Spring 2014
Final Exam , Wednesday 28/5 2014 ( 1-3pm)
Definitions
1. Price elasticity of demand is a measure of how much the quantity demanded of a good
responds to a change in the price of that good
Percentage change in quantity demanded
Percentage change in price
2. Income elasticity of demand measures how much the quantity demanded of a good
responds to a change in consumers’ income.
Price elasticity of demand =
3. Total revenue is the amount paid by buyers and received by sellers of a good.
Computed as the price of the good times the quantity sold.
TR = P x Q
4. Welfare economics is the study of how the allocation of resources affects economic wellbeing
5. Consumer surplus measures economic welfare from the buyer’s side.
6. Producer surplus measures economic welfare from the seller’s side.
7. Willingness to pay is the maximum amount that a buyer will pay for a good. It measures
how much the buyer values the good or service
8. Consumer surplus= buyer’s willingness - amount the buyer actually pays
The area below the demand curve and above the price measures the consumer surplus in the
market.
9. Producer surplus is the amount a seller is paid for a good minus the seller’s cost.
It measures the benefit to sellers participating in a market.
The area below the price and above the supply curve measures the producer surplus in a
market
10. The production function shows the relationship between quantity of inputs used to make a
good and the quantity of output of that good.
11. Diminishing marginal product is the property whereby the marginal product of an input
declines as the quantity of the input increases.
12. Law of diminishing (marginal) returns states that as we continue to add more of any
one input (holding the other inputs constant) Its marginal product will eventually decline
13. Marginal Cost: Increase in total cost from producing one more unit or output Marginal cost
is the change in total cost (ΔTC) divided by the change in output (ΔQ)
(change in total cost) TC

(change in quantity)
Q
14. Efficiency is the property of a resource allocation of maximizing the total surplus received
by all members of society.
Market Efficiency ( Total surplus) = Value to buyers – Cost to sellers
MC 
Page 1
Ashgan Abougabal
15- The production function shows the relationship between quantity of inputs used to make a
good and the quantity of output of that good.
16- Fixed costs are those costs that do not vary with the quantity of output produced.
17- Variable costs are those costs that do vary with the quantity of output produced.
18- Marginal cost (MC) measures the increase in total cost that arises from an extra unit of
production
Complete the following
•
The Price Elasticity of demand determinants by : 1- Availability of Close Substitutes, 2Necessities versus Luxuries, 3- Definition of the Market, and 4-Time Horizon
•
Goods with close substitutes tend to have more elastic demand . Goods tend to have more
elastic demand over longer time horizons. While necessities tend to have inelastic
demands, luxuries have elastic demands. A broad category market, has a fairly inelastic
demand
•
Demand for a good is said to be elastic if the quantity demanded responds substantially to
changes in the price. Demand is said to be inelastic if the quantity demanded responds only
slightly to changes in the price.
•
If the elasticity is greater than 1, the demand is elastic, when elasticity equals 0, the demand
is perfectly inelastic
•
Higher income raises the quantity demanded for normal goods but, and lowers the quantity
demanded for inferior goods.
•
Necessities, such as food and clothing tend to have small income elasticities but, luxuries,
such as caviar and furs, tend to have large income elasticity's
•
Consumer surplus measures economic welfare from the buyer’s side, while producer
surplus measures economic welfare from the seller’s side
•
The area below the demand curve and above the price measures the consumer surplus in
the market.
•
A firm’s cost of production include explicit costs which involving actual payments and
implicit which includes input costs that do not require an outlay of money by the firm
• Utility = Satisfaction/Happiness/Pleasure one gets from consuming a good. Utility is
difficult to quantify, as it differs between people and situations. Measured in “utils”
which means (a personal measure)
• Total Utility (TU): Total amount of satisfaction or pleasure a person derives from
consuming a given quantity of that product
• Marginal Utility (MU): The extra satisfaction a consumer derives from one additional unit
of that product.
• The economic goal of the firm is to maximize profits
Page 2
Ashgan Abougabal
• Long-run decisions—involves a time horizon long enough for a firm to vary all of its
inputs
• Short-run decisions—involves any time horizon over which at least one of the firm’s
inputs cannot be varied
•
Explicit costs are input costs that require direct outlay of money by the firm.
