Final Exam Review Micro Economics Study Union

1. Define microeconomics and macroeconomicsa. Microeconomics- the study of the economy at the small scale level, examining

individuals and specific marketsb. Macroeconomics- the study of the economy at the large scale level. Examining,

total output, the price level, and other aggregate measures of the economy.

2. Identify the various resource categories used in economicsa. Land- all natural resources used in production sometimes referred to as “gifts of

nature”b. Labor- all physical and mental activity devoted to producing goods and servicesc. Capital- the tools, machinery infrastructure and knowledge used to produce goods

and services. Capital is sometimes divided into physical and humand. Entrepreneurial ability- the talent or ability to combined, land, labor and capital to

produce goods and services. Entrepreneurial ability is different from human capital in that it primarily involves assuming risk and organizing resources into productive process.

3. Define scarcity and explain its importance in economicsa. A condition that results from the inability of limited resources to satisfy unlimited

wants. Economics exist because there is scarcity.

4. Identify the opportunity cost of a choice a. The opportunity cost to a consumer who smokes cigarettes consists of the_____

pick one of the following below1. product that the consumer could have bought instead of cigarettes2. costs imposed on others who inhale second-hand smoke.3. amount of cigarette taxes paid by this consumer.4. cost of complementary products such as lighters, ashtrays, and cigarette

holders.

5. Explain rational decision making 

a. If the price of ice cream cones is 4 dollars, how many ice cream cones would she buy if she is rational?

Ice cream cones

Marginal Benefit

1 $102 $83 $64 $45 $2

b. If the price is 10 dollars, how many would she buy if she was rational?

6. Define marginal benefit and marginal cost a. Marginal benefit- The Additional benefit associated with 1 more unit of activityb. Marginal cost- The additional cost associated with one more unit of activity

7. Describe the relationship between marginal benefits and costs in equilibriuma. At equilibrium the price and quantity where this is located is the optimal price and

quantity. b. If marginal benefit is greater than marginal cost, you should consume until you

reach equilibrium c. If the marginal cost is greater than marginal benefit, you should reduce the amount

of activity until you reach equilibrium8. The following question covers the following objectives

a. Identify Absolute Advantage b. Identify comparative advantage using opportunity costs c. Identify patterns of specialization using comparative advantage d. Identify the terms of trade using comparative advantage e. Illustrate the gains from trade in a production possibilities frontier model

Below is a production schedule for Russia’s two cities:

St. Petersburg MoscowVodka Nesting Dolls Vodka Nesting Dolls

0 80 0 5015 64 20 4030 48 40 3045 32 60 2060 16 80 1075 0 100 0

a. If St. Petersburg split the time spent producing vodka and nesting dolls in half, what is the maximum number of vodka and nesting dolls that they could make?

b. What is St. Petersburg’s opportunity cost of producing one bottle of vodka

c. What is Moscow’s opportunity cost of producing one bottle of vodka

d. Who has the comparative advantage in vodka?e. Who has the comparative advantage in nesting dolls?f. If the cities trade with each other what are the terms of trade in terms of vodka?

g. The two cites agree to specialize and trade 32 bottles of vodka for 32 nesting dolls. Terms of trade are 1 bottle of vodka for 1 nesting doll. How many bottles of vodka and nesting dolls will they have after trade is completed?

h. Who has the absolute advantage in vodka?i. Who has the absolute advantage in nesting dolls?

