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Question: You win $100 in a basketball pool.


You win $100 in a basketball pool. You have a choice between spending the money now and putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?



> Over the past 40 years, technological advances have reduced the cost of computer chips. How do you think this has affected the market for computers? For computer software? For typewriters?

> If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? a. Prices and quantities both rise. b. Prices and quantities both fall. c. Prices rise and quantities fall. d. Prices fall and quantities rise.

> If two parties trade based on comparative advantage and both gain, in what range must the price of the trade lie?

> England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. a. Which country has the abs

> Suppose that in the United States, producing an air- craft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor and producing a shirt takes 4 hours of labor. What will these

> Name one economic interaction that isn’t covered by the simplified circular-flow diagram.

> Classify the following topics as relating to microeconomics or macroeconomics. a. a family’s decision about how much income to save b. the effect of government regulations on auto emissions c. the impact of higher national saving on economic growth d. a

> All of the following topics fall within the study of microeconomics EXCEPT a. the impact of cigarette taxes on the smoking behavior of teenagers. b. the role of Microsoft’s market power in the pricing of software. c. the effectiveness of antipoverty prog

> Define the price elasticity of demand. • Explain the relationship between total revenue and the price elasticity of demand.

> Why isn’t trade among countries like a game with some winners and some losers?

> The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your sales people report that the introduction of competing products has reduced the expected sales of your n

> Adam Smith’s “invisible hand” refers to a. the subtle and often hidden methods that businesses use to profit at consumers’ expense. b. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants. c. the abil

> Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the rate of saving?

> What is the opportunity cost of investing in capital? Do you think a country can overinvest in capital? What is the opportunity cost of investing in human capital? Do you think a country can overinvest in human capital? Explain.

> Because capital is subject to diminishing returns, higher saving and investment do not lead to higher a. income in the long run. b. income in the short run. c. growth in the long run. d. growth in the short run.

> Over a long period of time, the price of a candy bar rose from $0.20 to $1.20. Over the same period, the CPI rose from 150 to 300. Adjusted for overall inflation, how much did the price of the candy bar change?

> Because consumers can sometimes substitute cheaper goods for those that have risen in price, a. the CPI overstates inflation. b. the CPI understates inflation. c. the GDP deflator overstates inflation. d. the GDP deflator understates inflation.

> Define real GDP and nominal GDP. Which is a better measure of economic well-being? Why?

> Many years ago, Peggy paid $500 to put together a re- cord collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?

> Define the price elasticity of demand and the income elasticity of demand.

> As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative mea- sure of economic well-being?

> An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction? a. Net exports and GDP both rise. b. Net exports and GDP both fall. c. Net exports fall, while GDP is unchanged. d. Net exports are unchanged,

> Describe what a tariff is and its economic effects

> Consider the arguments for restricting trade. a. Imagine that you are a lobbyist for timber, an established industry suffering from low-priced foreign competition, and you are trying to get Congress to pass trade restrictions. Which two or three of the f

> If a nation that imports a good imposes a tariff, it will increase a. the domestic quantity demanded. b. the domestic quantity supplied. c. the quantity imported from abroad. d. all of the above.

> Why do experts disagree about whether labor taxes have small or large deadweight losses?

> Suppose that the government imposes a tax on heating oil. a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain. b. Would the revenue collected from this tax likely be greater in

> Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government’s tax revenue a. increases by less than 50 percent and may even decline. b. increases by exactly 50

> What is efficiency? Is it the only goal of economic policymakers?

> It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of water: Value of first bottle $7 Value of second bottle $5 Value of third bottle $3 Value of fourth bottle $1 a. From this information, derive Bert’s demand schedule. Gra

> For each of the following pairs of goods, which good would you expect to have more elastic demand and why? a. required textbooks or mystery novels b. Beethoven recordings or classical music recordings in general c. subway rides during the next 6 months o

> An efficient allocation of resources maximizes a. consumer surplus. b. producer surplus. c. consumer surplus plus producer surplus. d. consumer surplus minus producer surplus.