• Implicit costs are input costs that do not require an outlay of money by the firm
In economics, an implicit cost occurs when one foregoes an alternative action but does not
make an actual payment
Total Cost = Impicit Cost + Explicit Cost
•
Sean builds a cabinet. He spends 2 hours building the cabinet. He could have been working
instead and normally makes $25/hour at his job. Since he was building a cabinet he wasn't
paid for this time. The materials to make the cabinet cost him $20.
* His Explicit Costs are: $20 in materials
* His Implicit Costs are: $25/hr x 2 hrs= $50 of foregone pay
* His Total Costs are: $20 in materials + $50 of foregone pay
=
$70 Total Costs
•
When total revenue exceeds both explicit and implicit costs, the firm earns economic
profit.
•
Production naturally brings to mind inputs and outputs. Inputs include resources, Labor,
Capital, Land, Raw materials. Way in which these inputs may be combined to produce
output is the firm’s technology
Page 3
Ashgan Abougabal
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
Price elasticity of demand =
Price
Quantity
% change in price
6
2
4
6
8
18
22
29
40
5
4
3
(Q 2  Q1 ) / [(Q 2  Q1 ) / 2]
(P2  P1 ) / [(P2  P1 ) / 2]
% change in
quantity
67
40
29
22
Elasticity
Description
3.7
1.8
1.0
0.6
Elastic
Unit elastic
inelastic
Define price elasticity of demand for ( a),(b),(c)
Price
( a) elasticity = ?
Demand ( b) , elasticity = ?
5
Demand ( C), elasticity = ?
4
0
Page 4
80
100
Quantity
Ashgan Abougabal
Complete the following table and then Use the data to draw total and marginal curves
# of slices of pizza
total utility
marginal utility
0
0
-
1
70
70
2
110
40
3
130
20
4
140
10
5
145
5
6
140
-5
Total Utility
200
150
100
50
0
1
2
3
4
5
6
7
8
9
10 11
($) M U
50
40
30
20
10
0
1
2
3
4
5
6
7
8
9
1
11
-10
-20
Page 5
Ashgan Abougabal
Quantity of
lemonda
glasses/
hour
30
Total cost
Fixed cost
Variable
cost
135
100
35
90
130
161
184
196
195
255
315
375
435
100
100
100
100
100
95
155
215
275
335
Average
Total cost
Average
Fixed cost
Average
Variable
cost
Marginal
cost
-
Complete the following table then draw the relevant curves from the data (fixed cost is
$200)
Page 6
Total
Product
Total
Variable Costs
0
1
2
3
4
5
6
7
8
0
20
38
58
64
76
93
114
139
Total cost
Average
fixed cost
Average
variable cost
Average
total cost
Marginal
cost
Ashgan Abougabal
Multiple Choice
1) Microeconomics studies the allocation of
A) decision makers.
B) scarce resources.
C) models.
D) unlimited resources.
Answer: B
2) Microeconomics is often called
A) price theory.
B) decision science.
C) scarcity.
D) resource theory.
Answer: A
3) Most microeconomic models assume that decision makers wish to
A) make themselves as well off as possible.
B) act selfishly.
C) make others as well off as possible.
D) None of the above.
Answer: A
4) Society faces trade-offs because of
A) government regulations.
B) profit motive.
C) faceless bureaucrats.
D) scarcity.
Answer: D
5) A market
A) always involves the personal exchange of goods for money.
B) allows interactions between consumers and firms.
C) always takes place at a physical location.
D) has no influence on prices.
Answer: B
6) What links the decisions of consumers and firms in a market?
A) the government
B) prices
C) coordination officials
D) microeconomics
Answer: B
7) The price of a good is
A) always equal to the cost of producing the good.
B) never affected by the number of buyers and sellers.
C) usually determined in a market.
D) None of the above.
Answer: C
Page 7
Ashgan Abougabal
In the simple circular flow model:
A) households are buyers of resources.
B) businesses are sellers of final products.
C) households are sellers of final products.
D) there are real flows of goods, services, and resources, but not money flows.