9. Describe the relationship between the price of a good and the quantity demandeda. The relationship is the law of demand. The law of demand dictates that as prices

rise quantity demanded will fall and vice versa10. Explain why the demand curve is downward-sloping

a. Because of the law of demand11. Determinates of demand (also known as non-price determinants of demand)

REMEMBER THAT ONLY THESE WILL CAUSE SHIFTS IN THE DEMAND CURVE, IE THESE DETERMINANTS EFFECT DEMAND AT EVERY QUANITITY AND PRICE. HOWEVER, PRICE CAUSES A MOVEMENT ALONG THE DEMAND CURVE.

a. Incomea. Income determines if a good is normal or inferior

1. If a increase in income results in an increase in demand the good is normal2. If a increase in income results in an decrease in demand the good is

inferiorb. Normal goods

1. A increase in income causes the demand curve to shift right2. A decrease in income causes the demand curve to shift left

c. Inferior goods1. A increase in income causes the demand curve to shift left2. A decrease in income causes the demand curve to shift right

b. Taste and preferences1. If desirability increases, demand curve shifts right

2. If desirability decreases, demand curve shifts rleftc. Number of buyers in the market

1. If the number or buyers increases, demand curve shifts right2. If the number or buyers decreases, demand curve shifts left

d. Expectations1. If consumers expect an increase in future costs associated with consuming

a good, demand curve shifts right2. If consumers expect an decrease in future benefits associated with

consuming a good, demand curve shifts lefte. Substitutes

1. A decrease in the price of a substitute, demand curve shifts left2. A increase in the price of a substitute, demand curve shifts right

f. Complements1. A decrease in the price of a complement, demand curve shifts right2. A increase in the price of a complement, demand curve shifts left

12.  Describe the relationship between the price of a good and the quantity supplied.a. the relationship between the price of a good and the quantity supplied is the law of

supply. The law of supply dictates that as price increases supply increases.

13. Determinates of demand (also known as non-price determinants of demand) REMEMBER THAT ONLY THESE WILL CAUSE SHIFTS IN THE DEMAND CURVE, IE THESE DETERMINANTS EFFECT DEMAND AT EVERY QUANITITY AND PRICE. HOWEVER, PRICE CAUSES A MOVEMENT ALONG THE DEMAND CURVE.

a. Taxes1. Supply shift left

b. Subsides1. Supply shifts right

c. Resource costs 1. If the price of the resource increases, then supply shifts left2. If the price of the resource decreases, then supply shifts right

d. Technology 1. Supply shifts right

e. Number of sellers 1. If the number of sellers increases, then supply shifts right2. If the number of sellers decreases, then supply shifts left

f. Expectations1. If suppliers expect the price to increase in the future, then supply shifts left2. If suppliers expect the price to decrease in the future, then supply shifts

right

14. The following question covers these conceptsa. Show how demand and supply interact to determine an equilibrium price and

quantityb. Calculate the magnitude of a surplus or shortage using supply and demandc. Predict how a change in demand will change equilibrium price and quantityd. Predict how a change in supply will change equilibrium price and quantity.e. Use supply and demand to determine the impact of a price ceiling on price and

output.f.  Use supply and demand to determine the impact of a price floor on price and

output.

Use the table below to answer the following questions (Graph of a market for pineapples)

a. What is the equilibrium price and quantity?b. Charging a price of 15 dollars there is a (surplus/shortage) of_______

c. Suppose for some reason or another, the government puts a price gouging law on pineapples of 25 dollars, what is the (surplus/shortage) generated by this new law.

Price Quantity Demanded Quantity Supplied10 300 10015 275 12520 250 15025 225 17530 200 20035 175 22540 150 25045 125 27550 100 300

d. Suppose that the government retracts their price gouging law and instead implemented a price floor of 40 dollars, what is the (surplus/shortage) generated by this new law.

e. Suppose the price of fertilizer (a necessary resource for the growth of pineapples) decreases, causing supply to shift (right or left), _____supply by 50 pineapples at every price. What is the new equilibrium quantity? Make a new column on the supply schedule

f. Suppose Oprah claims that pineapples are the key to immortality, causing demand to shift (right or left), _____demand by 80 pineapples at every price. What is the new equilibrium quantity? Make a new column on the schedule

15. Predict how changes in both demand and supply will change equilibrium price and quantity. Use this table to predict what will happen.

Supply Demand Equilibrium Quantity

Equilibrium Price

increase increase increase unknowndecrease decrease decrease unknownDecrease increase unknown increaseincrease decrease unknown decrease

16. Use supply and demand to determine the effect of a tax paid by suppliers on the price and equilibrium quantity of a good.

