Econ 2000 Exam 1 (HW and Quizzes) Questions & Answers

When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing, - ANSWERSscarcity Billie Jean has $120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that - ANSWERSpeople face trade-offs. Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth - ANSWERSis more equal but less efficient for society. Consider Mandy's decision to go to college. If she goes to college, she will spend $20,000 on tuition, $10,000 on room and board, and $2,000 on books. If she does not go to college, she will earn $18,000 working in a store and spend $8,000 on room and board. Mandy's cost of going to college is - ANSWERS42,000 Barb's aunt gave her $100 for her birthday with the condition that Barb buy herself something. In deciding how to spend the money, Barb narrows her options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally she decides on Option B. The opportunity cost of this decision is - ANSWERSthe value to Barb of the option she would have chosen had Option B not been available. Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $6200. Bill discovers that he needs to do an additional $2400 of work to make the car worth $6200 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do? - ANSWERSIt does not matter if Bill sells the car now or completes the work and then sells it at the higher price because the outcome will be the same either way. Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight. Then the average cost per seat is $500. There is one passenger on the standby list. You would be willing to take this passanger on the plane only if he is willing to pay more than - ANSWERSThis cannot be determined from the information given. You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a rational consumer you should make your choice by comparing - ANSWERSthe benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs. Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate? - ANSWERSPeople respond to incentives. England can benefit from trade - ANSWERSwith any nation. A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect - ANSWERSboth the value of a good to society and the cost of making it. According to Adam Smith, the success of decentralized market economies is primarily due to - ANSWERSindividuals' pursuit of self-interest. Water pollution from pulp and paper mills harms plants, animals, and humans. This is an example of - ANSWERSa market failure caused by an externality. The phenomenon of scarcity stems from the fact that - ANSWERSresources are limited. Guns and butter are used to represent the classic tradeoff between spending on - ANSWERSnational defense and consumer goods Juanita is deciding whether to buy a suit that she wants, as well as where to buy it. Three stores carry the same suit, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $114 for the suit. Store Travel Time Each Way (Minutes) Price of a Suit (Dollars per suit) Local Department Store 15 114 Across Town 30 86 Neighboring City 60 60 - ANSWERS129 Consider Paul's decision to go to college. If he goes to college, he will spend $90,000 on tuition, $15,000 on room and board, and $7,000 on books. If he does not go to college, he will earn $22,000 working at a construction job and he will spend $11,000 on room and board. Paul's cost of going to college is (ignore any other possible cost that is not mentioned here) - ANSWERS$123,000. Ashley eats two bananas during a particular day. The marginal benefit she enjoys from eating the second banana - ANSWERScan be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana. A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate? - ANSWERSPeople respond to incentives. If the United States decides to trade with Yemen, we know that - ANSWERSYemen and the United States can both benefit. A rationale for government involvement in a market economy is - ANSWERSmarkets sometimes fail to produce a fair distribution of economic well-being, markets sometimes fail to produce an efficient allocation of resources, property rights have to be enforced. (All of the above are correct) Water pollution from pulp and paper mills harms plants, animals, and humans. This is an example of - ANSWERSa market failure caused by an externality. In a market economy, who makes the decisions that guide most economic activity? - ANSWERSfirms and households Economics is best defined as the study of - ANSWERShow society manages its scarce resources. For a market for a good or service to exist, there must be a - ANSWERSgroup of buyers and sellers.