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studies how
1 individuals,
2 governments,
3 firms and
4 nations
STUDY BEHAVIOR
Foundations:
1 Marginal Analysis
2 Opportunity Costs
3 Efficient Markets
SCARCITY->OPTIMIZATION->MARGINAL
ANALYSIS-> EXAMPLE IS MAKE OR BUY DECISION
INCREMENTAL ANALYSIS/DIFFERENTIAL
ANALYSIS/RELEVANT COSTING
MAKE
SCARCITY->OPTIMIZATION->MARGINAL ANALYSIS->
BUY
1. No. Its income would fall by $30,000.
.
Make Buy Difference
Purchase price $ 0 $310,000 ($310,000)
Materials 40,000 40,000
Direct labor 90,000 90,000
Variable overhead 80,000 80,000
Avoidable fixed overhead 50,000 50,000
Foregone rent 20,000 20,000
Net cost $280,000 $310,000 $30,000
The $20,000 rent, an opportunity cost, could be subtracted from the cost of
buying. The $180,000 total fixed overhead could be shown under the make decision,
with $130,000 ($180,000 - $50,000) shown under the buy decision as cost that the
company would not avoid by buying. Any such manipulations still show that the
advantage to making is $30,000.
39. The measurement of the
benefit lost by using
resources for a given purpose
is
a. Economic efficiency.
b. Opportunity cost.
c. Comparative advantage.
d. Absolute advantage
39. (b) opportunity cost is the
benefit given up from not using
the resource for another
purpose. Answer (a) is incorrect
because economic efficiency is a
comparison among uses of
resources. Answers (c) and (d)
are incorrect because they involve
comparisons across
countries.
Economics can generally be
broken down into:
1 Macroeconomics, which
concentrates on the
behavior of the aggregate
economy; and
2 Microeconomics, which
focuses on individual
consumers.
Examples of Microeconomic and Macroeconomic Concerns
Divisions
of Economics Production Prices Income Employment
Production/output in Price of individual Distribution of Employment by
Microeco individual industries
goods and services income and individual
wealth businesses
nomics and businesses
and industries
Price of medical care Wages in the auto
How much steel
Price of gasoline industry Jobs in the steel
How much office
Food prices Minimum wage industry
space
Apartment rents Executive salaries Number of
How many cars
Poverty employees
in a firm
Number of
accountants
DEFLATION->CONTRACTION-
>UNEMPLOYMENT->ECONOMIC
DOWNTURN->POVERTY
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27.X and Y are substitute
products. If the price of product Y
increases, the immediate impact
on product X is
a. Price will increase.
b. Quantity demanded will
increase. SHOULD BE DEMAND
c. Quantity supplied will increase.
d. Price, quantity demanded, and
supply will increase.
27. (b) The demand and
price of substitute
products are directly
related. If the price of a
good increases, the
demand for its substitute
will also increase.
CORRECTION IN THE
ANSWER CHOICE
Substitute Goods
9.A decrease in the price of a
complementary good will
a. Shift the demand curve of the joint
commodity to the left.
b. Increase the price paid for a
substitute good.
c. Shift the supply curve of the joint
commodity to the left.
d. Shift the demand curve of the joint
commodity to the right. SHOULD BE
THE COMPLEMENTARY GOOD
9. (d) If the price of a
complementary good decreases,
demand for the joint commodity
will increase. This is due to the
fact that the total cost of using the
two products decreases. If
demand for a product increases
the demand curve will shift to the
right. SHOULD BE
COMPLEMENTARY
Complementary Goods
Normal and Inferior Goods
Supply
A supply curve shows the amount
of a product that would be
supplied at various prices.
Graphically a supply curve
shows a direct relationship
between price and quantity
supplied. The higher the price the
more products that would be
supplied. A supply schedule and
supply curve for Product X are
presented below.
2.A supply curve illustrates the
relationship between
a. Price and quantity supplied.
b. Price and consumer tastes.
c. Price and quantity demanded.
d. Supply and demand.
2. (a) The requirement is to
describe the relationship
shown by a supply curve. A supply
curve illustrates the
quantity supplied at varying prices
at a point in time.
Therefore, the correct answer is
(a). Answers (b) and (c)
are incorrect because they deal
with demand. Answer (d) is
incorrect because it deals with
demand-supply equilibrium
Supply curve shift.A supply curve
shift occurs when supply variables
other than price change. As an
example, if the costs to produce
the product increase, the supply
curve would shift upward and to
the left. A shift in the supply
curve is illustrated below.
Supply Shifts
16.Which of the following will
cause a shift in the supply
curve of a product?
a. Changes in the price of the
product.
b. Changes in production
taxes.
c. Changes in consumer tastes.
d. Changes in the number of
buyers in the market.
16. (b) A shift in the supply curve may
result from (1) changes in production
technology,
(2) changes or expected changes in
resource prices,
(3) changes in the prices of other goods, (4)
changes in taxes or subsidies,
(5) changes in the number of sellers in the
market,
(6) expectations about the future price of
the product.
