The opportunity cost of any action would be zero.

Trade makes the

impossible possible

Positive Statement

A description of how the world is. A statement that is able to be proven true or false by observable data.

Hypothesis

An assertion of a relationship between two or more variables that could be proven true or false.

Normative Statement

A description of how someone wants the world to be, based on preferences. A subjective statement that includes a value judgment about costs and benefits.

Economics

The social science that studies the choices individuals make as they cope with scarcity and the incentives that influence these choices.

Microeconomics

The study of how individuals and firms make decisions and how they interact in markets.

Macroeconomics

The study of economy-wide phenomenon, including inflation, unemployment, and economic growth.

Theory

A simplified representation of how two or more variables interact. The purpose of a theory is to simplify complex, real-world issues.

Elements of a Theory include

• Simple - Focusing on fewer variables than the real world • General - Applies everywhere and always • Useful - Able to correctly predict real-world phenomenon.

Production Possibility Frontier (PPF)

A graph depicting the maximum quantities of two goods that an economy can produce when its resources are used efficiently.

Production Efficiency

Producing goods such that you cannot produce more of one good without giving up some of another; all points along the PPF.

Marginal

The change in some variable; synonymous with additional, incremental, or the difference between two totals.

Marginal Cost

The change in total cost created by increasing the amount of production by one unit.

Law of Escalating Marginal Costs

Also known as the law of Increasing Marginal Cost; each additional unit will add more to total cost than the previous unit, causing the marginal cost curve to slope upward.

Allocation Efficiency

The optimal combination of all possible combinations of goods; no other combination would make people better off.

Economic Growth

A change that causes the Production Possibility Frontier (PPF) to shift to the right.

Indifference

When two or more options give an individual equal satisfaction.

Utility

The level of satisfaction an individual gets from consuming a good.

Opportunity Cost

The highest-valued forgone alternative.

Use Value

The monetary value placed on a good by an individual.

Willingness to Pay (WTP)

Maximum an individual would be willing to pay for a good. Also called a reservation price. In principle, they would be willing to pay up to but no more than their use value.

Diminishing Marginal Utility

Each additional unit of a good is not as satisfying as the previous unit. As a result, the willingness to pay for additional units will fall.

Demand Schedule

A table that shows the quantity demanded at given prices.

Demand Curve

A line or curve that shows the quantity demanded of a good over a range of possible prices.

Law of Demand

If the price of a good falls, the quantity demanded of that good rises. If the price of a good rises, the quantity demanded of that good falls.

Ceteris Paribus

A Latin phrase meaning 'Holding other things constant.'

Choke Price

The price at which quantity demanded is zero units; the price intercept of a demand curve.

Reasons Quantity Demanded Rises as Price Falls:

• People who used to buy the good buy more of the good to use in the same way. • New people buy the good to use in the same way. • Some people buy the good to use in a completely new and different way.

Willingness to Sell

Minimum you would have to receive in order to sell something. The price you are willing to sell for must be at least as much as the opportunity cost.

Marginal Cost

The change in total cost created by increasing the amount of production by one unit. Refers to only the cost of the nth unit.

Escalating Marginal Costs

Each additional unit will add more to total cost than the previous unit.

Supply Curve

A line or curve that shows the quantity supplied of a good over a range of possible prices.

Supply Schedule

A table that shows the quantity supplied at given prices.

Law of Supply

If the price of a good falls, the quantity supplied of that good falls. If the price of a good rises, the quantity supplied of that good rises, ceteris paribus.

Shortage

When quantity demanded is higher than quantity supplied at the current price. Shortages will drive prices upward.

Surplus

When quantity supplied is higher than quantity demanded at the current price. Surpluses will drive prices downward.

Market-Clearing Price

The price at which quantity demanded equals quantity supplied. There will be no upward or downward pressure on price because there is no shortage or surplus.

Equilibrium

When price does not rise or fall because there are no shortages or surpluses to change the price. Price will stay here until some other factor in the market changes.

