Econ 2110 Final Exam Clemson University

Economics

the study of how people allocate their limited resources to satisfy their nearly unlimited wants

Micro

the part of economics concerned with single factors and the effects of individual decisions

Macro

the part of economics concerned with large scale or general economic factors, such as interest rates and national productivity

Incentives

rewards r punishments that people react to

Scarcity

living in a world of finite resources and having unlimited needs and wants

Trade-offs

giving up one thing in order to gain another

Opportunity Cost

the value of the next best decision, what it costs someone to produce something, loss of potential gain of other alternatives

Thinking on Margin

what a producer/seller has to sacrifice in order to sell/produce one more of an item

Positive Economics

hows the economy actually works, facts

Normative Economics

an opinion of how the economy should work, not facts

Consumer Surplus

willingness to pay minus the cost/actual price of item

Producer Surplus

the cost/actual price of item minus the production cost

Voluntary Trade

trade that is mutually beneficial

Specialization

leads to increased productivity and the division of knowledge

Self-Sufficiency

leads to death

Division of Knowledge

the sum of total knowledge increases and in this way so does productivity

Absolute Advantage

when and individual or country can produce a good using fewer resources

Comparative Advantage

When and individual or country can produce a good at a lower opportunity cost

PPF

graphical representation of a combination of goods that an individual or country can produce

PPF Efficiency

on line is efficient
above the line is unattainable
below the line is inefficient

Direct Cost

price that can be completely attributed to the production of specific goods or services

Indirect Cost

cost not directly related to production

Explicit Cost

direct payment made to others in the course of running a business

Demand

the relationship between the price of a good and the quantity demanded

Supply

as the price of a good rises, the quantity supplied also rises

Equilibrium

when the quantity demanded equals the quantity supplied

Surplus

when the quantity supplied is greater than the quantity demanded

Shortage

when the quantity demanded is greater than the quantity supplied

Inelastic

when the elasticity of demand is less than -1 (greater than one absolute value)

Elastic

when the elasticity of demand is between -1 and 0 (between 0 ad 1 in absolute value)

Unit elastic

when the elasticity of demand is exactly -1 (exactly 1 in absolute value)

Perfectly Elastic Curve

horizontal

Perfectly Inelastic Curve

vertical

Elasticity of Demand

how responsive the quantity demanded is to a change in price. the more responsive, the more elastic

Revenue

price * quantity

What makes a product more elastic?

number of substitutes
necessity vs luxury
time
good classifications
budget share

Substitutes

more substitutes = more elastic

Luxury vs. Necessity

necessities are more inelastic
luxury goods are more elastic

Time (Elasticity of Demand)

short run: less elastic
long run: more elastic

Budget Share (Elasticity of Demand)

the more money allocated from your budget to a product, the more elastic the product is

Elasticity of Supply

measures the responsiveness of a quantity supplied to a change in price

Price Controls

attempt to set or manipulate prices through government involvement in the market

Price Ceiling

maximum price a good can legally be bought or sold for
ex. rent control

Price Floor

minimum price a good can legally be bought or sold for
ex. minimum wage

Binding price ceilings lead to...

shortages

Externalities

when individuals don't consider the costs or benefits of their actions on others

Positive Externalities

Benefits received by people other than the producers or consumers in the market

Negative Externalities

people that aren't the producer or consumer pay (social cost)

Lack of Property Rights

externalities occur because property rights have not been clearly defined

Commodity Tax

tax on goods like fuel, liquor and cigarettes

Commodity Tax Effect

government can tax consumers or producers with the same effect

Finding the Amount of a Tax

price paid by buyers minus the price received by sellers

Top of Tax Wedge Represents

price paid by the buyers

Bottom of Tax Wedge Represents

price received by the sellers

Tax Wedge Shortcut

the most important effect of a tax is to drive a tax wedge between the price paid by the buyers and the price received by the sellers

Commodity taxes _____________ revenue and ____________ gains from trade.