(a) is incorrect because a change in the
price of the product involves movement
along the existing supply curve, not a shift
in the supply curve. Answers (c) and (d) are
result in a shift in the demand curve.
7.An improvement in technology that
in turn leads to improved worker
productivity would mostlikely result in
a. A shift to the right in the supply
curve and a lowering of the price of
the output.
b. A shift to the left in the supply curve
and a lowering of the price of the
output.
c. An increase in the price of the
output if demand is unchanged.
d. Wage increases.
Market Equilibrium
A product’s equilibrium price is determined
by demand and supply; it is the price at
which quantity demanded =quantity supplied
Market Equilibrium
Excess Demand
Excess Supply
Changes In Equilibrium
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8. Which of the following
market features is likely to
cause a surplus for a particular
product
a. A monopoly.
b. A price floor.
c. A price ceiling.
d. A perfect market.
8. (b) is correct because a price floor,
if it is above the equilibrium price, will
cause excess production and a
surplus. Answer (a) is incorrect
because a monopoly market is likely to
be characterized by underproduction
of the product. Answer (c) is incorrect
because a price ceiling, if it is below
the equilibrium price, will cause
underproduction and shortages.
Answer (d) is incorrect because in a
perfect market with no intervention
demand and supply will be equal.
21.If the government
regulates a product or service
in a competitive market by
setting a maximum price
below the equilibrium price
what is the long run effect
a. A surplus.
b. A shortage.
c. A decrease in demand.
d. No effect on the market.
21. (b) If the government
mandates a maximum price below
the equilibrium price, the product
will be selling at an artificially low
price resulting in shortages. (a) is
incorrect because price floors
result in surpluses. Answer (c) is
incorrect because price ceilings
would probably result in more
demand. Answer (d) is incorrect
because the market would be
affected.
Items 4 and 5are based on the following
information:Assume that demand for a
particular product changed as shown below
from D1 to D2.
4. Which of the following could
cause the change shown in the
graph?
a. A decrease in the price of the
product.
b. An increase in supply of the
product.
c. A change in consumer tastes.
d. A decrease in the price of a
substitute for the product.
4. (c) because a shift in demand
could result from a change in
consumer tastes. Answer (a) is
incorrect because this would
result in movement along the
existing demand curve. Answer
(b) is incorrect because change in
supply would not affect the
demand function. Answer (d) is
incorrect because a decrease in
price of a substitute would result
in a shift of the curve to the left.
5. What will be the result
on the equilibrium price
for the product?
a. Increase.
b. Decrease.
c. Remain the same.
d. Cannot be determined.
5. (a) because the shift (increase)
in demand will increase the price
of the product. Answer (b) is
incorrect because a shift of the
demand curve to the left would
have to occur to decrease price.
Answers (c) and (d) are incorrect
because the effect on price will
not be to remain the same and it
can be determined.
6.Which one of the
following has an inverse
relationship with the
demand for money?
a. Aggregate income.
b. Price levels.
c. Interest rates.
d. Flow of funds.
6. (c) because as interest rates
increase the demand for
money decreases because the
opportunity cost of holding on
to money becomes higher it
becomes costly to hold on to
money. This encourages
people to deposit their money
in the bank.
19.In a competitive market for
labor in which demand is stable, if
workers try to increase their wage
a. Employment must fall.
b. Government must set a
maximum wage below the
equilibrium wage.
c. Firms in the industry must
become smaller.
d. Product supply must decrease.
19. (a) like any other good or
service, if price is increased for
labor, the demand will fall and
employment will fall. Answer (b) is
incorrect because setting a
maximum wage will not allow
workers to increase wages. Answer
(c) is incorrect because firms may
or may not change in size. Answer
(d) is incorrect because supply will
only decrease if the price of the
product decreases.
Price elasticity of demand.The elasticity of demand
measures the sensitivity of demand to a change in
price. It is calculated as follows:
To make results the same regardless of whether
there is an increase or decrease in price, the
amount is usually calculated using the arc method
as shown below.
Interpretation of the demand elasticity
coefficient.
Elastic
29. (d) Using the traditional method is
calculated by dividing the percentage
change in quantity demanded by the
percentage change in price, not using the
average
changes.
(150 – 100) ÷ 100) x 100% 50%
_______________________=____ = -5
($45 – $50) ÷ $50) x 100% - 10%
Elastic
30.As the price for a particular product changes, the
quantity of the product demanded changes according to
the following schedule:
Total quantity demanded Price per unit
100 $50
150 45
200 40
225 35
230 30
232 25
Using the arc method, the price elasticity of demand for
this product when the price decreases from $40 to $35 is
a. 0.20
b. 0.88
c. 10.00
d. 5.00
30. (b) formula for price elasticity is
equal to the percentage change in
quantity demanded divided by the
percentage change in price.
Inelastic
Relationship between price elasticity
and total revenue.
Price elasticity is an important concept
because if demand is elastic an
increase in sales price results in a
decrease in total revenue for all
producers.