Answer: B
production possibilities curve indicating
A) constant opportunity costs.
B) increasing opportunity costs.
C) that the quantity of consumer goods demanded increases as the price of capital falls.
D) technology frontier curve.
Answer: A
5) Economics is the study of the ________ people make to attain their goals, given their
________ resources.
A) purchases; unlimited
B) choices; scarce
C) income; available
D) decisions; household
Answer: B
16) What does the term "marginal" mean in economics?
A) the edge of a market
B) an additional or extra
C) illegal
D) secondary
E) trivial
Answer: B
21) The cost incurred from the production of an additional unit of a product
A) is a marginal cost to the firm.
B) is called a loss.
C) is called opportunity cost.
D) must be zero for a firm to be efficient.
Answer: A
1) Factors of production are
a) inputs and outputs.
b) outputs only
c) inputs only
d) the minimum set of inputs that can produce a certain fixed quantity of output.
Ans: C
3) The production function represents
a) the quantity of inputs necessary to produce a given level of output.
b) the various recipes for producing a given level of output.
c) the minimum amounts of labor and capital needed to produce a given level of
output.
d) the set of all feasible combinations of inputs and outputs.
Page 8
Ashgan Abougabal
Ans: B
8) Use the following table to answer questions 11 - 14.
Labor
Quantity produced
0
0
1
20
2
50
3
90
4
125
5
140
6
150
9) The marginal productivity of the third worker is
a) 30.
b) 40.
c) 50.
d) 90.
Ans: B
10) *The average productivity of the fifth worker is
a) 20.
b) 28.
c) 30.
d) 140.
Ans: B
11) Marginal productivity is maximized with the ___________ worker.
a) second
b) third
c) fourth
d) sixth
Ans: B
12) *Average productivity is maximized with the ____________ worker.
a) second
b) third
c) fourth
d) sixth
Ans: C
14) If marginal product is greater than average product
a) total product must be increasing.
b) marginal product must be decreasing.
c) marginal product must be increasing.
d) average product may be increasing or decreasing.
Ans: A
Page 9
Ashgan Abougabal
22) The law of diminishing marginal returns states that
a) when the marginal product is above the average product, average product must be
increasing.
b) when the marginal product is below the average product, average product must be
decreasing.
c) as the use of one input increases holding the quantities of the other inputs fixed,
the marginal product of the input eventually declines.
d) as the use of all inputs increases, the marginal product of the inputs ventually
declines.
Ans: C
23) The expression given below explains:
MPL = change in quantity of output Q
change in quantity of labor L
a) Product hill
b) Marginal product of labor
c) Non-marginal product
d) Total product
Ans: B
25) Marginal cost is the ________ associated with undertaking an activity.
A) total cost
B) extra cost.
C) opportunity cost.
D) foregone cost.
Answer: B
The statement that ________ is a positive statement.
A) the price of gasoline is too high
B) too many people in the United States have no health care insurance
C) the price of sugar in the United States is higher than the price in Australia
D) more students should study economics
Ans: B
Which of the following is a positive statement?
A) My favorite dinner is pizza and soda.
B) The government must provide health insurance so that the poor can obtain decent medical
treatment.
C) The government should spend more on education.
D) An increase in the price of pizza will lead fewer students to buy pizza
Ans: D
Scarcity is a situation in which ________.
A) something is being wasted B) long lines form at gas stations
C) some people are poor and others are rich D) we are unable to satisfy all our wants
Ans: D
Page 10
Ashgan Abougabal
Economics can be defined as the social science that explains the ________.
A) choices that we make as we cope with scarcity
B) choices made by households
C) choices made by politicians
D) choices we make when we trade in markets
Ans: A
1) Microeconomics studies the allocation of
A) decision makers.
B) scarce resources.
C) models.
D) unlimited resources.
Answer: B
The branch of economics which studies how households and firms make choices, interact in
markets and how government attempts to influence their choices is called
A) macroeconomics.
B) microeconomics.
C) positive economics.
D) normative economics.
Answer: B
4) Society faces trade-offs because of
A) government regulations.
B) profit motive.
C) faceless bureaucrats.
D) scarcity.