Gene would choose to play piano with an hour of his time. If he couldn’t do that, he’d choose to take a nap. If he couldn’t do either of those actions, he’d get a snack. What is the opportunity cost of taking a nap?
A. the value of playing piano

B. the value of the snack
C. the value of playing piano plus the value of the snack

The value playing piano.

Consider the following statements

1. High-income individuals spend a larger percentage of their income on food than low-income individuals

2. The government should prioritize housing policies
   
   Statements positive or normative?

Statements 1 is Positive and Statement 2 is Normative

Which of the following is a microeconomic issue?
A. Why did overall production increase within the United Status last year?
B. Why is the average income lower in Africa than in Latin America?
C. Why has unemployment risen nationwide?
D. What is the impact on the quantity of Pepsi purchased if consumers’ tastes change in favor of non-carbonated drinks?
E. Why has economic growth been rapid in China?

What is the impact on the quantity of Pepsi purchased if consumers’ tastes change in favor of non-carbonated drinks?

A theory is simple when..

It focuses on fewer variables than the real world

Which of the following is a positive statement?
A. If we reduce welfare payments given to the poor, they will find jobs.
B. Everyone should have some knowledge of economics
C. Social Security must be reformed
D. Taxes on gasoline should be lower so that gasoline is more affordable to the poor
E. The rich should pay more in taxes

If we reduce welfare payments given to the poor, they will find jobs.

Self interest

reflects choices that are best for the individual who makes them

Scarcity
A. Is the result of artificial restrictions on output}
B. Is caused by some goods being rarer than others
C. Is implied by choice
D. Is because of finite resources

Is implied by choice

A good is considered scarce if …
A. If it has only one use
B. You have to give something up to get it
C. Must be manufactured
D. If there is little of it

You have to give something up to get it

A theory is useful when…

is able to predict real world phenomenon

Macroeconomics is the study of

national or global economies

Consider the following statements:
1. Access to health care for free is a human right
2. If out of pocket payment to see a doctor rise, then patients will make fewer doctor visits

Statement 1 is Normative and Statement 2 is positive

Decision making on the margin involves…

Comparing the marginal cost and marginal benefits when making a decision

The cost of a one-unit increase in an activity is called the

marginal cost

Microeconomics includes the study of

The choices that individuals and businesses make

The marginal cost of an activity____ as you do more of it

increases

A characteristic from which all economic problems arise is

scarcity

If a country has absolute advantage in producing a good, ___

it might or might not have a comparative advantage in producing that good

Voluntary trade benefits ____
Specialization in comparative advantage is _____
Trade allows for ____

both parties; productive; specialization

A country produces only apples and bananas. Moving from point A to point B along its production possibilities frontier, 5 apples are forgone and 4 bananas are gained. What is the opportunity cost of a banana?

B. 5/4 of an apple

Workers in the nation of Bitaly can either produce 1000 units of motor oil or 2000 circuits. The opportunity cost of 1 unit of motor oil is __ circuits.

2

Workers in the nation of Squirmany can either produce 50 chocolate bars or 10 board games. The opportunity cost of 1 board game is __ chocolate bars.

5

No entity can have the ____ advantage in everything.

comparative

A bowed out PPF reflects which of the following ideas?

i. Increasing opportunity cost
ii. Resources are not equally productive in all activities
iii. Prices of goods increase over time

i and ii

Consider a production possibility frontier with jeans on the vertical axis and shoes on the horizontal axis. As a country moves along the frontier closer to the vertical axis.

the opportunity cost of producing jeans increases

Suppose that a company total cost are given in the chart below:
Units Total Cost
4 $200
5 $210
6 $222
What is the marginal cost of the 5th unit?

10

The supply schedule shows the relationship between _____ when all other __________.

the quantity supplied and the price of a good when all other influences on selling plans remain the same

If at the current price, there is a surplus then…

quantity demanded is less than quantity supplied and price will fall

Price is governed by both ________ costs and ____.

marginal costs and use values