> Explain why economists usually oppose controls on prices.

> Suppose the federal government requires beer drinkers to pay a $2 tax on each case of beer purchased. (In fact, both the federal and state governments impose beer taxes of some sort.) a. Draw a supply-and-demand diagram of the market for beer without the

> Which of the following would increase quantity supplied, decrease quantity demanded, and increase the price that consumers pay? a. the imposition of a binding price floor b. the removal of a binding price floor c. the passage of a tax levied on producers

> On a supply-and-demand diagram, show equilibrium price, equilibrium quantity, and the total revenue received by producers.

> A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic? Explain.

> The ability of firms to enter and exit a market over time means that, in the long run, a. the demand curve is more elastic. b. the demand curve is less elastic. c. the supply curve is more elastic. d. the supply curve is less elastic.

> On the appropriate diagram, show what happens to the market for pizza if the price of tomatoes rises. On a separate diagram, show what happens to the market for pizza if the price of hamburgers falls.

> Harry’s income declines, and as a result, he buys more pumpkin juice. Is pumpkin juice an inferior or a nor- mal good? What happens to Harry’s demand curve for pumpkin juice?

> Consider the markets for film streaming services, TV screens, and tickets at movie theaters. a. For each pair, identify whether they are complements or substitutes: • Film streaming and TV screens • Film streaming and movie tickets • TV screens and mo

> A life-saving medicine without any close substitutes will tend to have a. a small elasticity of demand. b. a large elasticity of demand. c. a small elasticity of supply. d. a large elasticity of supply.

> The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price. a. supply, higher b. supply, lower c. demand, higher d. demand, lower

> Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to question 3.

> Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushe

> Which goods will a nation typically import? a. those goods in which the nation has an absolute advantage b. those goods in which the nation has a comparative advantage c. those goods in which other nations have an absolute advantage d. those goods in whi

> An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day and can pro- duce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars;

> An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers’ preferences, it would a. expand the production possibilities frontier. b. contract the production possibilities frontier.

> Why should policymakers think about incentives?

> A marginal change is one that a. is not important for public policy. b. incrementally alters an existing plan. c. makes an outcome inefficient. d. does not influence incentives.

> Describe three ways a government policymaker can try to raise the growth in living standards in a society. Are there any drawbacks to these policies?

> What is a market? What are the characteristics of a perfectly competitive market?

> In what way is a college degree a form of capital?

> Societies choose what share of their resources to devote to consumption and what share to devote to investment. Some of these decisions involve private spending; others involve government spending. a. Describe some forms of private spending that represen

> Most economists are ________ that natural resources will eventually limit economic growth. As evidence, they note that the prices of most natural resources, adjusted for overall inflation, have tended to ________ over time. a. concerned, rise b. concerne

> If the price of imported French wine rises, is the CPI or the GDP deflator affected more? Why?

> Suppose that people consume only three goods, as shown in this table: a. What is the percentage change in the price of each of the three goods? b. Using a method similar to the CPI, compute the percentage change in the overall price level. c. If you were

> If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase a. both the CPI and the GDP deflator. b. neither the CPI nor the GDP deflator. c. the CPI but not the GDP deflator. d. the GDP deflator

> List the four components of expenditure. Which is the largest?

> A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP?

> The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.

> Which of the following does NOT add to U.S. GDP? a. Air France buys a plane from Boeing, the U.S. air- craft manufacturer. b. General Motors builds a new auto factory in North Carolina. c. The city of New York pays a salary to a policeman. d. The federal

> What is a competitive market? Briefly describe a type of market that is not perfectly competitive.

> The textile industry of Autarka advocates a ban on the import of wool suits. Describe five arguments its lobbyists might make. Give a response to each of these arguments.

> Draw the supply-and-demand diagram for an importing country. Identify consumer surplus and producer surplus before trade is allowed. Identify consumer surplus and producer surplus with free trade. What is the change in total surplus?

