ECON101 Chapter Notes - Chapter 8: Normal Good, Economic Surplus, Bounded Rationality

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blackmouse455

21 Dec 2014

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Liton Chakraborty

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ECON101 Full Course Notes

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Consumptions choices: the choices that you make as a buyer of goods and services are influence by many factors summarized under two broad headings: Are all the things that you can afford to buy. The easiest way to describe consumption possibilities is to consider a model consumer who buys only two items. Consumption possibilities are limited by income and the prices that you must pay. Budget line: marks the boundary between those combinations of goods and services that a household can afford to buy and those that is cannot afford. Everywhere under and on the line is affordable, but everywhere beyond the line is unaffordable. Consumption possibilities change when income or prices change. A rise in income shifts the budget line outward but leaves its slope unchanged. A change in price changes the slope of the line. The budget line shows what is possible; preferences determine which possibility is chosen.

Related Questions

1) Suppose your grandmother gave you $25 for your birthday and you decided to spend all of it on candy bars and bags of popcorn. The price of candy bars is $1.25 and price of a bag of peanuts is $3.75.

a) Construct a table showing the alternative combinations of the two products that are available.

b) Plot the data in your table as a budget line in a graph. What is the slope of the budget line? What is the opportunity cost of one more candy bar? Of one bag of peanuts?

c) How, in general, would you decide which of the available combinations of candy bars and bags of peanuts to buy?

2) With current technology, suppose a firm is producing 750 screwdrivers daily. Also assume that the least-cost combination of resources in producing those screwdrivers is 15 units of labor, 20 units of land, 4 units of capital, and 3 unit of entrepreneurial ability, selling at prices of $50, $45, $75, and $50, respectively. If the firm can sell these 750 screwdrivers at $2.50 per unit,

a) what is its total revenue?

b) what is its total cost?

c) what is its profit or loss?

d) will it continue to produce screwdrivers?

e) If this firmâs situation is typical for the other makers of screwdrivers, will resources flow toward or away from this product?

3) How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do equilibirium price and quantity rise, fall , or are the answers indeterminate because they depend on the magnitudes of the shifts?

a)Supply decreases and demand is constant. Change in eqilibrium price chnage in eqilibrium quantity

b)Demand decreases and supply is constant.

c)Supply increases and demand is constant.

d)Demand increases and supply increases.

e)Demand decreases and supply decreases.

4)Zeke likes to go to music concerts. The number of times per year that he attends concerts depends on both the price of the concerts as well as Zekeâs income and the cost of other types of entertainmentâin particular, how much it costs to go see a movie instead of attending concerts. The three demand schedules in the $60,000 per year and movies cost $10 each. In scenario D2, Zeke's income is also $60,000 per year, but the price of seeing a movie rises to $12. And in scenario D3, Zeke's income goes up to $80,000 per year, while movies cost $12.

a)Using the data under D1 and D2, calculate the cross-elasticity of Zeke's demand for concerts at all three prices. (To do this, apply the midpoints approach to the cross-elasticity of demand.) Is the cross-elasticity the same at all three prices? Are movies and concerts substitute goods, complementary goods, or independent goods?

b)Using the data under D2 and D3, calculate the income elasticity of Zeke's demand for concerts at all three prices. (To do this, apply the midpoints approach to the income elasticity of demand.) Is the income elasticity the same at all three prices? Are concerts an inferior good?

PRICE	D1	D2	D3
50	10	5	12
40	15	10	25
30	25	15	40

Income 60,000 60,000 80,000

Cost of revenue 10 12 12

5) On the basis of the three individual demand schedules below, and assuming these three people are the only ones in the society, determine (a) the market (a) the market demand schedule on the assumption that the good is a private good and (b) the collective demand schedule on the assumption that the good is a public good.

P	Qd(D1)	Qd(D2)	Qd(d3)
20	0	0	1
19	0	1	2
17	0	2	3
16	0	3	4
15	1	4	5
14	2	5	6
13	3	6	7
12	4	7	8
11	5	8	9
10	6	9	10

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1. In every society, choices must be made because resources are

a. Infinite, but economic want are finite

b. Finite, but economic wants are insatiable

c. Unlimited, but economic wants limited

d. Limited, and so are economic wants

2. Which question is an illustration of a microeconomic question

a. Is the quantity of wine purchased in one year dependent upon the price of wine?

b. Does government spending influence the total level of employment in the economy?

c. Is the purchasing power of the dollar higher or lower today than it was in 2000?

d. Is capitalism superior to socialism?