Assume the government imposes a $1.75 excise tax on the sale of every of bushel of apples. The tax is to be paid by the producers of apples. Use the table below to solve the following questions

a. Before the tax is imposed, what is the equilibrium price and quantity

b. After the excise tax is imposed, what is new equilibrium price and quantity

c. After the excise tax is imposed, the price producers keep after the tax is ____

d. The government is able to collect $____in tax revenue

Price Quantity demanded

Quantity

Supplied without the tax

Quantity supplied with the tax

1 60 0 0

2 50 10 0

3 40 20 0

4 30 30 10

5 20 40 20

6 10 50 30

7 0 60 40

17. The following question demonstrates the following objectivesa. Determine consumer surplus and predict how changes in price affect consumer

surplus.b. Determine producer surplus and predict how changes in price affect producer

surplus.c.  Determine the economic surplus and gains from trade in a market.d.  Identify a deadweight loss.e.  Illustrate the effect of a price ceiling on economic welfare using consumer and

producer surplus.f. Illustrate the effect of a price floor on economic welfare using consumer and

producer surplus.g. Illustrate the effect of a tax on economic welfare using consumer and producer

surplus.

Use the graph below to answer the following questions, the graph is of the market for cars

a. What is the equilibrium price and quantity?b. What is the consumer surplus?

1 2 3 4 5 6 7 8 9 10 110

102030405060708090

100110120130140150160170180190200210

quantity in hundreds

price

in th

ousa

nds

c. What is the producer surplus?

d. What is the economic surplus?

e. Suppose the government imposes a price ceiling $90,000 what is the dead weight loss, consumer surplus, producer surplus and economic surplus.

f. Suppose the government imposes a price floor of 120,000 what is the dead weight loss, consumer surplus, producer surplus and economic surplus.

g. Suppose there is an excess tax of 40,000 dollars, below is the new graph

h. Total economic surplus before the tax _____ million

i. Consumer surplus after the imposition of the tax _____ million

j. Producer surplus after the imposition of the tax _____ million

k. Total tax revenue _____ million

1 2 3 4 5 6 7 8 9 10 110

102030405060708090

100110120130140150160170180190200210

quantity in hundreds

price

in th

ousa

nds

l. Total economic surplus after the tax _____ million

m. Deadweight loss _____ million

18. Define and identify productive and allocative efficiency in a competitive market.a. Productive efficiency- producing output at the lowest possible average total cost of

production; aka using the fewest resources possible to produce a good or serviceb. Allocative efficiency- producing goods and services that are most wanted by

consumers in such a way that their marginal benefit equals their marginal cost1. Note that marginal benefit is the same as the demand curve and marginal

cost is the same as the supply curve. Allocative efficiency happens only at the quantity and price of equilibrium.

19. Define elasticity and its role in economics.a. Elasticity- a measure of how responsible one variable is to a change in another

variable; calculated as the percentage change in quantity divided by the percentage change in price. Its role in economics is to predominantly see how responsive consumers or producer’s quantity is to a percentage change in price. It allows for people to see if raising the price will effect business.

20. Interpret the numerical value found by calculating the price elasticity of demand/supply for a good or service.

a. When elasticity is greater than one the good is elasticb. When elasticity is less than one the good is inelasticc. When the elasticity is equal to one the good is unit elasticd. When elasticity is equal to zero the good is perfectly inelastice. When elasticity is equal to infinity the good is perfectly elastic

1. NOTE: THE ELASTICITY OF DEMAND WILL ALWAYS BE NEGATIVE DUE TO THE LAW OF DEMAND. WHEN EVALUTING THE NUMERICAL VALUE OF ELASTICITY TAKE THE ABSOLUTE VALUE OF IT THEN COMPARE IT TO THE INEQUALITIES WRITTEN ABOVE TO DETERINE IF THE GOOD IS UNIT ELASTIC, ELASTIC ETC. IF THE QUESITON SIMPLY ASKS FOR THE ELASTICITY GIVE ELASTICITY AS YOU DERIVED IT FROM THE EQUATION. IN OTHER WORDS KEEP THE NEAGTIVE SIGN.