> When China’s clothing industry expands, the increase in world supply lowers the world price of clothing. a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imp

> When a nation opens itself to trade in a good and be- comes an importer, a. producer surplus decreases, but consumer surplus and total surplus both increase. b. producer surplus decreases, consumer surplus increases, and so the impact on total surplus is

> If the government doubles the tax on gasoline, can you be sure that revenue from the gasoline tax will rise? Can you be sure that the deadweight loss from the gasoline tax will rise? Explain.

> How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?

> Consider the market for rubber bands. a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in

> Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax a. increases by less than 50 percent and may even decline.

> Draw the supply and demand curves for turkey. In the equilibrium, show producer and consumer surplus. Explain why producing more turkeys would lower total surplus.

> In a supply-and-demand diagram, show producer and consumer surplus at the market equilibrium.

> Explain each of the following statements using supply-and-demand diagrams. a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country.” b. “When the weather turns warm in New England every summer, the price

> Suppose the demand for French bread rises. Explain what happens to producer surplus in the market for French bread. Explain what happens to producer surplus in the market for flour. Illustrate your answers with diagrams.

> John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase? a. by less t

> What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?

> A recent study found that the demand-and-supply schedules for Frisbees are as follows: a. What are the equilibrium price and quantity of Frisbees? b. Frisbee manufacturers persuade the government that Frisbee production improves scientistsâ€

> A $1 per unit tax levied on consumers of a good is equivalent to a. a $1 per unit tax levied on producers of the good. b. a $1 per unit subsidy paid to producers of the good. c. a price floor that raises the good’s price by $1 per unit. d. a price ceil

> How might a drought that destroys half of all farm crops be good for farmers? If such a drought is good for farmers, why don’t farmers destroy their own crops in the absence of a drought?

> If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals zero, is demand perfectly elastic or perfectly inelastic?

> Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run. a. If the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the lon

> A linear, downward-sloping demand curve is a. inelastic b. unit elastic. c. elastic. d. inelastic at some points, and elastic at others.

> Make up an example of a monthly supply schedule for pizza, and graph the implied supply curve. Give an example of something that would shift this supply curve, and briefly explain your reasoning. Would a change in the price of pizza shift this supply cur

> A change in which of the following will NOT shift the demand curve for hamburgers? a. the price of hot dogs b. the price of hamburgers c. the price of hamburger buns d. the income of hamburger consumers

> Does a change in consumers’ tastes lead to a movement along the demand curve or to a shift in the demand curve? Does a change in price lead to a movement along the demand curve or to a shift in the demand curve? Explain your answers.

> Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price

> Movie tickets and film streaming services are substitutes. If the price of film streaming increases, what happens in the market for movie tickets? a. The supply curve shifts to the left. b. The supply curve shifts to the right. c. The demand curve shift

> Suppose that a skilled brain surgeon also happens to be the world’s fastest typist. Should she do her own typing or hire a secretary? Explain.

> Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.

> Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris

> When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage, a. they both obtain consumption outside their production possibilities frontier. b. they both obtain consumption inside their production po

> Why might economic advisers to the president disagree about a question of policy?

> Should an economic model describe reality exactly?

> The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society’s trade-off between two “goods”—a clean environment and the quantity of industrial output. What do you s

> Draw an example of a production possibilities frontier for Robinson Crusoe, a shipwrecked sailor who spends his time gathering coconuts and catching fish. Does this frontier limit Crusoe’s consumption of coconuts and fish if he lives by himself? Would he

> Describe some of the trade-offs faced by each of the following: a. a family deciding whether to buy a new car b. a member of Congress deciding how much to spend on national parks c. a company president deciding whether to open a new factory d. a professo

> Calculate the daily production quantities and sequences from the following monthly requirements for product models A, B, and C. Assume the month has 20 production days. a. 5000 A, 2500 B, and 3000 C b. 2000 A, 3000 B, and 6000 C

> Visit a repetitive manufacturing facility in your area. What are the major causes of inventory? Be sure to ask about lot sizes and setup times. Would a lean production system work in this facility? Why or why not?

> What does it mean to say that a supply chain can be too lean? Give examples why this may be a problem.

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