Answer: D
2) Every society faces economic trade-offs. This means
A) some people live better than others do.
B) not everyone can have enough goods to survive.
C) producing more of one good means less of another good can be produced.
D) society's output cannot be made available to all.
Answer: C
4) Which of the following is an example of an economic trade-off that a firm has to make?
A) whether it is cheaper to produce with more machines or with more workers
B) deciding why consumers want its products
C) whether or not consumers will buy its products
D) deciding what profit margin it desires for its products
Answer: A
In a market economy, who decides what goods and services will be produced?
A) only the producers
B) only consumers
C) consumers and producers
D) the government
Answer: C
Page 11
Ashgan Abougabal
In a market economy, those who are willing and able to buy what is produced
A) receives what the government allows them to receive.
B) receive the most of what is produced.
C) receive no more than everyone else in the market.
D) solely determine what is produced.
Answer: B
20) When goods and services are produced at the lowest possible cost, ________ occurs.
A) allocative efficiency
B) productive efficiency
C) equity
D) efficient central planning
Answer: B
21) Productive efficiency is achieved when firms produce goods and services
A) most desired by society.
B) at the highest profit margin.
C) at the lowest cost.
D) of the highest quality.
Answer: C
24) Which of the following contributes to the efficiency of markets?
A) Governments play an active role in the day-to-day operations of markets.
B) Markets are able to bring about an equitable distribution of goods and services.
C) Markets promote equal standards of living.
D) Markets promote competition and voluntary exchange.
Answer: D
25) Competition forces firms to produce and sell products as long as the ________ to consumers
exceeds the ________ of production.
A) marginal benefit; marginal cost
B) marginal benefit; marginal benefit
C) marginal cost; marginal cost
D) marginal cost; marginal benefit
Answer: A
2) Which of the following is part of an economic model?
A) assumptions
B) norms
C) opinions
D) preferences of economic agents
Answer: A
Which of the following statements about positive economic analysis is true ?
A) Positive analysis uses an economic model to estimate the costs and benefits of different
course of actions.
B) There is much less disagreement among economists over normative economic analysis than
over positive economic analysis.
Page 12
Ashgan Abougabal
C) There is much more disagreement among economists over positive economic analysis than
over normative economic analysis.
D) Unlike positive economic analysis, normative economic analysis can be tested.
Answer: A
4) Which of the following is a positive economic statement?
A) Everyone should live at the same standard of living.
B) If the price of gasoline rises, a smaller quantity of it will be bought.
C) The government should close income tax loopholes.
D) U.S. firms should not be allowed to outsource production of goods and services.
Answer: B
5) Which of the following is a positive economic statement?
A) People should not buy imported fruits and vegetables.
B) The government should subsidize solar power for homeowners.
C) The minimum wage law causes unemployment.
D) The number of work visas should not be limited by the government.
Answer: C
1) Which of the following statements is true about revenue?
A) Revenue is the total amount received for selling a good or service.
B) Revenue is calculated by dividing the price per unit by the number of units sold.
C) The terms "revenue" and "profit" can be used interchangeably.
D) A firm's revenue will increase as its costs increase.
Answer: A
4) Which of the following is counted as "capital" in economics?
A) the money people have
B) the machines workers have to work with
C) the accumulated skills and training workers have
D) the wealth people have
Answer: B
5) The processes used to produce goods and services describes
A) innovation.
B) entrepreneurship.
C) technology.
D) capital.
Answer: C
Page 13
Ashgan Abougabal
Explain the concepts of absolute advantage and comparative
advantage.
What is scarcity, and why is it a fundamental concept in economics?
Answer: Scarcity refers to a situation in which unlimited wants exceed the limited resources
available to fulfill those wants. Scarcity is a fundamental concept in economics, because
economics is the study of the choices people make to attain their goals, given their scarce
resources.
What does the word "marginal" mean in economics? What is a marginal benefit? What is a
marginal cost? What is marginal analysis?
Answer: In economics, the word "marginal" means "extra" or "additional." Marginal benefit is
the additional benefit received from continuing with an activity. Marginal cost is the additional
cost associated with continuing with an activity. Marginal analysis involves comparing marginal
benefits and marginal costs.