21. Explain why the elasticity of demand changes along a linear demand curve using the midpoint formula. (INPUT GRAPH HERE)

22. Use the elasticity of demand to determine how total revenue will change in response to a change in price.

a. If demand is elastic, a decrease in price will increase total revenue and an increase in price will decrease total revue

b. If the demand is inelastic, a decrease in price will decrease total revenue, and an increase in price will increase total revenue

23. Predict how the number of substitutes or the proportion of income spent on a good or service will impact the elasticity of demand.

a. Substitutes1. The greater the amount of substitutes the more elastic it is2. The less amount of substitutes the more inelastic is

b. Income1. Large proportion of income, the more elastic it is2. Small proportion of income, the more inelastic it is

24. Predict how the characteristics of a good or service and the passage of time impact the elasticity of demand.

a. The more amount of time that passes the more elastic the good becomes. This is due to the fact that more time allows for more substitutes to be found for the good.

25. Define the price elasticity of supplya. A measure of how responsive quantity supplied is to a change in price; calculated as

the percentage change in quantity supplied divided by the percentage change inn price

26. Contrast the elasticity of supply in the immediate period, short run, and long run.

Input graphs here.

27. If an decrease in the price of apples of 15% results in an increase in the demand for grapes of 7%, the cross-price elasticity of demand between apples and grapes is:

28. Suppose the cross-price elasticity of demand between tequila and limes is –.8, if price of limes increases by 20% we would expect the quantity demanded of tequila to _______(increase/decrease) by _____

29. Suppose the income elasticity of demand for houses is 1.5. If the median income in the United States rises by 30%, then demand for houses should - _______(increase/decrease) by _____

30. Godiva chocolate is a normal good. Demand for Godiva chocolate is likely to increase when _______, ______ (increases/decreases)

31. Cross price elasticity determines if a good is a complement or a substitutea. If the cross-price elasticity is negative, then the good is a complementb. If the cross-price elasticity is positive, then the good is a substitute

32. Income elasticity determines if the good is inferior or a normal gooda. If the income elasticity of the good is positive, then the food is normalb. If the income elasticity of the good is negative, then good is inferior

33. Write all of the elasticity equations here:

34. Know the characteristics of a perfectly competitive market.a. Many buyers and sellersb. Price takersc. Standardized productsd. Easy entry and exit into the market

35. Show how the demand for an individual firm’s output is determined by the market equilibrium price

a. Price is equal to marginal revenue which is equal to average revenueb. There for the market equilibrium price of 15 dollars, makes the marginal revenue 15 dollars

and the average revenue 15 dollars at every quantity. c. To find the demand we utilize the profit maximizing rule of marginal revenue is equal to

marginal costd. Meaning when the marginal revenue is 15 and the marginal cost is 15, the quantity in which

this happens is the profit maximizing quantity. There is no need to look for the profit maximizing price for marginal revenue is the same as price, ie the profit maximizing price is 15. This is true about price, due to perfectly competitive firms being price takers.

36. Predict how a perfectly competitive firm will respond to changes in market prices.a. Utilize knowledge of shifts in supply and demand to find new equilibrium price. That new

equilibrium price will become your new market price and also your marginal revenue and average revenue. (P=MR=AR) using the new price, you know your new marginal revenue. All you need to od now is find the new quantity in which marginal revenue equals marginal cost (profit maximizing rule)

37.  Use the model of the perfectly competitive firm to determine short-run economic and normal profits.

a. If profit is greater than 0 there is an economic profitb. If profit is less than 0 there is a lossc. If profit is equal to 0 there is a normal profitd. When p is greater than average total cost there is a profite. When price is less than average total cost there is a lossf. When price is equal to average total cost there is a normal profitg. Normal profit occurs at the point where marginal cost is equal to average total cost

38. Use the model of the perfectly competitive firm to determine when a firm will shut down or operate at a loss in the short run.

a. A firm shall only shut down when price is less than average variable cost. If the price is greater than or equal to average variable cost, but less than average total cost, the firm is producing a loss, but they will continue to produce a loss, at the profit maximizing quantity of the price. They will never change their output unless the price changes. For the profit maximizing quantity and that quantity alone, is what brings them the most money.