raise, reduce

When demand is more elastic than supply... (taxes)

buyers pay less of the tax than the sellers

When supply is more elastic than demand... (taxes)

suppliers pay less of the tax than the buyers

The more elastic the demand... (taxes)

the larger the DWL

Social Security Tax

tax levied on both employers and employees to fund the social security program. payroll tax, self-employment tax

Per Unit Tax

fixed amount of tax for each unit of a good or service sold. proportional to the quantity of the product sold regardless of the price

Tax Burden

the analysis of the effect of a particular tax on the distribution of economic welfare

Subsidy

opposite of a tax, when the government pays buyers or sellers to sell a good

External Cost

occurs when producing or consuming a good or service imposes a cost upon a third party

Social Cost

private cost plus externalities

Coase Theorem

the economic efficiency of an economic allocation or outcome in the presence of externalities

Pigouvian Tax

a tax on a good with external costs

A subsidy will cause the biggest DWL when...

both supply and demand are inelastic

When demand is ____________ , an increase in price __________ total revenue.

inelastic, raises

The slope of a PPF at any point indicates

a country's opportunity cost of production

Market Power

the power to raise price above marginal cost without fear that other firms will enter the market

Monopoly

a firm with market power

Marginal Revenue

the change in total revenue from selling an additional unit

Marginal Cost

the change in total cost from producing an additional unit, to maximize profit, a firm increases output until MR=MC

Economies of Scale

advantages of large scale production that reduce average cost as quantity increases

Natural Monopoly

exists when a single firm can supply the entire market at a lower cost than two or more firms

1. The idea that "people respond to incentives" would lead us to conclude that the murder rate
a. would rise if tougher penalties are enacted.
b. would fall if tougher penalties are enacted.
c. would be unaffected by changes in penalties, since crimes are committed in moments of passion.
d. depends entirely on the level of penalties enacted.

B

2. Which of the following is an example of a scarce good?
a. Coca Cola
b. Insulin
c. Diamonds
d. All are scarce goods.
e. Just b and c

D

3. In economics, the cost of something is
a. the out-of-pocket expense of obtaining it.
b. always measured in money.
c. what you must give up to get it.
d. always higher than people think.

C

4. If you've bought an $80 sticker to park on campus for the semester, and you plan to park on campus eighty times before the semester ends, the marginal cost to you each time you park is
a. $0
b. $1
c. $8
d. $80
e. Negative

A

5. Marginal benefit is the benefit
a. that your activity provides to someone else.
b. of an activity that exceeds its cost.
c. that arises from the opportunity cost of an activity.
d. that arises from a small increase in an activity

D

6. The costs that influence decisions are always
a. average costs.
b. marginal costs
c. sunk costs.
d. total costs

B

7. After graduating from high school, Steve had three choices, listed in order of preference: (1) matriculate at Clemson, (2) work in a printed circuit board factory, or (3) attend a rival college. His opportunity cost of going to Clemson includes
a. the income he could have earned at the printed circuit board factory
b. the direct cost of attending Clemson (tuition, textbooks, etc.)
c. the benefits he could have received from attending the rival college
d. All of the above
e. Just a. and b.

E

8. Sunk costs are irrelevant to economic decisions because
a. they don't involve monetary expenditures, merely opportunity costs.
b. opportunity costs rise with the quantity supplied.
c. they don't affect a firm's profit.
d. they don't reflect what people actually value.
e. they cannot be affected by the decision in question.

E

9. If it costs a theater $180,000 to put on four shows, and the cost would rise to $200,000 if the theater adds a fifth show,
a. the marginal cost of the fifth show is $20,000.
b. the marginal cost of the fifth show is $40,000.
c. the marginal cost of the fifth show is $200,000.
d. the marginal cost of the fifth show is $50,000.