Suppose a doctor can earn an additional $10,000 in revenue per year from keeping her office
open on Saturdays. What must the additional cost of keeping the office open on Saturdays be
to make this decision economically rational?
Answer: The additional cost of keeping the office open on Saturdays must be no more than
$10,000 per year to make this decision economically rational
What is the difference between economic efficiency and equity?
Answer: Economic efficiency is concerned with maximizing the value of output that can be
generated by a given resource base while equity deals with the distribution of society's total
output among the sectors and individuals of society.
What is the difference between accounting profit and economic profit?
Answer: Profit is the difference between revenue and cost. Accounting profit excludes the cost
of some economic resources that the firm does not pay for explicitly. Economic profit includes
the opportunity cost of all resources used by the firm.
What is a market economy?
Answer: A market economy is an economy in which the decisions of households and firms
interacting in markets allocate economic resources
What is a household? How do households interact with firms in a market?
Answer: A household consists of all persons occupying a home. Households supply factors of
production used by firms to produce goods and services. Households also demand goods and
services produced by firms.
How does the study of microeconomics differ from that of macroeconomics? Give one
example each of an issue studied in microeconomics and in macroeconomics.
Answer: Microeconomics is the study of how household and businesses make choices, how they
interact in markets, and how the government attempts to influence their choices while
macroeconomics is the study of the economy as a whole including topics like unemployment,
inflation and economic growth. (Students will give many different examples.)
Page 14
Ashgan Abougabal
True or False
1) Scarcity applies to both the rich and the poor.
Answer: TRUE
2) Scarcity affects only those who are in need.
Answer: FALSE
Microeconomics is the study of topics such as national production and unemployment.
Answer: FALSE
Macroeconomics is the study of aggregate variables such as national production and
unemployment.
Answer: TRUE
5) The tools, instruments, machines, and buildings that people use to produce goods and services
are called human capital.
Answer: FALSE
8) When I buy an $8.00 movie ticket rather than two paperback books, the opportunity cost of
going to the movie is the two paperback books I did not buy.
Answer: TRUE
When marginal cost is below average variable cost, average variable cost must be
rising. {FALSE}
Long Range Average Total Cost reaches its minimum where short run marginal cost is
equal to LRATC. {FALSE}
Economic costs include implicit costs, whereas accounting costs do not. {TRUE}
Marginal costs are the change in costs associated with the addition of one more unit of
output. {TRUE}
36) All economic questions arise from the fact that resources are scarce.
Answer: TRUE
37) As population declines, scarcity eventually disappears.
Answer: FALSE
38) The term "market" refers only to trading arrangements that have been approved by the
government.
Answer: FALSE
40) Marginal benefit is the benefit that your activity provides to someone else.
Answer: FALSE
41) If it costs Vijay $150 to design 5 websites and $175 to design 6 websites, then $175 is the
marginal cost of producing the 6th Websites.
Answer: FALSE
The distribution of income should be determined by the government" is an example of a
normative economic statement.
Page 15
Ashgan Abougabal
Answer: TRUE
Policies based on normative economic ideas tend to increase economic efficiency and
improve equity.
Answer: FALSE
In the market for factors of production, households earn income by supplying factors of
production to firms.
Answer: TRUE
One example of human capital is the amount of savings that you have.
Answer: FALSE
Because quantity demanded and income move in the same direction, normal goods have negative
income elasticity's
Answer: FALSE
Higher income lowers the quantity demanded for inferior goods, Because quantity demanded and
income move in opposite directions,
Answer: TRUE
Inferior goods have positive income elasticities.
Answer: FALSE
Economic profit is smaller than accounting profit.
Answer: TRUE
Page 16
Ashgan Abougabal
Total number of workers
Average cost of producing atelevision set
(dollars)
4
125
10
75
13
77
15
85
Graphing the data in the above table with the number of workers on the horizontal axis and
the average cost on the vertical axis, the graph would show
A) first a negative and then a positive relationship.
B) a horizontal line.
C) no relationship.
D) a linear relationship.
Answer: A
Ashgabal.wordpress.com
Econ260
Page 17
Ashgan Abougabal
Page 18
Ashgan Abougabal