39. Determine the shape of the short-run supply curve using the marginal cost curve.a. The marginal cost curve is the short run supply curve. However, the entire marginal cost

curve is not the short run supply curve. The short run supply curve starts at the point where marginal cost is equal to average variable cost. Any points below that are disregarded, all points above that point are included.

40. Show how the perfectly competitive firm adjusts to changes in market prices in the long run.a. In the long run:

1. If a firm is making a profit, firms will enter, supply will shift right and prices will decrease

2. If a firm is making a loss, firms will exit, supply will shift left and prices will increase

3. Always remember that in the long run, perfectly competitive firms will always try to reach the point in which normal profit occurs (where marginal cost is equal to average total cost.)

41. Derive the long-run market supply curve in a perfectly competitive industry under conditions of constant resource costs.

a. Long run market supply curve is a horizontal line originating at the long run equilibrium price

Use the graph above to answer question 42

42. PineapplesRUS are is a perfectly competitive firm that produces pineapples. According to the graph, what is PinapplesRUS marginal revenue?

Quantity Marginal Revenue Total revenue Average revenue5101520253035

43. Fill in the table above if the market price is $15

Use the graph above to answer questions 44-50 (ATC IS THE GREEN LINE, AND MC IS THE RED LINE)

44. At the market price of $350 per shoe, how many shoes should NIKE produce?45. The market price is $500 per shoe, what is marginal revenue?46.  What is the profit-maximizing level of output for NIKE at $500 per shoe47. What are NIKE’S weekly profits at the profit-maximizing level of output?

48. At what market price is a normal profit generated?

49.  If NIKE’s production costs are typical of all perfectly competitive firms in the shoe industry, over time firms will _____(enter/exit/neither enter nor exit) the market

50. If NIKE’s production costs are typical of all perfectly competitive firms in the shoe industry, we would expect that in the long run that the market price will -______(fall/rise/ stay the same), supply will shift _____(left/right/not move) and firms will ______ (enter/exit/neither enter nor exit) the market.

51. Know the characteristics of a pure monopoly.a. Price makersb. Single sellerc. Barriers to entryd. No close substitutes

52. Contrast the efficiency of a competitive market to that of a monopolistic market.a. A competitive market, due to large amount of competition, in the long run will

always be allocatively and productively efficient. However, a monopoly due to lack of competition is generally not productively or allocatively efficient. Furthermore, they are not allocatively efficient because price is greater than marginal cost. And they are not productively efficient because they have no need to be. Monopolies CAN BE productively and allocatively efficient, but they are GENERALLY NOT!

Price (dollars)

Quantity (headphones)

Marginal Revenue (dollars)

Marginal Cost (dollars)

Average Total Cost (dollars)

$150 0 — — —140 2,000 140 100 163

130 6,000 125 110 124120 10,000 105 105 132110 14,000 85 75 90100 18,000 65 48 4890 22,000 45 32 25

Use the table above to answer questions 3-5

53. How many headphones should Apple sell in order to maximize profits?

54. What price should Apple charge for headphones in order to maximize profits?55. How much profit will Apple’s headphones generate if they produce the profit-

maximizing quantity and charge the profit-maximizing price?

Use the graph above to answer questions 7-1056. How many headphones should Samsung sell in order to maximize profits?57. What price should Samsung charge for headphones in order to maximize profits?58. How much profit will Samsung’s headphones generate if they produce the profit-

maximizing quantity and charge the profit-maximizing price?

59.  In the market for Samsung’s headphones, the allocatively efficient level of output is _____ and the allocatively efficient price is ______