3. The purpose of the ceteris paribus assumption used in economic analysis is to :

a. Avoid making normative statements

b. A void the post hoc, ergo propter hoc fallacy

c. Make sure that all relevant factors are considered

d. Restrict the analysis to effect of a single economic factor

4. The profit motive is

a. Ineffective at producing consumer goods

b. Inherently beneficial to society if left alone to pursue its own self interests

c. Effective at producing goods when consumption is non-rival or non-excludable

d. Is often at odds with societies interests

5. In the system of central planning

a. There is repaid of the infrastructure

b. There is severe inflation in wholesale and retail prices

c. Economic growth leads to widespread unemployment among workers

d. The outputs of some industries become inputs for other industries

6. The market system communicates changes in supply and demand and elicits appropriate responses from businesses and resource suppliers. This is known as the:

a. Rationing function of prices

b. Guiding function of prices

c. Monetary function of prices

d. Circular flow of income

7. An increase in the quantity of automobiles supplied would be caused by which be caused by which of the following?

a. An increase in the demand for automobiles

b. A decrease in the demand for automobiles

c. Higher prices for steel

d. Higher prices for gasoline

8. All of the following would cause an increase in the demand for private airplanes at a given price, except a:

a. Decrease in interest rates

b. Increase in consumer incomes

c. Decrease in taxes on luxury goods

d. Decrease in the costs of constructing private airplanes

9. In modern economies of mass production,

a. Biological need motivates most consumption

b. The intrinsic value of goods and services motivates mass consumption

c. Affluence makes relative depravation meaningless

d. Invidious comparison motivates much of mass consumption

10. a more equal distribution of income in the United States would result in greater total consumer satisfaction. This statement is based on the concept that:

a. Income inequality is unfair

b. Income inequality is undemocratic

c. Income equality stimulates efficiency

d. Incomes are subject to diminishing marginal utility

11. While command systems suffer from incentive problems, market economies

a. Have no incentive problems

b. Suffer from incentive problems of their own

c. Tend to resolve all problems by their own dynamics

d. Have problems to the degree that there is government interference.

12. What economic concepts can be used to explain the reason that a new car purchased by a consumer and driven off a new car lot decrease in value almost immediately compared with the value of the same make and model of a car still on the new car lot?

a. Positive and negative externalities

b. Liability rules and lawsuits

c. The Coase theorem and moral hazard

d. Asymmetric information and adverse selection

13. Consider a situation where the U.S. Congress wants to place a special tax on private airplanes to increase tax revenue. This tax would only be effective in raising new tax revenues if the price elasticity of:

a. Supply is elastic

b. Supply is inelastic

c. Demand is elastic

d. Demand is inelastic

14. Under what circumstances would you expect economic profits to be zero in a particular industry?

a. During a recession

b. When there is little competition in the industry

c. When the industry is neither expanding nor contracting

d. When the demand for the product being produced is increasing

16. If economic resources are perfectly interchangeable between the two products shown on a production possibilities graph:

a. The economy will always be at full employment

b. More of one product can be produced without producing less fo the other product

c. The production possibilities curve would be straight line

d. The two products are of equal value to the economy

17. Opportunity cost is best defined as:

a. Marginal cost minis marginal benefit

b. The time spent on an economic activity

c. The value of the best foregone alternative

d. The money cost of an economic decision

18. All of the following would affect the position of a country production possibilities curve expect:

a. The quality of labor

b. The level of employment

c. The amount of the capital stock

d. Technological progress

19. The post hoc, ergo propter hoc fallacy consists of:

a. Using an example to a different point

b. Inferring causality from chronological sequence

c. Jumping to conclusions from an inadequate number of cases

d. Arguing for or against the person rather than the position being supported

20. Which is one of the five fundamental question that needs to be answered by economic system

a. What is the rate of unemployment?

b. Who will be the richest person in the economy?

c. What goods and services will be produced?

d. Why are the prices for goods and services so high?

21. The institution of private property is sustained over time by:

a. Competition

b. Bequests

c. Self-interest

d. Free enterprise

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ECON101 Chapter Notes - Chapter 8: Normal Good, Economic Surplus, Bounded Rationality

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