A

10. If you've purchased an all you can eat ticket to a pig roast for $25, good economic thinking would tell you to take one last plateful if
a. the value of that plateful to you is greater than $25
b. the value of that plateful to you is greater than or equal to $1 and you've already taken 24 platefuls that you value at $1 each.
c. the value of that plateful to you is greater than zero.
d. none of the above

C

11. Suppose a law requires employers to provide health insurance coverage for "contract employees" (i.e., workers on short-term contracts), "because contract employees deserve health insurance too!" What would our economic model lead us to predict?
a. Firms would use fewer contract employees
b. Firms would reduce the amount they pay contract employees
c. All current contract employees would be made better off
d. All of the above
e. Just a and b.

D,E

15. Which of the following costs will you consider when deciding whether it is efficient to take a hike one afternoon?
a. The gas it takes to get to the hiking trail.
b. The studying you won't be able to do.
c. The wear and tear on your hiking boots.
d. All of the above.
e. Just a and c.

D

16. The cost to a ski instructor of taking a day off
a. is higher on the weekend when more people ski.
b. falls when it snows.
c. rises when it rains.
d. rises when there are a lot of other instructors around, so competition is intense.

A

17. If you are searching for a new pair of skis, it makes sense to keep looking as long as
a. you haven't found the lowest price available.
b. the shopping time matters less to you than the lower price you expect to get.
c. there are stores left that you haven't checked.
d. you face no opportunity costs at all.
e. All of the above.

B

18. If you decide to go to a movie this evening rather than study economics, you thereby demonstrate that
a. you don't care about getting good grades
b. you hate economics
c. you would rather have fun than fulfill your responsibilities
d. at the margin, you value two hours of movie watching more than two hours of studying economics
e. none of the above.

D

19. How can I raise the price of coming to class?
a. charge an admission fee
b. schedule class at inconvenient times
c. give extra homework to anyone who shows up
d. all of the above
e. none of the above

D

20. I am considering joining a "shopper's club", where I pay $100 membership fee and then get a twenty-five percent discount on all my purchases. In making my decision, I should
a. only join if I plan to make at least $100 of purchases
b. ignore the membership fee since it is a sunk cost
c. only join if I expect to get at least $100 worth of discounts
d. only join if they promise to refund my membership fee if I'm not satisfied

C

21. Could you ever have too much environmental protection?
a. No, because it is important to protect the environment.
b. Yes, if the marginal costs are greater than the marginal benefits.
c. No, because a clean environment is a scarce good.
d. No, because the benefits of a clean environment outweigh the costs.
e. Yes, if the demand for environmental protection is not very important.

B

22. The cost of attending the last class before an exam includes
a. whatever tuition you paid.
b. payments on the car that you drive to campus if you commute.
c. the cost of your dorm room you live in the dorms.
d. whatever you miss doing because you go to that class.
e. All of the above.

D

23. If you buy a motorcycle for $1000 and then discover that you hate riding it and will never ride it again, the best thing to do is
a. keep the motorcycle because you've paid so much for it
b. keep the motorcycle unless you can find someone who will pay you at least $1000 for it
c. sell the motorcycle for the best offer you can get
d. sell the motorcycle for the best offer you can get, as long as it covers most of what you paid for it

C

26. We know that trade makes people better off because
a. it is a voluntary activity.
b. people wouldn't engage in it otherwise.
c. it only occurs when there is the potential for gains.
d. All of the above.

D

29. "Senior citizens deserve an income that will allow them to live in comfort for their remaining years." This is an example of
a. a normative statement.
b. a positive statement.
c. neither a positive and normative statement.
d. a statement reflecting the concept of scarcity.

A

30. Your company is engaged in two projects, one of which has cost $25 million to date, the other of which has cost $10 million to date. It can only afford to finish one of the projects. The expected benefit from each project is the same. Which project should it finish?
a. The $25 million project, because it has already invested so much.
b. The $10 million project, because it has cost so little thus far.
c. Whichever can be completed at the least additional cost.
d. Whichever will result in the lowest cost in total by the end of the project.

C

34. Bob's opportunity cost of making a desk is $20. Bill values the desk at $50. Bob sells the desk to Bill for $34. What is the value of Bill's consumer surplus?
a. $14
b. $16
c. $30
d. $34
e. $50

C